Memorandum submitted by PricewaterhouseCoopers
LLP
This paper covers the following:
— It sets out what we believe
the overall objectives on climate change to be, and the tools
that are available to help achieve these objectives.
— It summarises what has been
implemented by Government in recent years with a focus on environmental
taxation.
— We raise a number of issues
that we think are relevant in the context of the current fiscal
and regulatory environment.
— We briefly review the most recent
announcements made in the Pre-Budget Report.
— We offer some final conclusions
and comment.
WHAT ARE
WE TRYING
TO ACHIEVE
AND HOW?
1. Recent economic studies undertaken at
PwC which were published last year in our report, "The
world in 2050: implications of global growth for carbon emissions
and climate change policy", show that emissions might
more than double by 2050 on certain baseline assumptions. To protect
the climate we estimated that global emissions would need to peak
by 2025 at levels no more than around 10% above 2004, and then
to reduce to at least 15% below 2004 levels by 2050.
2. Our report indicates that a viable strategy
to achieve the reductions mentioned needs to involve three broad
strands:
— a greener fuel mix with more
focus on natural gas, nuclear and renewables;
— energy efficiency and conservation
particularly for vehicles and buildings; and
— investment in carbon capture
and storage.
3. Government policies are therefore required
to assist with these measures, and environmental taxes are certainly
one way of helping with the methods outlined above. In its statement
of intent, Government says that it believes that environmental
taxes and other economic instruments are key tools for achieving
environmental improvements.
4. The Stern report on the economics of
climate change underlines predictions of dire social and financial
consequences if mankind continues to produce greenhouse gases
at the current rate. It highlights three key policy elements available
to Government: Carbon pricing, technology policy and the removal
of barriers to behavioural change. In the light of the Stern report,
PricewaterhouseCoopers supports the view that Government needs
to actively consider the instruments which are at its disposal
and should reassess how best to deploy them to tackle climate
change.
5. The principal economic instruments available
are:
Carbon taxes (and hybrids such as taxes on energy).
Induced technological change.
6. In principle, carbon taxes are designed
to impose tax on the source of pollution at a level which represents
the cost to society of the pollution (the externality). Assessing
the level of cost that should be applied is not easy for various
reasons, including predicting the environmental impacts and the
need to set the tax on a national basis when the externalities
occur on a global basis.
7. Carbon emissions trading sets the overall
quantity of what is perceived to be an acceptable level for emissions,
and allows the market to set the price. Trading arises between
those who individually have a surplus of allowances and those
who have a shortfall.
8. Induced technological change includes
implementing a wide mix of policies to assist with investment,
and encouraging private investment, promoting research and development
and the sharing of technology.
9. HM Treasury is responsible for reviewing
the appropriateness of these economic instruments and possible
hybrids, to encourage each of the three fundamental strands specified
and so facilitate the reduction of emissions as outlined above.
The emphasis must be on encouraging behavioural change, although
to the extent that funds can be raised by taxing pollution and
waste, and ring-fenced for use in connection with the climate
change agenda, then that could be a justifiable policy to pursue
from an environmental perspective.
WHAT HAS
BEEN DONE
IN RECENT
YEARS?
10. Over the last few years a number of
additions and changes have been made to the tax and regulatory
system. These changes have forced business to address environmental
issues by having an obligation to understand and comply with the
new legislation and regulation.
11. The new elements include a number of
new taxes such as landfill tax, aggregates levy and climate change
levy, which have added to existing environmentally related taxes
such as vehicle excise duty, fuel duties and air passenger duty,
while noting that these existing taxes would probably not have
been labelled "environmental taxes" when they were first
introduced.
12. There are also now a number of specific
incentives within the fiscal system. The list includes Enhanced
Capital Allowances and reduced VAT rates for environment related
expenditures, Land Remediation relief, reliefs for Micro generation
technology, and tax differentials for the use of more environmentally
friendly cars and biofuels. More general reliefs such as Research
and Development credits may also be considered helpful to environmental
objectives. A general observation on tax incentives is that business
generally considers that increased incentives are needed to encourage
"good" behaviour. Existing incentives should be reviewed
to ensure that they are properly publicised and adequate in providing
relief for environmentally beneficial expenditures. Our research
suggests that, especially for privately owned business, very few
companies are aware of, or access, the corporate tax reliefs currently
available.
13. In addition to this tax-related legislation,
there is voluminous regulation that companies now have to manage
and comply with. The EU Emissions Trading Scheme is probably the
most well known example of these, but substantial obligations
also arise under the Waste Packaging regulations, Renewable Obligations
and Building Regulations to name just a few with a new European
Directive on Waste Electrical and Electronic Equipment and the
potential for new road pricing policies also to bear in mind.
WHAT ARE
THE ISSUES?
14. Complexity—Even before we consider
the additional environmental taxes, incentives and regulations
that have been mentioned, the UK tax system is voluminous and
is growing relentlessly with each passing Budget and PBR.
15. Resource—The current regime requires
companies to invest in IT and knowledgeable personnel (potentially
whole departments), dedicated to dealing with environmental obligations.
16. Competitiveness—If other countries
are not implementing similar systems to deal with climate change
and environmental issues, we run the risk of industry leaving
the UK and/or Europe. This might lead to the migration of industries
which pollute so that they can pollute elsewhere—a short-term
"win" for the UK, perhaps, but not really achieving
the aim of the provisions.
17. Certainty—In order for business
to fully engage and commit to an environmental strategy implemented
by Government, they need certainty and long-term consistency in
policy decisions that stretch beyond the term of a parliament
or indeed of a particular Government. The environment needs long-term
investment and certainty to encourage such investment.
18. Trust, confidence and effectiveness—Business
needs to buy into Government policy, to believe that it is seriously
trying to change behaviour and that its policies are not just
designed to raise more revenue or, if they are, that they are
assisting the achievement of environmental goals by funding bespoke
Government environmental objectives and projects.
19. Who to speak to—This is becoming
more difficult to establish in view of the number of Government
departments now interested and working on these issues. There
are also numerous initiatives, programmes and associations which
have been set up in recent years. There is now perhaps a perception
that the setting of Government policy needs to be more focused.
THE IMPACT
OF THE
LATEST PBR ANNOUNCEMENTS
20. There was extensive comment on environmental
issues in the most recent PBR, but we remain to be convinced that
the measures announced will really be effective in helping to
achieve the changes required.
21. There is a focus on the EU Emissions
Trading scheme and generally we think that industry welcomes this
mechanism as one which can deal with the competitiveness issues
if applied consistently in an international context. We should
not forget however the administrative burdens and the complexity
that comes with the scheme, and if it is perceived that there
is duplication of effort here by an overlap with other elements
of the tax and regulatory regime, then simplification and rationalisation
will be matters to seriously consider. Uncertainties, inconsistencies
and anomalies on both accounting and taxation continue with regard
to the scheme and these need to be resolved. The current consultation
on the Energy Performance Commitment, which would extend emissions
trading to industries not currently within the EUETS, should focus
on the lessons learned from the first two years of the EUETS.
22. The measures announced in connection
with carbon capture and storage are welcome in light of the enormous
potential for storage of CO2 in the depleted oil and
gas wells and saline aquifers of the North Sea. Currently there
is no agreed basis for the taxation of Carbon Capture Storage
(CCS) in the UK. Government policy in the tax arena here needs
to be stable, coherent and consistent if industry is to make the
long term investment that CCS will require. The consultations
and engineering studies announced to evaluate associated costs,
and collaboration with Norway in relation to a joint study are
good initiatives as is the opportunity to convene a joint HMRC/
industry work group to provide clarity on the tax position where
oil and gas fields in the North Sea undergo a change in use of
infrastructure to one of carbon storage.
23. Air Passenger Duty was introduced in
1994 at £5, increased in 1997 to £10, reduced again
to £5 for economy class in 2001 and now doubled to £10
for EU flights and £40 for long-haul flights. The change
adds to the cost for business and personal travel but it is doubtful
that it will change behaviours. The change creates more uncertainty
and the tax is not well targeted to carbon emissions, being a
largely undifferentiated tax on travel. The proposed inclusion
of aviation in the EUETS will perhaps be more effective.
24. The increase in fuel duty by 1.25p per
litre is unlikely to significantly impact traffic volumes and
fuel consumption and for this reason alone is unlikely to meet
the test of an effective environmental tax. To promote it as such
undermines trust and confidence in the underlying objectives of
the policy.
25. Zero carbon housing and the proposed
related time limited stamp duty relief is a good idea but raises
at the same time the question of whether sufficient incentive
is provided for energy efficiency in the far larger existing housing
stock.
OVERALL CONCLUSIONS
26. With environmental issues clearly claiming
a large part of the political agenda, and in light of recent economic
reports including Stern, we could expect the recent PBR statement
to have announced and implemented more strategic measures to provide
business with the long term policy framework required for business
to help in tackling climate change. Clarity and certainty are
required along with a system which encourages and incentivises
environmentally beneficial business behaviour and investment.
The regime we have at present arguably does not provide that,
and the most recent changes have done little to move us in the
right direction, but at least we know that the technologies to
achieve the goals exist, and that Government does have the issue
firmly on its agenda. There seems to be a commitment to looking
at the issues with an international perspective, and this will
be important to ensure that the US and the rapidly growing economies
of China and India are drawn into setting international policies
which are then able to achieve the necessary goals.
January 2007
| 
