Conclusions and recommendations
GREEN TAXES:
OVERVIEW
- 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. (Paragraph 8)
- 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. 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.
(Paragraph 9)
- 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.
(Paragraph 12)
AVIATION
- 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 of 29%. (Paragraph
13)
- 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.
(Paragraph 15)
- 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. 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. (Paragraph 17)
MOTORING
- 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. We also note, however,
that demand for road fuel is still strong in spite of these price
RISES. The forthcoming Budget
is a test of the Treasury's environmental credibility: it must
not defer its planned rises in fuel duty. (Paragraph 19)
CARBON CAPTURE
AND STORAGE
- If the Government were only
going to fund one Carbon Capture and Storage demonstration project,
we believe it was right to restrict the scope of the competition
to a post-combustion coal plant. We agree with the Government
that this type of technology has the greatest global potential,
given the possibility that it could be retrofitted to existing
power plants. If widely adopted, it could dramatically reduce
the emissions of countries such as China and India, while simultaneously
providing significant economic opportunities to firms with experience
of carrying it out. (Paragraph 22)
- Post-combustion technology appears to be further
away than pre-combustion from being introduced by the market on
its own. This means that funding a full-scale demonstration plant
is a particularly appropriate and effective form of subsidy for
post-combustion technology. We hope that this demonstration will
be able to prove to interested companies that post-combustion
plants are physically viable, and teach valuable lessons about
how to build and operate them efficiently. (Paragraph 23)
- While the CCS competition is very welcome, it
is imperative that the Treasury provide considerably more assistance
for CCS projects overall. No matter which type of technology is
adopted, CCS plants will incur extra build, operational, and infrastructure
costs over conventional power stations. Without clear and long-term
financial security for CCS, the risk is power companies will not
invest in CCS plants even once the demonstration project is operational—let
alone bring forward the plans they have for pre-combustion plants
today. In the longer term the EU ETS may be able to provide sufficient
financial incentives. But in order for CCS to be deployed widely
and swiftly in the UK, we recommend that the Government introduce
some form of financial mechanism for incentivising CCS power plants
over conventional power stations. The Treasury should examine
options such as a feed-in tariff for CCS plants, or contracts
which guarantee funding for the difference in costs between CCS
and conventional plants. (Paragraph 28)
- Overall, we are concerned that the Government
is not showing sufficient urgency in its assistance to Carbon
Capture and Storage industries. The Government must now be more
decisive in its support for CCS, especially given that a number
of existing power stations are coming to the end of their lives,
and power companies are taking decisions imminently on a new generation
of power plants to replace them. Where these can be built with
pre-combustion CCS, they will immediately lower UK emissions.
Where they are built as conventional gas and coal-fired power
stations, the Government must mandate that they are built 'CCS-ready',
with the expectation and the financial support in place to ensure
they are retrofitted with post-combustion technology as soon as
possible. (Paragraph 29)
SHADOW PRICE
OF CARBON
- There appear to be serious
flaws in the thinking behind the new Shadow Price of Carbon. We
recommend that it be reformed, so that instead of assuming that
global climate change goals will be met, it is based on the costs
of climate change on a 'business as usual' trajectory of emissions.
Furthermore, given the inherent difficulties in putting a price
on climate change, the Government's first priority in deciding
on the merits of potential policies and construction projects
ought to be deciding how they affect UK carbon budgets, and only
secondly on what the monetary value of resulting carbon emissions
would be. We may choose to examine the Shadow Price of Carbon
in more detail in a future inquiry, looking in particular at how
it is being used in cost-benefit analyses and impact assessments
throughout government. (Paragraph 38)
ENVIRONMENTAL TRANSFORMATION
FUND: DOMESTIC
ELEMENT
- We believe that the £170m
new money over three years, announced in the PBR for low carbon
investments in the UK, would have been a significant start
several years ago. But the urgency of the need to cut emissions
means that this should now be a much higher spending priority.
In particular, we are disappointed that this sum appears to be
considerably smaller than the amount of revenue the Government
is projected to earn from auctioning carbon allowances under the
EU Emissions Trading Scheme. We are also concerned that the domestic
Environmental Transformation Fund is being spread too thin, and
that a considerable proportion of the funding, while welcome,
is not aimed at developing step-changes in new technology, which
ought to be the focus of the Fund. We recommend that the Treasury
revisit the settlement for the domestic ETF as soon as possible,
especially once revenues from EU ETS auctions are more certain.
(Paragraph 43)
ENVIRONMENTAL TRANSFORMATION
FUND: INTERNATIONAL
ELEMENT
- We welcome the announcement
of £800m new money over three years for environmental investments
in the developing world. This was probably the most significant
and impressive announcement in the PBR. (Paragraph 45)
- The Government should work with the World Bank
to ensure appropriate governance standards are in place for the
international ETF to deliver a suitable disbursement mechanism
that places rigorous sustainability criteria at the heart of what
the fund delivers. Furthermore, the Government should look again
at whether this fund should be dedicated solely to
low carbon energy investments, with forestry protection and climate
change adaptation being funded by separate instruments, less focused
on profit-making opportunities. (Paragraph
46)
EMISSIONS TRADING
- In his Pre-Budget address
on 9 October 2007, the Chancellor told the House that, "We
are the only country to have met our Kyoto obligations. We have
reduced our greenhouse gas emissions by almost a fifth since 1990",
without making it clear that this incorporated the net purchase
by the UK of some 33.8 million carbon allowances in 2006. We recommend
that it is always made clear, in Government statements and documents,
where UK reported emissions figures incorporate the purchase of
carbon credits; the risk otherwise is that politicians and the
public will receive a falsely reassuring picture of progress in
decarbonising the UK itself. (Paragraph 50)
- The Government cannot afford simply to assume
that purchasing carbon credits is leading to genuine emissions
reductions elsewhere in the world. We recommend that the Government
demonstrate a systematic approach to verifying, as rigorously
as possible, that the net purchase of carbon credits by the UK
is funding genuine emissions reductions. We further recommend
that the new Committee on Climate Change evaluate each year the
quality of the emissions credits set against the UK's carbon budget
for that year: we believe it should state whether, in its opinion,
these credits have genuinely reduced global emissions by an equivalent
amount. (Paragraph 52)
PUBLIC SERVICE
AGREEMENTS
- In bringing the previous Public
Service Agreement on climate change to an end, the Treasury did
not publish an assessment of Departments' performance against
it, along with any actions for improvement. This is despite the
fact that the previous target to reduce UK CO2 by 20%
by 2010 looks set to be missed by a wide margin. This suggests
either that there is a weakness in the design and operation of
the PSA system, or that the Treasury is less interested in driving
progress on reducing carbon emissions than other objectives. (Paragraph
54)
- The new PSA on climate change is too diffuse,
with no clear departmental targets for reducing emissions, and
less emphasis overall on reducing emissions from the UK. We recommend
that, in consultation with the Committee on Climate Change, the
Government considers setting emissions reduction targets for specific
sectors of the economy, with relevant Departments being made accountable
for achieving them. (Paragraph 55)
- We recommend that, in preparing now for the
next Spending Review, the Treasury work to develop PSAs that will
mainstream environmental objectives throughout the entire range
of departmental activity. Environmental objectives must not be
confined simply to a couple of explicitly environmental PSAs.
In particular, we recommend that, rather than focusing purely
on labour productivity, work starts now on developing ways of
incorporating targets for improving the efficiency with which
natural resources are used in the UK economy. (Paragraph 58)
CONCLUSION
- The next Pre-Budget Report will be published
within a new policy landscape, following the scheduled passing
of Bills on climate change, energy, and planning, as well as the
EU carbon reduction and renewable energy targets for 2020. Pre-Budget
Report 2008 must establish a coherent set of measures to help
deliver the UK's 2020 domestic and European targets on emissions
and renewable energy, and show explicitly what their planned contribution
to this delivery will be. (Paragraph 62)
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