Memorandum submitted by Friends of the
Earth England, Wales and Northern Ireland
Question 1—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
Friends of the Earth lobbied for and welcomed
the 1997 Statement of Intent on Environmental Taxation with its
underlying principle that "quality of growth matters not
just quantity" and its recognition of the important role
to be played by taxation in managing the economy according to
that principle.
The statement itself sets out broad undertakings
including "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"; encourage innovation in meeting higher environmental
standards".
We will look at each of these three in turn.
(a) Increasing incentives
The Government has attempted to do this in three
ways, differentials within a tax, changing the basis for tax relief,
and increasing or introducing a tax rate.
The differentials policy has been applied to
a number of taxes but only in some of these cases can it be considered
to have increased the incentives in a way that led to a substantive
impact. It has been used to reduce pollution, other than CO2,
from road fuel. Previously this has been used successfully to
remove lead from petrol and since 1997 this policy approach has
been successful in speeding the uptake of low sulphur petrol and
diesel. In these cases the greener fuel targeted by the incentive
policy was commercially available and required no change in vehicle
technology or fuel distribution.
The Government has also used the differential
approach less successfully in relation to road fuels that reduce
CO2 emissions (for example LPG) that typically require
some change in vehicle technology and fuel distribution. Given
the changes involved and the consumer perception of the changes
involved the scale of the differential needed to be far greater
and backed up by a wider policy approach. The low level of incentive
and lack of policy integration both have a negative influence
of the ability of the policy to stimulate innovation.
The Government has also used this differential
approach with VED. Friends of the Earth and other groups had long
made the case for the previously flat rate of road tax to be differentiated
to provide an incentive to use more fuel efficient cars. The Government's
response has been poor in two respects—the differential
has been limited to cutting the rates for more efficient cars
with no increase in the low top rate for the most inefficient
cars and in 2001 weakening the lower rate impact by increasing
the engine size it was applied to. Once again although an incentive
was installed it is inappropriately weak and therefore prevented
from stimulating innovation.
One clear success in increasing incentives was
the reform of company car allowances. This installed an incentive
by changing the basis for tax relief which for many was a no-brainer.
Shifting the basis of this tax relief so that rather than increasing
if you drove more it increased according the efficiency of the
vehicle used simultaneously removed an incentive to drive further
and installed one to drive cars that emit less CO2.
This clear shift in Government policy in an important market for
new cars is likely to have a positive impact on innovation and
it is therefore no surprise that the nascent market in hybrid
cars is dominated by vehicles that also fit into the company car
market.
Incentives have also been increased by raising
the rates of existing taxes. Since 1997 the most prominent examples
have been road fuel duty and the landfill tax.
With the Landfill Tax the Government has followed
a policy of a gentle annual increase in the rate. It has provided
an incentive for those waste producers who pay that are hit hard
by the tax but this is not many. Research published by Friends
of the Earth after the Government's early rounds of increases
showed that the modest increases in the rate was failing to encourage
more than two-thirds of companies to reap the financial and environmental
benefits of waste reduction.[1] It found that a major barrier
to the effectiveness of the tax is the small size of the tax in
relation to overall company costs (typically less than 0.05% of
total costs). Soon after the Government had set a tax escalator
to reach £15 per tonne by 2004 the waste industry itself
identified a rate of at least £30 a tonne to bring about
significant increase in waste minimisation and recycling.
The Government has so far missed the chance
to install a meaningful incentive promptly enough that would stimulate
innovation. The potential for doing so is highlighted in those
few sectors who were significantly impacted upon where companies
facing more significant increases and who in general already considered
waste as an important cost took a variety of actions including
innovation for waste minimisation and seeking markets for recycling
their waste products.
In the case of road fuel duty the 1997 Government
inherited a policy of increasing its rate on an annual basis.
It did so partly because of the incentive but because of the income
raised—far greater than any other environmental tax to date.
It stuck with the escalator while oil prices remained low. But
the Chancellor faltered in his commitment to the policy at the
point where it started to have a more significant impact upon
emissions and in all likelihood innovation. According to the IFS
"a 10% rise in the price of fuel reduces fuel consumption
by around 2.5% and the volume of traffic by 1% after a year."
They show that "had the real rates of duty been maintained
at their peak values since 1999, we might expect current fuel
consumption to be around 4-5% lower (and as much as 9-12% lower
in the long run)."
The other important point about the fuel duty
policy was that although in 2002 the Chancellor did commit to
using any revenue from future increases in the rate to invest
in and stimulate sustainable transport up to that point this was
a fiscal stick that neither paid for nor was integrated with any
tax or spending carrots.
Finally the Government since 1997 has installed
incentives by introducing two new green taxes the Climate Change
Levy and the Aggregates Levy.
The climate change levy package has been effective
in changing behaviour.[31]
The tax itself has been designed in a policy package that includes
negotiated agreements for sectors to benefit from an 80% rate
cut, exemptions for on-site renewable energy, an enhanced capital
allowance scheme for investments in energy efficient products
and a information and advice provided through a new Carbon Trust.
A survey of businesses completed 18 months after the introduction
of the Levy found that it had helped increased the use of renewable
energy by businesses, helped increase energy efficiency and raised
awareness amongst senior managers about the needs to address energy
use and climate change. Crucially the survey found that many of
these changes had been considered before the Levy but it was the
financial incentive that provided the immediate stimulus to take
action. Yet despite its success the Chancellor froze the rate.
The Aggregates Levy was reviewed in the 2004
Pre Budget Report which put forward evidence that the Levy was
achieving its objectives.[32]
(b) Shifting the Burden of Taxation
In addition to installing specific incentives
the statement of intent also commits to the broader aim of shifting
the burden of tax off "goods", or things that need to
encouraged in the economy such as employment and onto to "bads"
such as environmental damage that need to be discouraged. This
was not a new concept, the Government in 1996 introduced the landfill
tax with an equivalent cut in employers' NIC claiming that it
was shifting the burden tax from employment to pollution. Both
the new environmental taxes introduced since 1997 have also included
cuts in employers NIC as part of the design.
Overall, however, since 1997 employers NIC has
grown as a percentage of the tax take and environmental tax takes
fallen. To use the statement of intent's language the shift, overall
and over the 10 years, has been off bads and onto goods. Fuel
duties accounted for 16% of receipts in 1996-97 and 15.1% in 2005-06[33]
for the same period NIC increased, from 16.3% to 17%.
Although the income from environmental taxes
increased by 28% in the first seven years since 1997 it increased
by 66% in the seven years previous to that. As proportion of total
tax take environmental taxes have also fallen from contributing
9.4% in 1997 to 7.7% in 2005[34].
Coincidently eight years before 1997 the contribution of green
taxes was 7.8% marginally more than it was 16 years later.
(c) Encouraging Innovation
There is a clear body of evidence that innovation
can be encouraged by achieving higher environmental standards.[35]
Since the Statement of Intent of Environmental Taxation however
significantly higher environmental standards have not be achieved
most notably in respect to emissions of CO2 which have
increased since 1997. It is worth considering two issues: the
importance of clear, strong, ongoing commitment to higher environmental
standards from Government for encouraging innovation; and the
extent to which the design of environmental tax reforms aimed
at encouraging innovation.
Where Government clearly has a commitment to
higher environmental standards it helps to convince firms of the
opportunities to be had in investing in innovation to meet those
standards and ensuring existing innovation programmes recognise
the reality of higher environmental standards. Over the 10 year
period the Government's commitment has been put in question as
it has reduced the rates of environmental taxes at consecutive
Budgets. The opportunities that Government can help unlock for
UK businesses is also recognised by the Corporate Leaders Group:
"We think that the transition to a low-carbon economy
could have a profound impact on British businesses" said
Neil Carson, Chief Executive of technology company, Johnson Matthey.
"As Stern points out, "the innovation associated
with tackling climate change could trigger a new wave of growth
and creativity in the global economy." Britain should be
at the crest of this wave".
The design of environmental tax policies is
crucial. We have already given several examples of where the rate
of the tax is simply been set to low but two other points need
to be made. First, the price mechanism, powerful as it is, on
its own will not be the most efficient approach to stimulating
innovation in the majority of cases. Tax breaks and spending that
help investment and research and increase information flows also
help. The climate change levy is an example of how different elements
can be packaged together. Second, in deciding on the levels of
a tax rate or conditions of a tax relief it is no good for innovation
if those are defined by existing commercially available technology.
BP for example when setting up their own internal carbon reduction
programme took the total of all actions they knew they could take
and then made the target 10% tougher because they new that innovation
would deliver the gap. Yet when the Government negotiated its
agreements for tax relief on the climate change levy it simply
took the available technology figure.
Question 2—Government's use of environmental
taxes to tackle climate change
Overall, we believe that the Government's progress,
after some real achievement in 1997-2000, has stalled and in many
areas gone into reverse. The bottom line is that taxes are a major
component of a successful strategy to tackle climate change, yet
in 10 years emissions have not fallen. It is our belief that the
Government has been paralysed by unsubstantiated claims that action
would be bad for the economy (which the Stern Review roundly refutes),
and by fears of political back-lash. Where it has introduced measures
it has failed to back them up, and in general leadership has been
lacking. Of course, increased taxes have the potential to be politically
difficult, but they have not been sold well. In particular, the
link between tax rises and either tax cuts or increased spending
elsewhere has not been made. The Government continues to be extremely
timid, even when—as now—there is increasing public
acceptance that climate change must be tackled. We hope that the
Stern Review's conclusions will give the Treasury in particular
the confidence to implement a strong, positive strategy to cut
carbon emissions—as Stern says, it is imperative that this
starts now.
Use of taxes in specific sectors:
Aviation
Aviation emissions have risen heavily in recent
decades, continue to rise, and are predicted to rise way into
the future. Total emissions doubled from 1990 to 2004, and are
predicted to more than double again by 2030. This is because demand
growth for flights heavily outstrips technological improvements
to plane efficiency. Demand growth is in turn heavily influenced
by flying falling in price (see graphs below). These low and falling
prices are in large part due to aviation's continuing exemption
from many taxes—notably the zero tax on aviation fuel and
exemptions from VAT. Both are anachronisms, but have proved difficult
to remove.
Air Passenger Duty (APD) could be used as an
environmental tax—as a proxy for VAT and fuel taxes. It
affects the cost of flying to the consumer and as such affects
marginal flights. We note however that APD rates have been low.
On EU flights APD was introduced at £5 for economy flights
in 1994, raised to £10 in 1997, dropped to £5 in 2001,
and raised to £10 again as from February 2007. The DfT's
December 2006 Progress Report on its Aviation White Paper notes
that current rates of progress on taxation will not stop the massive
predicted growth in flights. Oxford University's Environmental
Change Unit states that APD escalators will be needed to stem
this growth—ie far greater progress than the occasional
increase every fifth year. We note that, contrary to Government
pronouncements, such escalators would not stop people flying,
but would stop the growth in flying. Moreover it does not "price
poor people off the airlines"—the evidence of the last
five years is that the falls in the cost of flying in that period
have led to more flights by richer people. The average household
income of people flying from Stansted is £50,000. Taxing
aviation is progressive taxation.
Green Cars
The Government's decision to differentiate Vehicle
Excise Duty (VED) levels by carbon emissions should in theory
give an incentive for people to buy less-polluting vehicles. However,
in practice the difference between these levels is far too low
to make any practical difference to people's purchasing patterns.
The difference between Band F and Band G is £20—around
the cost of replacing one windscreen-wiper. The decision to make
the least-polluting Band A pay zero VED is welcome, but the differentials,
particularly between the higher bands, need to be made far wider
for the policy to be effective.
Fuel Duty
Fuel Duty is the largest and most controversial
green tax. The Fuel Tax Escalator, introduced by Norman Lamont
in 1993 and increased by Kenneth Clarke and Gordon Brown, had
a clear environmental effect. The Treasury reported in 1999 that
it "...has given a clear signal to motorists and manufacturers
to design more fuel efficient vehicles, avoid unnecessary journeys
and consider alternatives to the car". Gordon Brown scrapped
the escalator in November 1999, and the received wisdom is that
the fuel tax protests of 2000 are a major cause of the freezing
(and hence real-terms fall) in fuel duty in almost every year
since. This has been a major contributory factor to the cost of
motoring falling in recent years, and to the increase in road
transport emissions.
We believe that fuel duty increases would be
far more politically palatable, and environmentally effective,
if they were linked to increases in spending on providing decent
and cheaper alternatives to motoring. Bus and Rail prices increase
heavily every year—it is no surprise that emissions of transport
rise when the Government's use of its economic instruments mean
that the two more polluting modes (air and cars) get cheaper,
while the two less polluting modes (bus and rail) get more expensive.
Climate Change Levy (CCL)
The CCL is the Government's environmental tax
success story. A survey of businesses completed 18 months after
the introduction of the Levy found that it had helped increase
the use of renewable energy by businesses, and helped increase
energy efficiency. Many senior managers had been considered before
the Levy, but it was the financial incentive that provided the
immediate stimulus to take action. The CCL has saved millions
of tonnes of carbon, and its use of a package of measures—taxes,
rebates, information provision—is one that we believe should
be replicated across other sectors. The rate of the CCL has however
been frozen in recent years—albeit with an inflation-based
rise announced in this pre-budget. It would be even more effective
if the Chancellor were to announce a series of increases in the
levy over the next five years, to further increase efficiency,
cut emissions, and boost the take-up of renewable energy.
Domestic Energy
Simple increases to taxes on domestic energy
to cut carbon emissions suffers from two main problems—doing
so would not don't distinguish between types of energy, and would
exacerbate the major problem of fuel poverty. The clear priority
for the domestic sector is a major package of measures to improve
energy efficiency of the UK's housing stock, which is among the
worst quality in Europe. The Government has some schemes here,
such as Warm Front and LESA, but overall a far greater investment
is required. It would have twin benefits—tackling fuel poverty
and carbon emissions.
The Government could use the tax system far
more to incentivise energy efficiency—and we advocate for
example the use of council tax rebates for people who install
cavity wall insulation or loft insulation. A £1.4 billion
fund could help all the 14 million households in the UK currently
without these basic measures.
With a major effort on energy efficiency, targeted
at the poorest households, it may be possible in a number of years
to implement a domestic carbon tax. Dresner and Ekins (2006) argue
that if the revenues raised were recycled at least partly in the
form of increasing pensioner's winter fuel allowance, higher income
support, and working and child tax credits, etc, then a carbon
tax can be progressive while reducing carbon emissions.
Waste
The treatment of waste does have a large impact
on climate change, as for example recycling saves massive amounts
of carbon from not having to mine, process and transport virgin
resources. Such savings wouldn't accrue to the UK carbon accounts
(as it would save carbon emissions in other countries), however
they are still carbon savings, and UK policy should—in line
with its waste hierarchy—try to incentivise reduce, reuse
and recyling above worse options such as incineration and landfill.
The Landfill Tax Escalator is having an effect
on reducing the proportion of waste going to landfill. However,
we note the Environment Secretary's letter to the Chancellor from
October 2006 stating that "our analysis suggests a rate of
£75 per tonne by 2013 makes alternatives to landfill sufficiently
financially attractive to tip behaviour significantly". To
get to this rate from the current £21 per tonne needs a higher
escalator than £3 per year.
Question 3—behaviour change or revenue raising?
We believe that too often green taxes are used
solely to raise revenue, and this can backfire spectacularly,
as was seen with the 2000 fuel tax protests. We believe that Government
must use green taxation as part of an overall strategy, involving
packages of measures, to meet its environmental goals while also
tackling distributional effects. There are two main reasons for
this.
First, tax measures will be far more effective
as part of integrated policy packages, as has been seen with the
Climate Change Levy. However simply increasing taxes without linked
measures is almost guaranteed to be unsuccessful. This was the
case with the fuel duty escalator—tax rises at the same
time as allowing the price of alternative transport modes to rise
far higher, with the revenues just accruing to general Treasury
coffers.
Second, linking taxes with spending on specific
linked measures makes taxes far more politically acceptable. 2006
MORI polling showed that 60% of people support increased taxes
on air travel for environmental reasons; this increases to 73%
if the money were to be spent on improving the environment.
Question 4—looking forward, the role of
environmental taxation
We believe that the implications of the Stern
Review require a major overhaul of the Treasury's policy on climate
change. Stern argues strongly that urgent action is needed, now,
that policy instruments on taxes, spending, regulation, other
market mechanisms and information are all required to do this
job, and that action is needed at the national as well as international
levels. This contrasts with the current Treasury approach which
is largely piecemeal, with some good measures (eg CCL), major
holes in some areas (eg domestic and aviation sectors) and stagnation
in others (surface transport). Overall, UK carbon emissions are
not falling, despite repeated commitments to emissions cuts and
repeated statements that climate change is "the greatest
challenge we face". A large part of this failure is down
to weak or misdirected economic signals throughout almost all
sectors of the economy.
The overwhelming priority is for the Government
to have an overall strategy, setting out annual cuts in carbon
emissions, carbon budgeting, and annual reporting on this strategy.
The Treasury has a key role to play in delivering these annual
cuts, using packages of measures, in which taxes have a major
role.
In specific sectors, we advocate:
Aviation
— the use of APD escalators to
prevent the planned growth in flights. EUETS may be an important
element of a strategy to reduce emissions, however aviation's
inclusion will not happen for a number of years, and interim measures
are urgently needed.
— The use of revenues to fund
necessary spending measures for carbon cuts elsewhere in the economy.
Domestic sector
— A massive expansion in funding
for energy efficiency measures, particularly for poorer households,
funded by increases in aviation taxation.
— Medium-term development of carbon
taxation, with policy design's first focus to avoid regressive
effects.
Surface transport
— The reintroduction of the fuel
duty escalator, with funds explicitly used to improve the cost,
reliability, safety and attractiveness of less polluting alternatives—rail,
bus, tram, cycling and walking.
— A major increase in the differentials
on Vehicle Excise Duty, to kick-start a massive switch away from
gas-guzzling vehicles.
Industry
— Increases in the Climate Change
Levy, with funds recycled to business through tax cuts on employment,
and schemes for further increasing energy efficiency.
Waste
— Steeper landfill escalator,
and also an incinerator tax to ensure that waste diverted from
landfill gets recycled in preference to incineration. Recycling
delivers far higher carbon savings than incineration.
Question 5—Stern Review
We believe the Stern Review provides a strong
imperative for a new strategy to use economic instruments, including
tax, to deliver major cuts in the UK's carbon emissions.
One particular piece of the Stern Review could
have major implications for UK policy making. Currently, the Government
routinely uses the Social Cost of Carbon (SCC) in policy and project
appraisal. It has a major effect in determining what level of
carbon emissions to allow in specific policies or projects. For
example in the last six months, the determination of appropriate
Building Regulations; levels of recycling in the Waste Strategy;
whether airports expansion is acceptable.
The figure currently used for SCC is £70
per tonne of carbon. The Stern Review is recommending a figure
three times this high—using this figure would have a major
effect on policy making, and on carbon emissions in the UK. At
present, in a parliamentary answer from John Healey, 18 December
2006, the Treasury is "in the process of re-examining
the issue of the social cost of carbon". The detail of
this process is not clear; we advocate that it should be resolved
before Budget 2007, used for policy and project appraisal at Budget
2007 and beyond, and applied retrospectively to major policy areas
to determine whether policy review is needed.
The new proposed SCC figure is in essence down
to three changes:
— It is based on more up-to-date
science—the £70tC figure is many years old.
— It is based on a lower discount
rate. We note that this is not a "scientific" issue,
but an "ethical" one. The Stern Review states that the
lower rate used reflects "the view that this rate should
be based largely on the probability that future generations exist,
rather than their having some more lowly ethical status".
— It covers a broader range of
impacts. The 2002 review was based on a literature review of studies
which only cover a small range of the total impacts of climate
change.
There still remain difficulties with using SCC—not
least that it institutionalises the trade-off of different policy
objectives, which is conflict with the Government's Sustainable
Development strategy that policy objectives should be integrated.
However, this higher SCC gives a more accurate reflection of the
actual damage from climate change, and is far more appropriate
than the current £70tC figure.
January 2007
31 Cambridge Econometrics and Policy Studies Institute
for HM Customs and Excise cited in Budget 2005, p 159. Back
32
HM-Treasury 2004, Pre-Budget Report Para 7.68 and Box 7.5. Back
33
IFS, 2005, Taxation, Election Briefing Notes, BN 58. Back
34
http://www.statistics.gov.uk/statbase/tsdintro.asp Back
35
Aldersgate Group, 2006. Green Foundations: Better Regulation
and a Healthy Environment for Growth and Jobs. London, Aldersgate
Group. Back
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