Appendix - Government response
GOVERNMENT RESPONSE TO ENVIRONMENTAL AUDIT COMMITTEE
REPORT: "Pre-Budget 2006 and the Stern Review "
(Fourth Report of Session 2006-07)
1. While Stern has used economic calculations
to inform his choice of targets, we are reassured by the way in
which he has very firmly suggested an upper limit to concentrations
of greenhouse gases above which we should not go, paying close
attention to the scientific evidence of the increasing risks of
more serious and irreversible impacts at higher concentrations.
(Paragraph 11)
2. In publicising the headline cost
figure of 1% of global GDP, the Treasury has implicitly chosen
to set its sights at the maximum limit of greenhouse gases suggested
by the Review—the level which Stern characterises as "a
dangerous place to be, with substantial risks of very unpleasant
outcomes"—as the target to aim for. (Paragraph 12)
The 1% estimate in the Stern Review is based on a
broad assessment of the latest literature. The Review makes clear
that the 1% figure is an expected approximate cost within a range
of + / - 3%. As the most recent IPCC report on mitigation confirms,
the economic literature has only recently begun to focus on the
costs of stabilisation paths below 550ppm CO2e, and
this has limited the sources of data available for a broad comparison.
The Review is clear that the 1% cost of action applies specifically
to the achievement of stabilisation at 500-550ppm, and that 550ppm
is at the top of the stabilisation goal range suggested by the
Review. In quoting this figure, the Government is not trying to
imply that 500-550ppm is the appropriate target for which to aim;
it is using the evidence provided by Stern. 1% of world GDP is
not trivial and it is in the mid-range of most respected modelling
studies. It represents a very significant change in the patterns
of energy investment, in line with the replacement cycles for
capital stock, towards low-carbon energy technology. The Stern
Review has highlighted the need for greater research into the
costs of more stringent targets, using a robust estimate based
on the most extensive and relevant modelling studies. The Government
is also aware that minimising the costs of action relies on adopting
a timely, flexible, global policy, employing a variety of economic
instruments to control emissions of a broad range of greenhouse
gases. On the other hand, there are also likely to be significant
co-benefits of reducing emissions, which are not accounted for
in these cost estimates.
3. While the Stern Review offers a
target range of between 450 and 550ppm greenhouse gas concentrations,
and while its costings of the efforts required to meet these targets
focus on the upper limit of this range, governments should not
treat the upper figure of 550ppm as the target
endorsed by the Review and the one which they should in practice
aim for. Sir Nick Stern himself has made it very clear that the
Review did not suggest 550ppm as the main target to work
towards. Rather, he has emphasised strongly that 550ppm is the
maximum stabilisation limit for 2050 we should possibly consider,
and that the further beneath this level at which we can stabilise
greenhouse gases by 2050, the lower the risk of catastrophic climatic
events in the future. We therefore urge the Government, in promoting
the findings of the Stern Review, to ensure that this is the message
that is widely understood. (Paragraph 18)
4. Our own view is that 550ppm CO2e
would be an excessively dangerous target, and that a prudent approach
would be to aim for 500ppm or below if this could be achieved.
Especially considering the dangers of slipping from and exceeding
initial targets, we urge the Government to work with international
partners towards selecting a global stabilisation goal at a level
very considerably below 550ppm CO2e. (Paragraph 19)
The Government agrees with the Committee's conclusions
that it is essential to promote the findings of the Stern Review,
and that the world community must collectively agree on ambitious,
equitable and feasible long-term goals urgently in order to avoid
dangerous climate change. The Stern Review analysis considered
both the scientific and economic aspects of climate change, and
recommended aiming for a stabilisation range of 450-550ppm. Global
atmospheric concentrations of greenhouse gases are currently at
430ppm and are increasing at a rate of at least 2.5ppm per annum.
Getting below 450ppm could be very difficult and costly. But going
above 550ppm could be very dangerous. The Government recognises
that the relationship between temperature changes, concentration
goals and emissions reductions is a complex one, on which our
understanding is improving all the time. What is clear is that
global emissions need to peak within the next 10-15 years if the
world is to maximize its ability to reach stabilisation goals
lower than 550ppm in order to avoid dangerous climate change.
The Government is committed to finding a lasting international
solution to the challenges of climate change, and will continue
to use the scientific and economic evidence and its influence
to make the case for action, and to demonstrate that action can
be taken in a cost-effective way. If countries are to invest
in making the transition to a low-carbon global economy, they
need to know that their actions will be reciprocated by others.
Chapter 7 of the Budget and the Pre-Budget Report affirms these
messages and sets out a range of policies to respond to the challenge
of climate change.
5. The Government is right to emphasise
Stern's arguments as to the benefits of an aggressive programme
to cut emissions. Aside from decreasing the risk of the most damaging
impacts of global warming in the future, rapid mitigation can
be expected to deliver a number of benefits in its own right,
speeding the deployment of new technology, and thereby increasing
economic efficiency as well as reducing pollution. (Paragraph
22)
6. At the same time, the Government
should not minimise the challenges of rapid mitigation. Rather,
it should be honest with businesses and consumers about the price
impacts on emissions-intensive processes and activities which
accelerated emission-reduction policies imply. This may help to
develop the social consensus needed to make rapid progress. (Paragraph
23)
The Government agrees that there will often be benefits
to mitigation beyond those associated with a reduced risk of the
severe impacts associated with irreversible climate change. These
include opportunities for growth and innovation in sectors and
firms affected by climate change policy. In addition to these
potential benefits, action on climate change can also have benefits
in terms of reductions in local air pollution, improved energy
security and access, and so on. Most estimates for the costs of
reducing emissions do not currently include such co-benefits.
Furthermore, the Stern Review is clear that in order to minimise
the costs of mitigation, coordinated, timely, flexible, global
policy, which employs the optimal balance of instruments to control
emissions of a broad range of greenhouse gases is key.
The Government agrees that the likely costs of action
should not be underestimated. It is possible that if any individual
country moves too far ahead of others, there is a risk of placing
its businesses at a competitive disadvantage while simply exporting
carbon-intensive production processes, thereby failing to achieve
any actual reduction in global emissions. However, the most recent
IPCC report on mitigation suggests that large uncertainties remain
as to whether such effects occur in practice. This is because,
as the Stern Review notes, other factors such as access to infrastructure,
proximity to markets, and differential labour costs tend to be
more important in driving relative wages and competitiveness.
However, the competitiveness of some highly energy-intensive trading
sectors could be affected by mitigation policy. Good policy design,
perhaps using sector-specific frameworks that involve all major
producing countries of energy-intensive products, can be used
to reduce such effects. Flexible, timely, credible, well-designed
policy is also necessary to make the most of the potential highlighted
in the Stern Review, which Government ministers have also stressed,
for early moving countries such as the UK to become leaders in
the emerging markets created by environmental industries, diversify
its energy sources and avoid locking into long term investments
in high-carbon infrastructure that will increase the costs of
moving to a low-carbon economy.
7. We are not in a position to engage
in the full detail of the economic arguments over the size of
the projected costs of unchecked climate change—estimated
by the Stern Review to be between 5% and 20% of global GDP. However,
we most certainly endorse the Review's use of a very low value
for its "pure time discount rate", meaning in effect
that Stern treats future generations as being of equal importance
to those alive today. To think otherwise would be morally reprehensible,
condemning future generations to an uncertain and, in many parts
of the world, possibly calamitous future, out of sheer indifference.
(Paragraph 30)
8. Secondly, we would point out that
there are many ways in which Stern's projected figures for the
costs of global warming are likely still to be underestimates.
While the Stern Review offers calculations for the "non-market
impacts" of global warming on human health and the environment,
it does not, as it makes clear, offer cost estimates for such
"socially contingent responses" to climate change as
"conflict, migration and the flight of capital investment".
Indeed, Sir Nick told us: "I do think it is an important
way in which some of what we have done may have been underestimating,
rather than overestimating." (Paragraph 31)
9. Thirdly, we would argue strongly
that, while economic analysis may have its place within climate
change policy it should be strictly subordinated to a scientific
understanding of the levels of mitigation required to give us
best-estimated probabilities of avoiding important thresholds
in the climate system, which might trigger very serious and irreversible
impacts. In short, global warming should not be treated like any
other economic issue. The effects of global warming do not easily
lend themselves to being quantified and expressed in terms of
economic utility, given that they may radically alter, not simply
purchasing power or productivity, but entire ways of life. Indeed,
in several parts of the world they threaten to make what are currently
densely populated areas literally uninhabitable. (Paragraph 32)
10. We are pleased to note that the
Stern Review itself acknowledges the limitations of economic analysis.
As the Review states: "These models should be seen as one
contribution […] They should be treated with great circumspection.
There is a danger that, because they are quantitative, they will
be taken too literally. They should not be. They are only one
part of an argument. […] Nevertheless, we think that they
illustrate a very important point: the risks involved in a 'business
as usual' approach to climate change are very large". (Paragraph
33)
The Government recognises that climate change has
a number of features which means that it differs from other economic
and social issues. In particular, the fact that it is global
in both its causes and its impacts, and that the consequences
are uncertain and occur over the long run, and there are potential
large and irreversible effects, means that it differs from other
market failures. Economic analysis of climate change requires
consideration of how countries can work together, of equity across
and between generations, of the economics of risk, and it needs
to go beyond the marginal, small changes that most economics is
concerned with. For example, the approach to discounting used
in the Stern Review reflected the special nature of climate change
with respect to these four qualities, and we think this approach
is appropriate for climate change. The most recent IPCC report
on mitigation finds that decision-making about the appropriate
level of global mitigation over time involves an iterative risk
management process. For these reasons, the Government believes
that there is significant value in using an economic framework—which
considers all these issues—to help assess the risks associated
with climate change and course of action for managing those risks.
As the Stern Review highlights "if economics
is used to design cost-effective policies, then taking action
to tackle climate change will enable societies' potential for
well-being to increase much faster in the long run than without
action." While science gives a greater understanding of
where the thresholds for catastrophic climate change might lie,
economics has an important part to play in quantifying the costs
and benefits, assessing the risks and determining the most cost-effective
ways of achieving the required emissions reductions. This can
facilitate both national and international policy making on climate
change. Cost-effective reductions produce dual benefits of allowing
developed countries to meet their climate change targets at the
least cost to the economy and facilitating the movement of developing
countries to a low carbon intensity growth path.
11. The Stern Review is, indeed, explicit
about being "based on a multi-dimensional view of economic
and social goals, rather than a narrowly monetary one". Taken
altogether, the range of evidence on the natural and human impacts
of climate change presented in the Review supplements and intensifies
its headline conclusions on the quantifiable economic costs and
benefits of taking action. Whatever the detail of the economic
analysis, and whatever one's views of the estimated costs, the
dangers of reaching important thresholds in the climate system
are surely so great that the need for urgent and aggressive mitigation
is overwhelming. (Paragraph 34)
12. The Government should do more to
publicise the size of the challenge as summarised in the Stern
Review. As Stern makes clear, the stabilisation of greenhouse
gases—whether at 450 or 550ppm CO2e—will
require ongoing reductions in emissions beyond 2050, ultimately
necessitating possibly the complete decarbonisation of every other
human activity beyond agriculture; and that further into the future,
net emissions must be cut even more deeply, possibly to just a
fifth of the present day emissions from agriculture alone. The
Review is clear that quantifying these limits is very difficult
and still uncertain. It is also clear that the first of these
limits would probably only need to be met in the second half of
the next century, while the second will probably not need to be
met for several centuries. Nevertheless it might still be valuable
to raise awareness of these long term limits; or at least to the
conclusion that emissions must continue to decline, even if we
meet Stern's targets for 2050. If nothing else, this might help
to increase popular consciousness of the ultimate inevitability
of radical changes to familiar technologies and habits of living
if climate change is to be tackled, which might help to stimulate
innovatory thinking and support for more radical measures in the
short term. (Paragraph 37)
13. The Government should do more to
highlight another key conclusion from the Stern Review: stabilising
greenhouse gas concentrations at a chosen level does not simply
depend on how much we cut annual emissions by,
but how quickly we do so. Stern repeatedly emphasises the
dangers of overshooting a target stock level of greenhouse gases
in the atmosphere: once we go above a certain level, it will be
very difficult and could take a prolonged time to reduce it again.
(Paragraph 39)
We know little about the size of the risks involved
in overshooting a concentrations target and expecting temperatures
to reduce when higher concentrations eventually come back down,
but we take seriously the caution counselled in the Stern Review
about relying too much on this possibility. Analysis on the risks
is on-going. The Government is working with international partners
to secure a global agreement for emissions reductions that will
reliably avoid dangerous climate change.
14. The Treasury can indeed point to
already having developed a number of policies which fall under
Stern's three main recommendations for government action. Indeed,
in commissioning and promoting the findings of the Stern Review
around the world, the Government is clearly playing a very important
role in helping to influence international opinion and rally support
for concerted and urgent action. But it must respond to Stern's
conclusions in its own domestic policies; the profound issue which
remains is the scale and urgency of its programme. The true test
of its policies is very simple: how fast the reduction in UK emissions
accelerates. (Paragraph 46)
15. In this respect, we are very disappointed
by this Pre-Budget Report. This was the Treasury's first opportunity
to incorporate the findings of the Stern Review in a major policy
statement. It did not take it; we did not see any escalation of
the Treasury's climate change policies in this PBR. (Paragraph
47)
The Government has a range of policies in place to
mitigate the effects of climate change, and this is proved by
the UK's performance towards its Kyoto target, where the UK is
currently on track to almost double its commitment to reduce emissions
by 12.5% by 2012 through taking measures to reduce emissions in
the UK and abroad. The approach taken in the Kyoto Protocol is
taken forward in the UK's draft Climate Change Bill, which proposes
a series of clear targets for reducing carbon dioxide emissions
- including making the UK's targets for a 60 per cent reduction
by 2050 and a 26 to 32 per cent reduction by 2020 legally binding.
The Bill proposes a new system of legally binding five year "carbon
budgets", with at least 15 years always set in legislation,
to provide clarity on the UK's pathway towards its key targets
and increase the certainty that businesses and individuals need
to invest in low-carbon technologies.
It is important to look at Government policy in the
round—PBR 2006 is only one element of the Government's continuing
strategy to tackle climate change. Furthermore, whilst reductions
made by the UK through domestic and international action are an
important indicator and focus of policy, the UK's role in tackling
this global threat though our part in helping secure wider international
action and agreement is also a proper focus for our policies.
In the Climate Change Programme in March 2006 and the Energy Review
in July 2006 the Government set out a package of policies to meet
its targets for emission reductions, including the 8 MtC reduction
per year achieved by the UK cap for Phase II of the EU Emissions
Trading Scheme. The Energy White Paper takes these policies forward.
Following Stern, the Pre-Budget Report in November 2006 announced
increases in air passenger duty and an ambition for all new homes
to be zero carbon by 2016. Budget 2007 built on this by announcing
future increases in fuel duty and vehicle excise duty, further
support for improving household energy efficiency, and a new competition
to develop the UK's first full-scale carbon capture and storage
demonstration, the result to be announced next year. It also
announced that in the 2007 Comprehensive Spending Review, the
Government will create a new international window of the Environmental
Transformation Fund with £800 million of official development
assistance to support development and poverty reduction through
environmental protection, and help developing countries respond
to climate change. The Government's response to the Committee's
conclusions 37-40 contains further examples of the action the
UK is taking to ensure international progress.
16. The Government currently uses a
figure of £70 per tonne of carbon as its Social Cost of Carbon.
The Stern Review suggests that the current SCC might be around
£238 per tonne of carbon, or over three times the Government's
SCC value. In discussing this point with us, the Financial Secretary
told us that the Government does not accept that Stern's figure
is applicable for Government decisions within the UK. We find
this argument hard to follow. After all, the Government frequently
makes the point that the global warming impacts of a tonne of
carbon do not differ depending on where those emissions are made.
The corollary of this should surely be that the Social Cost of
Carbon should be the same for any emissions, no matter where they
are made. We accept that Defra are currently reviewing the UK's
SCC, but we can see no convincing reason why the UK should not
adopt Stern's suggested SCC value for the current global emissions
trajectory. If the Government accepts the findings of the Stern
Review, it should surely accept its conclusions on the Social
Cost of Carbon. (Paragraphs 49-51)
The Social Cost of Carbon (SCC) is dependent on the
path of emissions and will rise over the medium term—meaning
that the SCC will be lower at any given time with climate change
policies in place than under business as usual. Estimates of
the SCC can be used to inform assessments of the costs and benefits
of alternative outcomes and policies. The Stern Review has given
estimates of the future path of the SCC under business as usual
as well as under different stabilisation paths. Stern suggests
that the expectations of the ultimate achievements or goals of
global climate change mitigation policies are one of the important
factors to consider in deciding what SCC is appropriate for use
in the UK and other countries, so it would not be appropriate
to focus on the £238 figure alone. The Government is currently
considering how to update its estimate of the SCC in the light
of the Stern Review as well as previous work by Defra in this
area, with the aim of agreeing and publishing any changes to the
methodology by summer 2007.
17. The Government's 2050 target for
reducing UK CO2 emissions is out of step with the
global targets recommended by the Stern Review. Indeed, the global
target limit for atmospheric concentrations of CO2
which underlies the UK's domestic target for 2050 is some 50-60ppm
CO2, or 10-12%, higher (that is, more lax) than Stern's
upper limit, the level of emissions which Stern makes clear
would itself be dangerous. (Paragraph 52)
18. The Government has explained that
even if its current domestic carbon reduction target, included
in the Climate Change Bill, becomes law, it may still be altered
and made tougher, should the science develop and suggest the need
for a lower limit to emissions. This is indeed welcome. However,
the science has already moved on since the UK's domestic target
for 2050 was first framed. The Government ought to adopt a domestic
target in line with Stern's target for global greenhouse gases.
(Paragraph 55)
19. It is useful to go back to the
original RCEP report from which the Government's 2050 target was
drawn. For a global 2050 target of 450ppm CO2 (roughly
in the middle of Stern's 400-490ppm CO2 target range),
RCEP recommended that UK annual emissions ought to be cut by 79%
from 1997 levels by 2050. Putting this in the form in which the
Government adopted RCEP's 550ppm target, this equates to around
an 80% cut in UK annual CO2 emissions from 1990 levels:
a reduction from annual emissions of 592.13Mt CO2 in
1990 down to around 118.43Mt CO2 in 2050. To illustrate
what a difference this would make to the Government's current
domestic target, a 60% cut from 1990 levels would result
in annual emissions in 2050 of around 236.85Mt CO2.
In other words, a new target for the UK, based on roughly the
mid-range of Stern's global targets, would mean that UK CO2
emissions in 2050 would have to be just half what they
would be under the Government's current target, the one that is
currently included in the Climate Change Bill. We need hardly
point out that the choice between such target values must have
the profoundest implications for the entire array of public policy
decisions, starting today. (Paragraph 56)
20. This highlights the need for greater
public debate on what the UK's longer term emissions targets should
be. Even more, it highlights the need for much greater international
focus on a global target. The Stern Review makes a powerful argument
for an urgent new international agreement on climate change, and
for it to be framed in terms of a target for the global stock
of greenhouse gases in the atmosphere in 2050. The Government
should work urgently to influence international negotiations in
this direction. (Paragraph 57)
The Government notes the Committee's concerns about
the targets proposed in the draft Climate Change Bill. The draft
Bill is being considered by a Joint Committee of both Houses and
by the Commons' Environment, Food and Rural Affairs Committee,
and is also open to public consultation. The Government welcomes
the opportunity the draft Bill gives for public discussion of
these issues.
The UK target of a 60 per cent reduction in carbon
dioxide emissions by 2050 is consistent with the EU's recognition
that to avoid temperatures rising higher than 2 degrees Celsius
above pre-industrial levels, global greenhouse gas emissions need
to fall by between 15 and 50 per cent by 2050, with reductions
in developed countries of between 60 and 80 per cent against 1990
levels. The UK's target is also consistent with the range of stabilisation
goals proposed in the Stern Review and represents a crucial step
towards these goals, noting also that UK cuts in greenhouse gases
overall have been deeper than those in carbon dioxide alone.
The UK target is both challenging and credible, but the Government
has made provision in the draft Bill that would allow for this
target to be revised in the light of significant developments
in scientific knowledge about climate change or in international
law or policy.
The Government agrees with the Committee that there
is a need for a much greater international focus on the need to
stabilise greenhouse gases in the atmosphere and to identify appropriate
goals. In its paper Emissions Trading: UK Government Vision
published in October last year, the Government called for
the EU to identify this level and to negotiate to secure a future
international agreement which will achieve this. But most individual
countries' emissions form a small proportion of the total. As
the Stern review notes "a shared global perspective on the
urgency of the problem and on the long-term goals for climate
change policy, and an international approach based on multilateral
frameworks and co-ordinated action, are essential to respond to
the scale of the challenge."
PRE-BUDGET 2006: SHIFTING THE BURDEN OF TAXATION
21. The picture is of an ongoing retreat
from the Treasury's announcement in 1997 of a policy to shift
the burden of taxation towards taxing environmentally damaging
activities. As the latest figures show, the proportion of all
taxation made up by green taxes is markedly less than in 1997,
and is indeed at a lower proportion than as far back as 1994.
This Pre-Budget does contain some limited announcements of rises
in green taxes, but these are still very modest when set in the
context of several Budgets and Pre-Budgets in recent years in
which many environmental taxes have not even been raised in line
with inflation. (Paragraph 61)
It is essential that the right instrument is used
by the Government in each particular circumstance so that the
pursuit of environmental objectives takes account of wider economic
and social objectives. The Stern Report reiterates this point,
and does not require that any particular instrument is used for
any particular mitigation policy; rather, Stern suggests that
each country should use the appropriate mix of taxes, trading,
spending and regulation as befits its national circumstances.
As such, the UK Government has looked to introduce an innovative
range of measures to tackle environmental challenges—including,
where appropriate, tax measures—but tax is not the only
lever.
Since 1997, the Government has put this commitment
into practice through the introduction of the climate change levy,
the aggregates levy and the landfill tax escalator. The climate
change levy and climate change agreements (which offer opportunities
for business to reduce their liability to the levy) are together
estimated to deliver carbon emissions savings of over 6MtC a year
by 2010. The aggregates levy has reduced the use of virgin aggregate
by 8% between 2001 and 2005 and landfill tax has contributed to
a drop of active waste disposed of at landfill by 14% between
1997-98 and 2005-06. These measures were introduced in a way that
has shifted the burden of taxation from goods to bads. The introduction
of the climate change levy was accompanied by a 0.3 percentage
point cut in employers' National Insurance contributions; and
the introduction of the aggregates levy and the landfill tax were
accompanied by a 0.1 percentage point and 0.2 percentage point
reductions in employers' NIC respectively.
The Government's principled approach to using environmental
tax was also reflected in PBR 2006 and Budget 2007 announcements
on environmental taxation, which included: an increase in all
rates of air passenger duty; an inflation increase in the climate
change levy in April 2008; raising the landfill tax escalator
from £3 per tonne per year to £8 per tonne; an increase
in the aggregates levy to £1.95 per tonne from April 2008;
increases in fuel duty and vehicle excise duty rates for the next
three years. The additional revenue raised from business by the
£8 per tonne rise in the standard rate of landfill tax each
year from 2008 until at least 2010-11 will be recycled to business
through the other corporation tax changes announced in the Budget.
But tax is not the only instrument the Government
has used to tackle environmental challenges. Over the last ten
years, new kinds of policy instrument have been developed, especially
emissions trading and tradable regulations like the Renewables
Obligation and Energy Efficiency Commitment—which have been
successful in reducing emissions. In particular, the EU Emissions
Trading Scheme (EU ETS) has been the centre-piece of our climate
change strategy and the UK's contribution to Phase II (2008-2012)
will be emission reductions of 8MtC a year by 2010.
The Government uses the most appropriate instrument
in each circumstance; therefore any assessment of the success
of the Government's environmental policy needs to consider the
full range of measures announced. Focusing on the proportion of
all taxation derived from environmental taxation is not necessarily
a useful measure of the success of environmental policy. For example,
the climate change levy supports the delivery of the aims of EU
ETS by encouraging business energy efficiency; however, climate
change agreements, which form part of the climate change levy
package, actually reduce environmental tax revenues whilst delivering
real and valuable environmental impacts. Tax also plays a supporting
role in developing the biofuels market; the 20 pence per litre
duty differential on biofuels has played a part in doubling biofuels
sales last year, but it is the Renewable Transport Fuels Obligation
(RTFO) that is the primary mechanism for supporting the biofuels
market.
Overall, the package of measures introduced by the
Government since 1997 have supported wider efforts to protect
the environment and have put the UK on track to meet its Kyoto
commitments, whilst also ensuring that progress towards wider
economic and social objectives—in particular, strong and
stable economic growth - is supported.
AVIATION
22. While we welcome the Treasury's
decision to double Air Passenger Duty rates, we do not feel this
goes nearly far enough. Notably, the doubling of APD rates announced
in this PBR is, for the majority of flights, only a restoration
of the tax rates of five years ago—and in real terms, of
course, it still represents a cut. This rise will do nothing to
stabilise aviation emissions, merely slow their growth slightly.
Moreover, it does nothing to impose an environmental charge on
air freight, which lies outside the APD regime. (Paragraph 68)
23. The Treasury should once more look
at reforming Air Passenger Duty, possibly levying it per flight
rather than per passenger, a reform which would capture air freight
(and empty flights), and might also incentivise airlines to increase
the efficiency of their passenger loading further. Equally, the
Treasury should look at varying APD rates according to the emissions
of each flight; if this is not to be adopted, the Treasury should
give a clear reason why not. Above all, however, the Treasury
should increase APD so that it becomes more effective in curbing
the demand for flights. To inform and embed this approach, the
Treasury should look very seriously at proposals outlined by the
Oxford University Centre for Environmental Change for introducing
an annual APD escalator. (Paragraph 69)
24. We are also concerned by the manner
of the Pre-Budget's raising of Air Passenger Duty rates. The travel
industry has argued strenuously against the timing of this rise,
coming into effect less than two months after its announcement.
This contrasts with the previous reform of APD, for example, which
was announced in Budget 2000 but not implemented until April 2001.
Our main concern here is that in its handling of this rise, the
Treasury may have caused unnecessary antagonism, with the potential
consequence of provoking more opposition to environmental tax
rises. (Paragraph 70)
The Government notes the Committee's comments on
the Government's decision to raise air passenger duty, and its
suggestions for reforms to air passenger duty to improve environmental
incentives. The Government recognises that air passenger duty
is not the ideal policy instrument for tackling emissions from
aviation. Decisions on aviation need to be taken in the light
of the tight restrictions of international law which apply to
the aviation industry, such as the restrictions on the ability
to tax aviation fuel, and it is right for the Government to look
at the tools which it has readily to hand. In a Swedish case (Braathens
Sverige), the European Court of Justice held that a tax which
resembled a tax on fuel (such as a tax relating to carbon dioxide
emissions) was incompatible with legislation pre-dating the current
Energy Products Directive. In the light of such restrictions it
is right for the Government to look at the tools which it has
readily to hand. The change announced to air passenger duty at
PBR will have a climate change impact equivalent to saving 0.75
million tones of carbon per year by 2010/11.
At the same time, the Government continues to argue
for the inclusion of aviation within EU ETS. Inclusion of aviation
within EU ETS will provide incentives for airlines to reduce their
emissions of each flight and to increase the load factors of their
flights, and will cover freight aircraft as well as passenger
aircraft. This has made significant progress with the publication
in December 2006 of a legislative proposal by the Commission and
the UK will continue to push at a European level to ensure that
an environmentally effective scheme is implemented as soon as
possible.
The Government will continue to keep the role, rates
and structure of air passenger duty under review in the future,
taking into account the points raised by the Committee alongside
the tight constraints of international law which apply to this
sector, and striking the right balance between economic, environmental
and social factors.
25. We cannot understand why the entire
aviation industry is zero-rated for VAT, meaning that airlines
and other aviation companies are able to reclaim the VAT they
pay on a whole range of goods and services. As a first step towards
greater public consideration of this issue, and to aid Parliamentary
scrutiny, the Treasury should publish figures of the full costs
to the Exchequer of reimbursing aviation companies in this manner.
(Paragraph 73)
Air passenger tickets are zero rated for VAT purposes
consistently with other passenger transport tickets. Air freight
is either zero rated (if international) or standard rated subject
to the normal VAT place of supply rules (if domestic or intra-EU).
"Zero rating" means that the input VAT payable on expenses
can be reclaimed by the airline company. Changing the VAT treatment
of these services so that input VAT could not be reclaimed would
require unanimous agreement by all EU member states. In addition
there is likely to be a significant behavioural change as aviation
companies seek to purchase their products in countries in which
no VAT is chargeable on their expenses. In view of these significant
obstacles the Treasury has made no detailed assessment of the
revenue which would accrue from such a change.
26. The Treasury should end the anomaly
by which airport vehicles are allowed to use "red diesel",
taxed at 7.69 pence per litre, rather than ordinary road fuel,
carrying the normal duty rate of 48.35ppl. While airport vehicles
may not indeed be running on public roads, it seems utterly perverse
to offer them such a large tax reduction, considering the large
impacts of airports, not just on global warming, but on local
air quality. (Paragraph 74)
Vehicles using public roads have a number of externalities
including congestion, climate change, local air quality and road
infrastructure costs. Where vehicles do not use public roads
or use them only incidentally they are entitled to use rebated
gas oil ("red diesel"), taxable at a reduced rate.
Budget 2007 announced above-inflation increases in
the duty rates for red diesel and the Government will continue
to keep the rates and scope of red diesel taxation under review
consistently with the provisions of European laws such as the
Energy Products Directive. However airport vehicles are taxed
consistently with the treatment of other vehicles which do not
use public roads and the Government does not currently regard
the treatment of airport vehicles as an anomaly.
MOTORING
27. We are disappointed with the Treasury's
arguments surrounding its fuel duty policies. What was widely
reported as a rise in fuel duty in this year's Pre-Budget Report
was only a rise in line with inflation, and this was only the
second time it had been revalorised since 2000. As the PBR confirmed,
what this means is that fuel duty is 15% lower in real terms than
in 1999; and, that moreover, this real terms cut has offset the
rise in oil prices over this period. Finally, there is surely
a strong case for building on what instruments are already available
and which could achieve rapid results—ongoing, real terms
rises in fuel duty being one of the prime examples. (Paragraph
77)
The Government's policy is that fuel duty rates should
rise each year at least in line with inflation as the UK seeks
to reduce polluting emissions and fund public services. Budget
2007 has now set out fuel duty rates for the next three years.
Main fuel duty rates for 2007-08 will increase by 2 pence per
litre (ppl), from 1st October 2007. Main fuel duty rates will
then rise by 2 ppl on 1st April 2008 and 1.84 ppl on 1 April 2009.
As set out in the Budget documentation the Budget forecast for
Q3 RPI inflation in the current year is used to revalorise all
excise duties in the current year, and to uprate income tax allowances
and bands for certain social security benefits in the following
year. The increases announced at Budget imply percentage increases
of 4.14%, 3.97% and 3.51% respectively. These are all slightly
above the Budget forecasts for Q3 2007 RPI inflation.
The Government recognises that emissions are rising
faster in the transport sector than in any other sector in the
UK. UK transport emissions are primarily priced through a taxation
framework—mainly through fuel duty—which provides
incentives to individuals and to business to drive less and use
other modes of transport. In setting fuel duty rates, the Government
also takes into account other external costs of motoring, such
as congestion and air pollution, and the need to maintain sound
public finances. The Budget announcement on main fuel duty will
lead to carbon savings of 0.16MtC a year by 2010.
Alternative fuel and vehicle technologies also have
the potential to deliver significant environmental benefits.
That is why the Government published the Alternative Fuels Framework
in 2003, reaffirming the need for fiscal incentives to reflect
environmental benefits of new fuels and committing the Government
to a three-year rolling guarantee for biofuel and road fuel gas
duty rates, offering greater certainty to support investment.
In line with this, Budget 2007 also announced a package of additional
support for biofuels, alongside progress in developing the Renewable
Transport Fuels Obligation, including extending the 20ppl duty
incentive for biofuels to 2009-10; an extension of the 40ppl biogas
duty incentive at least at its current rate until 2011-12; a payable
Enhanced Capital Allowance for the cleanest biofuels plant; and
a 2% discount in Company Car Tax for vehicles which can run on
high-blend biofuels (E85).
In addition, Budget 2007 announced VED rates for
2007-08 and the subsequent two years to further sharpen environmental
signals to motorists to purchase more fuel efficient vehicles
and continue to support the development of the low-carbon market.
This included raising the rate for the most polluting cars (band
G) to £300 in 2007-08 and £400 in 2008-09; and reducing
the rate for low carbon band B cars to £35 in 2007-08, with
that rate then frozen for the subsequent two years.
28. We recognise the environmental
benefits of a properly sustainable and well-regulated expansion
in the use of high-blend biofuels such as E85. Under the current
fiscal regime, however, it is unlikely that the market for high-blend
biofuels will take off, due to its increased costs. The Treasury
should therefore increase the duty differential available to high-blend
biofuels in order to make them cost-competitive. (Paragraph 80)
Government recognises the importance of delivering
and developing biofuels such as E85. The Alternative Fuels Framework,
published in PBR 2003, affirmed the need for fiscal incentives
to reflect environmental benefits of new fuels. Budget 2007 announced
the extension of the 20ppl biofuels duty incentive until 2009-10,
which will offer further support high blend biofuels. In addition,
Budget 2007 also announced that the Government will introduce
a 2% discount in Company Car Tax for vehicles which can run on
E85 from April 2008.
Government has already provided grants through the
Energy Savings Trust to support the development of refuelling
infrastructure—some major supermarkets have committed to
having flex-fuel pumps on their forecourts—and extended
the alternative fuel rate of VED to E85 cars. Furthermore, the
Department for Transport are currently consulting on design aspects
of the Renewable Transport Fuel Obligation (RTFO). The consultation
will consider the role of high-blend biofuels such as E85 in delivering
RTFO targets.
29. Our over-riding concern regarding
biofuels is that in increasing the volume of biofuels imported
into the UK, the Government must ensure that these come from sustainable
sources, do not encourage deforestation of tropical rainforests
to be replaced with biofuel crops, and minimise the carbon inputs
which go into growing the crops and transporting and refining
the resulting fuel. On this point, given that a coalition of major
environmental organisations has such reservations that it is refusing
to support the Government's Renewable Transport Fuels Obligation
- in stark contrast, for instance, to their support for the Renewables
Obligation in energy generation—we cannot but be disquieted.
The Government must do more to implement a truly effective and
convincing international sustainability assurance scheme for biofuels.
(Paragraph 80)
As highlighted in the Government's response to the
Committee last year, the Government is very clear about the need
to consider sustainability issues in taking forward the RTFO.
A key purpose of the RTFO is to ensure that biofuels are sourced
in a sustainable way so as to not damage natural habitats, and
to deliver real carbon savings over fossil fuels. That is why
the Government will require all transport fuel suppliers supplying
biofuel and registering for an RTF certificate to report on the
carbon saving and sustainability of the biofuels they have supplied
from the start of the obligation. As set out in Budget 2007,
work on developing a framework for these reporting schemes is
being led by the Low Carbon Vehicle Partnership and is progressing
well. The Government will consult on this draft framework shortly.
This is being done in partnership with the Dutch Government and
the European Commission with the aim of demonstrating how such
systems could be developed on an EU-wide basis. We are continuing
to press the Commission to develop mandatory minimum standards
for carbon and sustainability at EU level.
Ahead of this the Government intends to do everything
possible to encourage the use of only the most sustainable biofuels
with the lowest carbon intensity, in a way that is compatible
with international trade rules. Once experience with reporting
has been established, the Government's intention is to move beyond
this and reward different biofuels on the basis of their relative
carbon saving performance under the RTFO.
30. Vehicle Excise Duty ought to be
reformed to widen the differentials between each band. Band G
in particular ought to be raised substantially in cost. The Treasury
should at least publish its rationale for the VED differentials
it adopts, in terms of the overall impact on the new car market
and on average CO2 emissions per kilometre of new
cars it seeks to achieve, and also in terms of the VED charge
as a proportion of an average car's sales price and g/km for each
VED band. The Treasury should also examine whether differential
rates of VAT can be charged on new cars to benefit lower carbon
models. (Paragraph 82)
Budget 2007 announced VED rates for 2007-08 and the
subsequent two years to further sharpen environmental signals
to motorists to purchase more fuel efficient vehicles and continue
to support the development of the low-carbon market. This included
raising the rate for the most polluting cars (band G) to £300
in 2007-08 and £400 in 2008-09; and reducing the rate for
low carbon band B cars to £35 in 2007-08, with that rate
then frozen for the subsequent two years. Indeed, the differential
between the lowest VED rate and the highest increases by £85
- £90 this year, and by a further £100 next year. When
considering the level of VED the Government takes account of all
relevant economic, social and environmental factors—including
proportionality and fairness to motorists—to ensure that
there are appropriate signals across the VED system to encourage
the development and purchase of fuel-efficient vehicles.
To push forward technological development, the EU
established voluntary agreements with car manufacturers to reduce
the average level of carbon dioxide (CO2) per grammes
per kilometre (g/km) for new cars to 140 g/km by 2008-9. Discussions
on the detail of a successor regime to the voluntary agreements
are currently being held. The European Commission recently published
its 'CO2 from cars' communication, which calls for
new mandatory targets for average new car CO2 to be
reduced to 130 g/km by 2012. Coupled with vehicle improvements,
for example, tyre pressure monitoring systems, and an increase
in the use of biofuels, the Commission proposed that the overall
target should be to reduce average new car CO2 to 120
g/km by 2012. The Government's view is that the objective beyond
2012 should be to reduce average new car emissions to 100 g/km
of CO2. In Budget 2007, the Chancellor announced that
Professor Julia King, Vice-Chancellor of Aston University, and
Sir Nicholas Stern will lead a review to examine the vehicle and
fuel technologies which over the next 25 years could help to 'decarbonise'
road transport, particularly cars.
Long-standing agreements with our European partners
allow the UK to keep our existing VAT zero rates, but we may not
extend them or introduce new ones. Therefore we could not introduce
a new zero rate for low carbon emission cars. EU law also sets
down a list of goods and services to which a reduced rate of VAT
may be applied - of no lower than five per cent. However this
list does not currently contain provision for a lower rate to
be applied to low emission motor cars.
WASTE
31. While we welcome the ongoing decreases
in amounts of waste going to landfill, we remain unsure as to
the direct impact of the Landfill Tax at current levels in terms
of disincentivising landfill use. To aid Parliamentary scrutiny
of the workings of this tax, the Treasury should publish analysis
which clearly isolates and accounts for the direct disincentivising
impacts of Landfill Tax to date. The rate of Landfill Tax should
then be increased, steeply, to the level at which it imposes an
effective driver against landfill use in its own right. (Paragraph
85)
The Government already provides details of the impact
of landfill tax and its other waste policies in the Red Book.
Also the quantity of waste sent to landfill is publicly available
on the 'UK tradeinfo[1]'
website. The Committee will be aware that in PBR 2006 the Government
announced that the standard rate of landfill tax, applying to
active wastes (those that give off emissions) would increase by
a further £3 per tonne to £24 per tonne from 1 April
2007. The Government also stated in Budget 2007 that, from 1 April
2008 and until at least 2010-11, the standard rate of landfill
tax will increase by £8 per tonne each year.
32. We are sympathetic to the idea
of a broader use of Landfill Tax, or other financial instruments,
to guide the development of waste disposal, in particular to incentivise
the organisation of waste so as to maximise the material which
is recycled, and maximise the energy that can be gained from the
rest while minimising the resulting emissions. As a first step,
the Treasury should consult on the introduction of an Incineration
Tax. (Paragraph 87)
The Treasury keeps all tax options under review.
However, the Government confirmed at PBR 2004 that it was not
convinced that there is a strong case for the introduction of
a tax on incinerated waste.
In 2004, the Government published reports detailing
the health and environmental impacts of waste management options,
including incineration. The Health and Environment Report (May
2004) showed that the health effects of incineration are small
compared with other day-to-day risks. And environmental standards
that incinerators have to meet have significantly tightened over
recent years and are set to become even tighter.
Incineration has a part to play in the UK meeting
its legally binding and demanding Landfill Directive targets,
particularly in dealing with the residual waste left even after
the much higher levels of waste minimisation and recycling the
Government is aiming for are achieved.
However incineration plays a relatively small part
in UK waste management. Taking these factors into consideration,
the Government does not agree with the Committee's recommendation
to consult on the introduction of an incineration tax.
The Government has set and met challenging targets
to raise the rate of recycling of household waste. In addition,
the Landfill Allowance Trading Scheme limits the volume of waste
that local authorities may send to landfill, with authorities
able to trade, bank and borrow allowances, incentivising authorities
to provide good recycling services to local residents. As a result
of these policies and the hard work of local authorities, household
recycling rates have increased from 7.5% in 1996/97 to 26.7% in
2005/6.
33. We are not especially convinced
by the Treasury's reasons for failing to introduce any taxes on
environmentally inefficient products, such as plastic bags, non-recyclable
batteries, and incandescent lightbulbs. There would be a double
purpose to such taxes: not only would they disincentivise the
use of such products in themselves in favour of more efficient
alternatives, but they would help to raise awareness generally
as to the desirability to shift whole arrays of purchasing decisions
and other daily habits in an environmentally friendly direction.
Such taxes would surely not harm the economy or provoke great
popular opposition. In cases such as this, the onus should be
on the Treasury to provide a convincing reason why not
to introduce such taxes. (Paragraph 90)
Whilst the Government recognises a potential role
for the use of fiscal instruments in encouraging consumers to
change their behaviour, there are a number of factors which must
be taken into consideration when choosing the most cost-effective
and best targeted measure including the distributional impact
of such a measure, as well as the cost to both business and Government
of administration and collection. Other measures, such as information
campaigns or voluntary agreements with manufacturers, may be more
effective.
The Committee suggests that such a tax could 'disincentivise
the use of such products…in favour of more efficient alternatives',
but in the case of the Irish Plastic Bag tax, evidence suggests
that the introduction of the charge has led to the use of heavier
alternatives, which use more energy to produce and are in fact
more harmful to the environment. Indeed, when considering a similar
levy in Scotland in 2006, the Scottish Environment and Rural Development
Committee concluded: "there are a number of unintended consequences
that appear likely to be connected with using the proposed levy
to achieve a large reduction in the number of single-use plastic
bags issued at checkouts. The net environmental impact of the
proposed levy is an issue of considerable dispute in a range of
areas."[2]
The Government has instead been working on alternative
measures to reduce the impact of such bags and on February 28th
announced a voluntary agreement with retailers to reduce the environmental
impact by 25% by the end of 2008 across the whole of the UK. Retailers
will be reducing the impact of bags by: encouraging customers
to reduce the number of carrier bags they use; reducing the impact
of each carrier bag (e.g. by using less material or incorporating
recycled content); and by enabling the recycling of more carrier
bags where appropriate. There will also be further work to encourage
carrier bag re-use.
The Chancellor made a similar announcement in relation
to light bulbs in a speech to the Green Alliance on 12th March
which was reiterated in the Budget. Following work with UK manufacturers,
retailers and trade associations, the UK Government aims to become
by 2011 the first European country to phase out the use of inefficient
general lighting service (GLS) light bulbs, where an efficient
alternative exists.
Acknowledging the potential role of a fiscal measure
in supporting this voluntary initiative and encouraging consumers
to purchase more efficient alternatives, alongside this announcement
the Chancellor also wrote to the European Commission and other
European Finance Ministers urging them to introduce a reduced
rate of VAT for energy saving materials and energy saving products,
including low energy light bulbs.
ENERGY
34. Our main verdict on the PBR's new
announcements on energy policy is that these were welcome but
only small steps in the right direction, and that much swifter
and bolder action is required. The new measures in this PBR tended
to be either well-defined but rather modest in aim, or ambitious
but rather vague or lacking in teeth. On Carbon Capture and Storage,
for instance, the main announcement is of an
intention to issue a tender for consultants to help the Government
assess whether to fund one demonstration project. As for the headline
announcement on household energy efficiency, that all new homes
are to become "zero carbon" by 2016, we note that the
PBR refers to this as an "ambition", and that the building
regulations which are to make it happen will only be "progressively
strengthened". Overall, these measures do not represent the
kind of radical acceleration of policies and funding we would
expect to see following the Stern Review. (Paragraph 91)
The Climate Change Bill sets out the Government's
ambitious targets to tackle Climate Change, and the forthcoming
Energy White Paper will set out measures to achieve these targets,
and also to meet other government objectives, such as security
of supply and fuel poverty. The issues and policies are complex
so a series of consultations are being held. On many of the issues
raised by the Committee, there will be more details to follow
in the forthcoming Energy White Paper.
The timetable for the development of government policy
on the commercial demonstration of carbon capture and storage
(CCS) has been determined by the development of possible projects
in the UK. The appointment of consulting engineers announced
in the PBR was the appropriate step to understand the costs of
the projects which had been developed by the private sector over
the previous 18 months since the Government's original expression
of interest in Budget 2005. In light of the consultants' report,
the Government announced in the Budget the next step, a competition
to fund demonstration of Carbon Capture and Storage (CCS) in the
UK. Further details will be announced in the Energy White Paper.
The Government consulted industry closely in reaching
the 2016 date for making all new homes zero carbon, which they
have said is challenging but achievable. Setting a date for zero
carbon standards any earlier than 2016 could jeopardise the number
of homes that need to be built (Kate Barker's 2004 report into
housing supply in the UK made clear that, unless we intervene,
only a third of young couples will be able to afford a home of
their own in 2025.) It is important that the building regulations
are progressively tightened over time to help the housebuilding
industry move towards the zero carbon standards and test out new
techniques and technologies.
The 2016 timeline is currently an ambition because
we needed to consult before we could make it policy. We will be
launching our final policy statement later this year which will
confirm the timetable to zero carbon homes.
New homes contribute only 1% to the total housing
stock each year. That is why are also working to tackle emissions
from existing homes, e.g. through Energy Efficiency Commitment
(EEC), Decent Homes and Warm Front. And we will be saying
more on our approach to reducing emissions from existing homes
in the Energy White Paper.
35. Where grant monies are distributed
to subsidise heating bills or to subsidise the installation of
central heating, this must be complemented in all cases by programmes
to make energy efficiency improvements to the same properties.
This year's PBR contains a welcome announcement of "£7.5
million to improve the coordination between, and effectiveness
of, Warm Front and the Energy Efficiency Commitment". However,
when we asked the Treasury whether this means that all households
which receive warm front grants will have energy efficiency measures
fitted as well, the answer did not suggest such universal coverage.
It seems clear to us that the Treasury, for reasons not just of
reducing carbon emissions but of social equity and simple value
for money, should do more to ensure that grants to subsidise central
heating are always paired with energy efficiency improvements.
Otherwise, public money will be leaking through doors and rooftops
as surely as warm air. (Paragraph 92)
The Government agrees that there are benefits to
energy efficiency measures both to those in fuel poverty via reduced
fuel bills, and to the environment through reduced energy demand.
Indeed, it is expected that carbon dioxide savings from Warm
Front and other fuel poverty programmes are expected to be 1.8MtC02
by 2010.
Warm Front is the Government's main tool for tackling
fuel poverty in the private sector in England, and is a major
grant programme for the installation of a range of energy efficiency
measures and the provision of energy advice in the private sector.
Since the introduction of the Scheme in June 2000 over 1.4 million
households have been helped to be warmer and more comfortable
in their homes.
We also agree that coordination of efforts is key
in minimising cost and maximising efficiencies. For example, Warm
Front has a fruitful and symbiotic relationship with energy suppliers
working towards their EEC priority group targets. Through a number
of forward trading contracts, the Scheme can offer its customers
the benefits of both the Warm Front Grant, and EEC measures. Of
course, not all households are suitable for cost effective EEC
measures and, as such, a commitment that all households receiving
Warm Front measures will also get EEC assistance, cannot be provided.
That aside, the Government are committed to tackling the issue
of fuel poverty, and will continue to explore new and enhance
existing opportunities for joined up working, and the potential
benefits this could bring to the public.
The Warm Front Scheme was boosted by an additional
£140 million announced in the 2004 Spending Review, and augmented
further by the Chancellor's announcement in PBR 2005 that an additional
£300 million is to be made available across the UK for tackling
fuel poverty over the 2005-08 period, of which some £250m
will be allocated to boost Warm Front in England. This means that
funding for the Scheme during that period will be over £800
million.
At PBR in December 2006, the Chancellor announced
a new investment of £7.5 million to improve the effectiveness
of Warm Front and the Energy Efficiency Commitment, with about
£6.3 million of this being made available for England. This
will fund projects aimed at using an area-based approach to identify
households and provide a coordinated set of advice and measures
to them, reaching up to 300,000 of the most vulnerable pensioner
and other vulnerable fuel poor households.
COMPANY REPORTING
36. We welcome the Government's amendments
to the environmental reporting requirements of listed companies,
following consultation during the passage of the Companies Bill
last year. However, these requirements still fail in certain important
respects. Most of all there is no mandatory guidance on the form
they must take, nor are there any requirements to have the information
that is published independently audited. The former is particularly
bad: not only does this undermine transparency and comparability
(and thus the main purpose of the requirement), but it also poses
a problem to companies themselves. The Government must implement
mandatory reporting standards when it reaches its two-year point
at which it is to review the workings of the Act. (Paragraph 100)
The requirements for a Business Review contained
in section 417 of the Companies Act 2006 will commence on 1st
October 2007 and will replace the existing requirements in the
Companies Act 1985 for financial years beginning on or after that
date. Under section 417, the Business Review is prepared by companies
for the benefit of their shareholders to help them in assessing
how the directors have performed their duty to promote the success
of the company. Section 417 will also introduce an expanded Business
Review for quoted companies requiring them, to the extent necessary
for an understanding of the business, to report on environmental
and other matters.
The Government decided, following public consultation,
that it would not make provision for mandatory guidance, on the
basis that this would encourage a box-ticking culture rather than
encourage directors to give proper consideration to the issues
on which they are reporting. Guidance is, however, prepared by
the Accounting Standards Board in the form of a reporting statement,
which they will be reviewing and updating as necessary.
The Business Review is part of the Directors' Report
and as such is subject to the requirement in section 496 of the
Companies Act 2006 that the auditor must state in his report on
the company's annual accounts whether in his opinion the information
given in the directors' report is consistent with those accounts.
Directors are also subject to the duty in section 418 of the Act
to make a statement giving assurances as to disclosure to auditors.
The Government reached the view following consultation that the
significant additional cost burdens of a higher level of audit
compliance were not justified.
The Government will conduct an assessment after two
years of whether the provisions are working in the way that is
envisaged.
CONCLUSION
37. The Stern Review highlights what
is perhaps the central problem of tackling climate change: the
need to take profound action before the more serious effects of
global warming have begun to be felt. Because of the time-lag
between emitting greenhouse gases—especially CO2—and
experiencing their ultimate effects, it means that today's generation
will be asked to make sacrifices, change habits, and face higher
costs of carbon-intensive activities, in order principally to
benefit future generations. To a considerable extent, given the
unequal nature both of current per capita emissions and long-term
vulnerability to climate change, it also means those in the UK
and other Western countries taking bigger actions in the interests
of people in poorer countries. All this means that reducing emissions
according to the trajectories suggested by Stern will not just
be practically but—perhaps an even bigger problem—
politically very challenging. (Paragraph 102)
38. On the practical challenge, the
Government can rightly point to a variety of activities which
fall within the main policy areas recommended by Stern. But what
is required now is for the Government seriously to accelerate
its policies, to begin to achieve the kind of steep cuts in emissions
Stern demonstrates are necessary. For this reason, we were very
disappointed in this year's Pre-Budget Report. The PBR was a grossly
inadequate response to the hardening evidence as to the increasing
risks of major and irreversible impacts of climate change. Coming
in the wake of the Stern Review, the PBR's lack of boldness raises
major doubts as to the Treasury's seriousness about implementing
Stern's recommendations in domestic policy. However, Pre-Budget
2006 was simply the first major opportunity for the Government
to implement the conclusions of the Stern Review. There are many
others to come, beginning with Budget 2007, the Climate Change
Bill and the forthcoming Comprehensive Spending Review. We look
forward to seeing an appropriate response to Stern from the Government
in its forthcoming fiscal policy, legislation, and, potentially,
machinery of government changes. (Paragraph 103)
39. Beyond this, there is still the
political challenge. Most importantly, there needs to be more
and better informed discussion of the science of climate change.
The Government needs to do more with the Stern Review in this
respect, using it as a springboard to raise levels of public discussion
about the risks and impacts of global warming and what needs to
be done to mitigate them. (Paragraph 104)
40. If there is one key conclusion
to draw from the Stern Review it is that we today are living at
an important moment: we still have a limited window of opportunity
to prevent greenhouse gases growing to dangerous levels. As Stern
underlines, once we overshoot a target stock of greenhouse gases
it will be very difficult and may be a very slow process to reduce
it again. Thus if we fail to act swiftly enough, it may be impossible
to reduce greenhouse gases to safer levels for decades or centuries
to come—during which time the risks of major irreversible
impacts will grow ever larger. But Stern's accompanying argument
is that the sooner the world begins to cut its emissions, the
easier and less costly mitigation will become. Both conclusions
need to be widely discussed. (Paragraph 105)
The Government agrees with the Stern Review that
responding effectively to climate change will require tough choices
over a prolonged period of time, with significant long-run changes
in the structure of the economy. However, it is clear that the
global economic consequences of not acting could be disastrous.
The Government agrees that there are significant practical and
political challenges involved. But, through the Climate Change
Programme Review, the Energy White Paper and the draft Climate
Change Bill amongst others it has already set out a credible approach
to meeting these challenges, and will continue to do so. It is
misleading to focus on the PBR which just happened to be the first
Government announcement following the publication of the Stern
Review; or to judge the Treasury's commitments on the basis of
this. PBR was not the appropriate place to announce most of the
Government's policies on climate change; and the Treasury's involvement
in Government policy-making is not limited to the Budget and PBR.
As the Stern Review highlights, fiscal policy is
only one element of a mitigation strategy to avoid the most serious
impacts of climate change. Three elements of policy are key:
carbon pricing, either through tax, trading or regulation; technology
policy to provide support for research, development and deployment;
and measures to encourage behavioural change and overcome barriers.
The Stern Review made clear the importance of trading across international
borders and expansion of trading schemes to cover more sources
of emissions, where appropriate and cost-effective. The EU Emissions
Trading Scheme (EU ETS) is the Government's carbon pricing instrument
of choice, and the UK is committed to building on the EU ETS to
ensure that emissions are effectively limited. The more we can
trade emissions reductions across international borders, and the
more emissions that are covered, the more cost effective it will
be for all to achieve challenging emissions reduction targets.
Making the carbon market deeper, wider and more liquid will increase
its effectiveness in delivering greater emission reductions, and
do so at least cost.
Alongside the UK's domestic policies, the Government
recognises that if we are to secure an international framework,
we must make climate change a priority for Heads of Government
and all the key departments in each country that will be affected
by climate change, including finance ministries and those responsible
for national security, energy, development and foreign policy.
Climate change must stop being purely an environmental issue.
In advance of the formal UN process that will culminate in Bali
in December 2007, the Government is engaging the leaders of the
G8 + 5 which includes all the major greenhouse gas emitters, through
a series of activities in 2007, including: the G8 + 5 meeting
of Environment Ministers in Potsdam in March, the G8 + 5 Development
Ministerial, the G8 + 5 Summit in Heiligendamm in June, leading
to the Gleneagles Dialogue with Energy and Environment Ministers
in September. The EU also has a critical role to play here and
the Government will be working closely with the Commission and
other Member States following on from Heads of State and Government
Spring Council meeting. The International Financial Institutions
meetings, especially the World Bank spring and annual meetings
are also a key opportunity to push this agenda forwards.
HM Treasury
May 2007
1 www.uktradeinfo.com Back
2
http://www.scottish.parliament.uk/business/committees/environment/reports-06/rar06-12.htm Back
| 
