House of Commons - Environmental Audit

Select Committee on Environmental Audit Third Report

Green taxes

OVERVIEW: THE TREASURY'S MOMENTUM ON GREEN TAXES

4. Following its announcement in 1997 on shifting the burden of taxation towards green taxes, the Treasury made a number of bold moves, increasing the fuel duty escalator and introducing a range of new instruments (including the Climate Change Levy package, the Renewables Obligation, and the Aggregates Levy). This momentum stalled with Pre-Budget Report 1999, however, when the then Chancellor abolished the fuel duty escalator (FDE). The impact of the abolition of the FDE was compounded by other decisions, such as the cut in the main rate of Air Passenger Duty (APD) in 2002, and the freeze in Climate Change Levy rates from 2001 to 2007. The result is that green taxes as a proportion of all taxation peaked at 9.7% in 1999 and have been declining ever since, falling to 7.3% in 2006.[2]

5. The 2006 Pre-Budget Report and 2007 Budget Report appeared to signal a slight shift forward in momentum again, with a doubling of APD rates, increases in fuel duty for the next three years, the raising of Climate Change Levy rates in line with inflation, the raising of Vehicle Excise Duty for the most polluting cars to £400 a year, and increases to Landfill Tax and the Aggregates Levy. There are no figures yet available to show what impact these changes will make to the balance of taxation made up by green taxes. However, in the context of the freezes in several environmental taxes in preceding years these were very modest increases, and in many cases still leave respective rates lower in real terms than they were several years ago.

6. We put it to the Exchequer Secretary that this represented a clear failure on the part of the Treasury to live up to its earlier policy. She made two arguments in reply. First, she stressed that the Government was doing lots of other things beyond taxation to help to change people's behaviour in more environmentally friendly directions; she singled out participation in the EU Emissions Trading Scheme, and an announcement in Budget 2007 to give stamp duty discounts or exemptions to new zero carbon homes. Second, she argued that the very decline in green taxes might be a sign of their success: "if you tax an environmental bad or pollution and prevent it happening one of the results is that the tax take goes down."[3]

7. We find neither argument impressive. As we have argued previously,[4] green taxes can do a number of jobs at once: i) deterring activities that are harmful to the environment; ii) incentivising greater efficiency in the use of environmental resources; iii) providing novel tax streams to raise revenue (both for general spending purposes and specifically for environmental improvements); and iv)—as a result of raising new revenue—allowing for tax cuts elsewhere, the meaning hinted at by the original 'shifting the burden' announcement.

8. The Treasury's argument that new or higher green taxes are unnecessary, because the Government is doing enough to protect the environment through other policies, is hardly convincing given the Government's lack of progress in reducing UK carbon emissions over the last decade. Even if it were the case that policy across Government was successfully delivering its environmental objectives in full, it would still not be an excuse for the Treasury's inaction. There is always a case for looking at the scope to increase green taxation, since the Government is always in need of tax revenue, and since, as the Treasury accepts, it is better to tax 'bads' than 'goods'. Taxes on high-carbon activities such as driving and flying can be used to reduce their demand without destroying it, thus helping to achieve environmental objectives while still generating large and predictable tax streams—which could potentially be used to reduce other taxes.Table 1 Changes to five key environmental taxes since 2000

Year¹ Fuel duty Vehicle Excise Duty Climate Change Levy Air Passenger Duty Aggregates Levy Landfill Tax

2000-01 Revalorise² Freeze Introduction Freeze N/A Rise TO £11/TONNE

2001-02 Freeze Reform (NEW BANDS), Cut FOR SMALLER CARS, Freeze FOR OTHER RATES Freeze Reform (AVG RATE CUT) N/A Rise TO £12/TONNE

2002-03 Freeze Freeze, PLUS Reform (NEW LOWER RATE FOR LOWER EMISSION CARS) Freeze Freeze Introduction Rise TO £13/TONNE

2003-04 Revalorise Revalorise, PLUS Reform (NEW LOWER RATES FOR LOW EMISSION CARS) Freeze Freeze Freeze Rise TO £14/TONNE

2004-05 Freeze Freeze Freeze Freeze Freeze Rise TO £15/TONNE

2005-06 Freeze Freeze FOR LOWER EMISSION BANDS, Revalorise FOR HIGHEST Freeze Freeze Freeze Rise TO £18/TONNE

2006-07 Revalorise Cut FOR LOWER EMISSION BANDS, Freeze FOR BANDS D&E, Rise FOR BAND F AND A Rise / Reform : NEW BAND G FOR HIGHEST EMITTERS Freeze Freeze UNTIL FEBRUARY 2007, THEN Rise (DOUBLING ALL BANDS) Freeze Rise TO £21/TONNE

2007-08 Rise
(2PPL IN OCTOBER 2007)
Freeze Revalorise Freeze Freeze Rise TO £24/TONNE

Note:
¹Changes are listed in the year in which they take effect, rather than the year in which they are announced.
² "Revalorise" means "rise in line with inflation experienced since the previous year".
Source: EAC analysis of Budgets and Pre-Budget Reports 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007; and Supplementary Memorandum from HM Treasury to Environmental Audit Committee inquiry into Pre-Budget Report 2005

9. As for the Treasury's argument that the relative decline in green taxes is a sign of their success in deterring the activities on which they are levied, we would reply overall that it has rather more to do with the Treasury's own decisions to freeze most environmental taxes in most years from 2000 to 2006 inclusive (Table 1: see page 8). Notably, over the period 2000-2005, receipts from fuel duty fell in real terms (following abolition of the FDE), with receipts from Air Passenger Duty falling in absolute terms (following the cut in the main rate of APD); during this time carbon emissions from road and air transport both increased.[5] This is not the first year we have heard this argument from a Treasury minister; we are disappointed to hear it yet again, having repeatedly pointed out its obvious flaws.

10. We are puzzled as to why the Treasury has not been bolder in communicating the benefits of green taxes in order to win greater public acceptance for them. We agree with the analysis of Simon Bullock, from Friends of the Earth:

[…] the main problem has been a selling job because [the Treasury] has not made the link between tax rises on the environmental pollutants and tax cuts elsewhere. […] Certain elements of the press are always stigmatising environmental taxes as stealth taxes and it will be politically difficult to get them unless they are explicitly linked to tax cuts elsewhere. […] If the Government were to commit to their statement of intent and deliver its strategy to increase the taxes on aviation, road fuel duty, waste, and the rest of it, explicitly linking it with cuts in things like VAT, national insurance contributions, income tax—taxing pollution not people—it would make it far more politically saleable.[6]

11. We drew the Exchequer Secretary's attention to the findings of a recently formed independent body, the Green Fiscal Commission, whose main focus is "greening the UK tax system".[7] In late 2007 the Commission published polling data that appeared to show that a majority of the population (51% for, versus 32% against) supported green taxes, and that this support increased markedly (77% for, with only 9% against) if revenue from green taxes was used to fund reductions in carbon emissions and to cut other taxes at the same time.[8] We suggested to the Exchequer Secretary that to increase support for green taxes, and thus allow for an expansion in their use, what the Treasury needed to consider was a greater use of hypothecation. Her reply was firm:

In Treasury terms it is a terrible word; it is almost banned from the dictionary. […] I do not sit here and say that in all circumstances hypothecation is always and everywhere bad, but if you get into hypothecation into a big way it means that there are fewer flexible choices as you go forward because money that you may be able to raise in revenue is put away for particular reasons. There are examples of hypothecation, for example the climate change levy and the reduction in National Insurance contributions. […] That can play a part, but we have to be careful that we do not get ourselves into a circumstance where paradoxically if we are hypothecating large amounts of revenue we cannot achieve what we need to achieve as we shift to a lower carbon-emitting economy.[9]

12. We understand the Treasury's caution over hypothecating revenues from taxes to specific ends. However, it seems clear that an element of hypothecation could play a crucial role in gaining public acceptance of green taxes. It is perhaps unnecessary formally to ring-fence certain revenue streams for particular purposes, which could indeed reduce the flexibility the Treasury has to manage year-to-year public finances. What is more important is that the Treasury does a better job of publicly justifying green taxes by explaining their core environmental purpose, as well as linking them—however strictly—to increased spending on the environment and reductions in other taxes. We recommend that the Treasury consults on, publishes, and follows an explicit strategy to win public support for environmental taxation.

AVIATION

13. For several years we have highlighted the failings of Treasury policy with regard to aviation. Aviation is the fastest growing source of greenhouse gas emissions in the UK, its contribution to global warming is enhanced through releasing emissions at altitude, its growth is being fuelled by largely inessential journeys (especially short-haul journeys, where there are rail alternatives), and it is very lightly taxed (notably aviation fuel is untaxed internationally). Despite all this, at Budget 2000 the then Chancellor decided to cut the short-haul economy rate of Air Passenger Duty (APD)—applying to three-quarters of all passengers—from £10 to £5. The same Budget saw an increase in the first/business class rates for short- and long-haul journeys, but these sums were modest (£20 and £40, a tiny proportion of first and business class fares). The overall effect was that in 2005 APD receipts were 5% down from 2000, even while annual carbon emissions from UK flights were up by 16%.[10] In December 2006 the Treasury announced a doubling of all APD rates from February 2007, which in some parts of the media was reported as a bold move for the environment. In reality for the majority of flights it only restored the rate of aviation tax the Government inherited when it came into office. This represents a cut in real terms (from May 1997 to February 2007) of 29%.[11]

14. The 2007 Pre-Budget Report announced that APD rates would be frozen next year, not even raised in line with inflation; further increasing the cut in the main rate in real terms. However, it also contained a major reform, announcing that the basis of APD would be changed, from a charge per passenger to a charge per plane. We had recommended this reform in our last two PBR reports, on the basis that it should incentivise airlines to increase the efficiency with which they fill their flights (and deter them from running empty flights for scheduling purposes), and that it should tax air freight for the first time. We took evidence on this reform from two leading aviation and environment experts. Peter Lockley of WWF welcomed the announcement in the PBR; but stressed that it was important that the level of aviation tax was increased, so as to curb demand for flights and resulting emissions. He also suggested that the Treasury should reform APD, so that in addition to the current rates for 'short-haul' (all destinations within the EU) and 'long-haul' (all destinations outside the EU), a third band is added to cover 'very long-haul' destinations, such as Australia.[12] The rationale for this is that, as WWF put it, "The emissions from a trip to Australia are around three times those of a trip to New York, but both are currently classed simply as long-haul."[13] (On a similar note, EasyJet recently told the Treasury Select Committee that a passenger travelling from London to Auckland generated more than 15 times the emissions of a passenger travelling from London to Marrakech, yet would be charged the same rate of APD.)[14] Jeff Gazzard of the Aviation Environment Federation, meanwhile, was not in favour of the reform to APD, arguing that it might obscure the personal link between each passenger's purchase of a ticket and the greenhouse gas emissions for which they would be responsible. Instead he proposed a charge per passenger (or tonne of freight) based on the distance travelled.[15]

15. We welcome the Treasury's announcement to reform Air Passenger Duty into a levy per flight rather than per passenger. We further welcome the Treasury's announcement of consultation on how this reform should be implemented, and how aviation tax might be better correlated to distance travelled. We recommend that airlines be mandated to calculate each passenger's share of the reformed 'per-flight' tax, and to make this figure highly visible (on adverts, websites, and tickets). We also recommend that the Treasury closely examine the merits and practicalities of better reflecting the emissions arising from longer intercontinental journeys by adding a third banding to Air Passenger Duty, to cover 'very long-haul' flights. Short-haul charges must reflect the disproportionate emissions resulting from take off and landing, and should be aimed to encourage 'modal shift' towards rail alternatives. Above all, it is vital that all rates of aviation tax are significantly increased, so as to stabilise demand and resulting emissions.

16. A further aspect of aviation and taxation that we have previously examined is the 'zero rating' of aviation for VAT, which enables companies in the aviation industry to claim back VAT on a wide range of purchases. Last year we recommended that, 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."[16] In response, the Treasury said it would be difficult in practice to change the VAT rating of aviation, and thus that it was not worth publishing such an estimate:

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.[17]

17. We are not impressed by this argument. In view of their potential size, we recommend that the Treasury publish an estimate of the costs to the Exchequer of reimbursing VAT expenses to aviation companies. In this year's inquiry we heard one estimate, from the Aviation Environment Federation, that the cost to the Exchequer ran to £4 billion a year.[18] This would be in the public interest, no matter the practical obstacles to changing aviation's VAT status, and might galvanise interest in how these obstacles might be overcome.

MOTORING

18. Although the 2007 Budget Report announced that fuel duty would rise by a cumulative total of nearly six pence per litre by April 2009, it followed this by saying: "By 2009-10, main fuel duty rates will still remain 11 per cent lower in real terms than they were in 1999."[19] In this context, we drew the Exchequer Secretary's attention to a recent speech in which she had said: "Tax has a part to play by influencing behaviour and incentivising low carbon technologies, and as the main way of tackling emissions from surface transport."[20] We asked her how, in this case, she could justify cutting fuel duty by so much in real terms over a decade. She responded that:

As with all these things, it is a question of getting a balance from where we are now, which is not ideal, to where we want to go, namely a future […] where individual cars are a lot less damaging in terms of carbon emissions and people can make other sensible choices about getting round. […] All of this takes time and we have to balance it.[21]

19. We are concerned by this response, because it suggests a lack of willingness to grasp the problem, in favour of an indefinite postponement of action. The Exchequer Secretary essentially told us that the Treasury could take only light action to curb demand for petrol and diesel in advance of low carbon alternatives which could fully replace them; but that this would take time, and in the meantime environmental concerns could not be allowed to impede economic growth or individual mobility. We would argue that the development and take-up of low carbon alternatives would be assisted by stronger action to curb demand for fossil fuels today. Furthermore, the Government has already had time to tackle this problem, and yet road traffic emissions in England went up by 12% between 1997 and 2006.[22] Indeed, the 2006 UK Climate Change Programme Review forecast that increased road transport emissions due to traffic growth over the period 1990-2010 would more than outweigh the entire suite of carbon reduction policies aimed at the transport sector.[23] We note that some motoring organisations have begun calling for the next planned increase in fuel duty to be scrapped, given the rise in petrol prices due to increases in the price of crude oil.[24] We also note, however, that demand for road fuel is still strong in spite of these price rises. Paul Watters, head of roads policy at the AA, has commented: "People appear to be cutting back on other spending, such as car servicing, rather than driving less."[25] The forthcoming Budget is a test of the Treasury's environmental credibility: it must not defer its planned rises in fuel duty.