Memorandum submitted by the Energy Saving
Trust
1. EXECUTIVE
SUMMARY
1.1 The Energy Saving Trust believes that
the Government has made only limited progress against the undertakings
set out in its Statement of Intent on Environmental Taxation,
published in 1997, and the subsequent Tax and the environment:
using economic instruments, published in 2002. Whilst the
undertakings were sound and sought to correct market failures
impacting upon the environment, they have not been continued in
taxation policy since publication. Only a very limited implementation
of environmental taxes has been seen, including the introduction
of Vehicle Excise Duty based on carbon dioxide emissions, and
Enhanced Capital Allowances for microgeneration and energy saving
equipment. There is considerable scope for a much greater range
of environmental taxes, particularly those seeking to address
climate change.
1.2 Environmental taxation has an important
role to play in behaviour change. This role has not been sufficiently
explored or exploited, in either encouraging or discouraging behaviour
which impacts upon climate change, including household sustainable
energy and transport.
1.3 Environmental taxation is a vital component
of the policy mix required to mitigate climate change. Along with
a clear and consistent regulatory regime, investment and spending
programme, trading schemes, and voluntary agreements, environmental
taxation can provide the necessary encouragement for comprehensive,
sustainable individual behaviour change in both their household
and transport habits.
2. INTRODUCTION
2.1 The Energy Saving Trust was established
as part of the Government's action plan in response to the 1992
Earth Summit in Rio de Janeiro, which addressed worldwide concerns
on sustainable development issues. We are the UK's leading organisation
working through partnerships towards the sustainable and efficient
use of energy by households, communities and the road transport
sector and one of the key delivery agents of the Government's
climate change objectives. Our response focuses on the key areas
of the Energy Saving Trust's activities and related issues that
are relevant to the inquiry. We do not attempt to answer questions
outside our area of expertise. Please note that this response
should not be taken as representing the views of individual Energy
Saving Trust members.
3. PROGRESS MADE
BY GOVERNMENT
ON 1997 AND
2002 UNDERTAKINGS
Progress made by the Government on the undertakings
set out in its Statement of Intent on Environmental Taxation,
published in 1997, and subsequently endorsed in its 2002 paper,
Tax and the environment: using economic instruments.
3.1 The Statement of Intent on Environmental
Taxation, published in 1997, committed HM Treasury to:
"... explore the scope for using
the tax system to deliver environmental objectives... over time
the Government will aim to reform the tax system to increase incentives
to reduce environmental damage. That will shift the burden of
tax from "goods" to "bads"..."
3.2 This was further endorsed by the Government's
2002 paper Tax and the environment: using economic instruments
which confirmed the primary purpose of environmental taxation
and regulation as the correction of market failure, of which climate
change is a clear example.
3.3 The Government's limited progress against
its 1997 and 2002 papers is evidenced by the falling rate of revenue
from environmental tax receipts, now only 2.9% of Gross Domestic
Product (GDP), compared with 3.6% in 1999. Similarly, environmental
taxes as a percentage of total taxes and social contributions
have fallen from 9.7% in 1999 to 7.7% in 2005. Total revenue from
environmental taxation is 2005 was £35 billion, largely from
the energy sector.
3.4 While there have been some efforts in
this direction, including the introduction of the emissions-based
Vehicle Excise Duty (although emission band differentiation remains
inadequate), and Enhanced Capital Allowances for microgeneration
and energy saving equipment, there is still considerable scope
for additional taxation to correct this market failure, particularly
on those products/behaviours which are contributing to negative
environmental outcomes, such as climate change. We still find
ourselves in a situation where products and behaviours which contribute
to climate change are not discouraged through the tax regime and
the most energy efficient products and behaviours on the market
are not encouraged through fiscal incentives. This is a particular
issue in relation to energy use of individuals—household
and transport—which makes up almost half of the UK's carbon
emissions.
4. GOVERNMENT'S
USE OF
ENVIRONMENTAL TAXES
FOR CLIMATE
CHANGE
The government's use of environmental or "green"
taxes that are specifically targeted at tackling climate change.
4.1 Within the Energy Saving Trust's area
of expertise—individual energy use predominately in homes
and personal transport—there has been very limited use of
environmental taxation. As previously mentioned, Vehicle Excise
Duty and Enhanced Capital Allowances are two key initiatives in
this area. In addition, the recent increase in fuel duty was a
step forward however, the re-introduction of the fuel price escalator
would provide a stronger and more effective long-term price signal
for vehicle users.
4.2 However, the general trend of environmental
taxation tackling climate change has been to provide limited,
and often not widely promoted, incentives on the "goods"
rather than taxing the "bads".
4.3 The Chancellor, in his Pre-Budget Report
2006, announced plans to remove stamp duty on zero carbon homes.
This is a welcome announcement and should provide some financial
incentive for home-buyers when zero carbon homes become more widely
available. It should also provide an incentive for the house-building
industry to mainstream zero carbon housing.
4.4 Reduced rate (5%) VAT is applied to
energy saving materials including energy efficiency measures such
as insulation, and microgeneration technologies. These materials
must be professionally installed in order to attract the reduced
rate. With the growing DIY market and increasingly popularity
of microgeneration technologies in this market, the reduced rate
of VAT should be applied to all of these materials.
5. ENVIRONMENTAL
TAXATION FOR
BEHAVIOURAL CHANGE
The extent to which the Government uses environmental
taxation to encourage behavioural change, rather than solely to
raise revenue, and the social impact of such taxation.
5.1 Effective environmental taxation can
play a major role in changing behaviours, saving energy resources,
addressing social issues and helping to benefit the economy through
increased demand for more sustainable products and services.
5.2 Green taxation is already widely accepted
as an effective driver of behavioural change for instance in the
OECD publication Environmentally Related Taxes in OECD Countries
Issues and Strategies, 2001 and the 2002 HM Treasury publication
Tax and the environment: using economic instruments, which
states:
"Taxes and other economic instruments
have a central role to play in this (correcting market failures
involving the environment process). They can provide incentives
for behaviour that protects or improves the environment, and deter
actions that are damaging to the environment. For both consumers
and business alike, economic instruments such as tax can enable
environmental goals to be achieved at the lowest cost and in the
most efficient way. By internalising environmental costs into
prices, they help to signal the structural economic changes needed
to move to a more sustainable economy. They can encourage innovation
and the development of new technology. The revenue raised by environmental
taxes can also be used to reduce the level of other taxes, which
can help to reduce distortions in the economy, while raising the
efficiency with which resources are used. Where there is a strong
case, some or all of the revenue may also be used to reinforce
the effectiveness of a tax measure by strengthening incentives
for positive action, or mitigating adverse impacts."
5.3 However, Government has only used environmental
taxation to encourage behavioural change in limited circumstances,
as outlined in section 5 (above). Given the pressing climate change
targets set by the Government—20% reduction in carbon dioxide
emissions on 1990 levels by 2010, and a 60% reduction by 2050—much
greater use of environmental taxation for the purposes of behavioural
change is required.
5.4 There are numerous opportunities for
Government, in the short term, to use environmental taxation to
change behaviour. Consideration should be given to a range of
additional taxation measures including the taxing of the most
energy inefficient types of products, such as "gas guzzlers"
and plasma screen televisions.
5.5 There is also a clear need to increase
the uptake of energy efficient lighting over incandescent bulbs.
This could be achieved by continuing to reduce the relative price
premium between energy efficient bulbs and conventional bulbs
to encourage consumer take up of more efficient lighting. Government
should give consideration to reducing the VAT on compact fluorescent
lamps (CFLs) to 5% and applying an inefficiency charge on incandescent
bulbs at a rate of at least 50 pence per unit.
5.6 The Government should also be encouraging
householder behaviour change, particularly the installation of
insulation, by utilising existing taxation mechanisms more effectively.
Council Tax rebates have provided an effective means of encouraging
the installation of cavity wall insulation in the 16 local authority
areas which are currently piloting the scheme in conjunction with
British Gas. Further analysis of Council Tax rebates can be found
in the Energy Saving Trust's Changing climate, changing behaviour:
delivering household energy saving through fiscal incentives
available at http://www.est.org.uk/uploads/documents/aboutest/fiscalupdate.pdf
6. APPROPRIATE
ROLE OF
ENVIRONMENTAL TAXATION
The appropriate role of environmental taxation,
in the context of the range of means by which the Government can
seek to achieve its environmental policy aims—for example,
by means of regulation, a voluntary agreement or a spending measure.
6.1 In order to be effective, environmental
taxation needs to be primarily linked to achieving long-term environmental
outcomes but should also be considered through fiscal measures
aimed at a short term behavioural change as a pre-cursor to longer-term
fundamental change. It should also be part of a comprehensive
policy package of taxation, regulation, spending and investment,
trading schemes, and where appropriate, voluntary agreements.
6.2 To a large extent, the most appropriate
instrument will depend upon the elasticity of the market. Taxation
and/or incentives are more likely to work in an elastic market
whereas those markets which are highly price inelastic are often
best addressed through regulation.
6.3 New and emerging technologies, for example
sustainable energy technologies, are often best encouraged and
developed through spending programmes which help to fast-track
their commercialisation. For example, the DTI's Low Carbon Buildings
Programme which encourages wider uptake of microgeneration technologies.
6.4 Consideration must also be given to
the use of revenues from environmental taxation. Generally, revenues
raised from environmental "bads" should be hypothecated
to provide investment, regulatory enforcement, and/or incentives
for linked environmental "goods".
6.5 The role of environmental taxation in
the policy mix is well supported in the Stern Review, which recommends
the three essential elements of climate change policy include
Carbon Pricing (pricing carbon through taxes, trading or regulation
in order to incorporate the full social costs of actions), Technology
Policy (bringing forward low-carbon and high-efficiency technologies
through research and development, demonstration, and market support),
and Policies to Remove Barriers to Behavioural Change (cost effective
mitigation options are not always taken up due to lack of information,
the complexity of choices or the upfront cost—policies on
regulation, information and financing are important).
6.6 It is important that all aspects of
the policy mix are sending clear and consistent signals to individuals
and the market. UK citizens need clear signals from Government
in order to change their behaviour, particularly around climate
change. This is strongly supported by the Sustainable Development
Commission's I will if you will report into bringing about
behaviour change for sustainable lifestyles.
January 2007
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