Pre-Budget Report 2008: Green fiscal policy in a recession - Environmental Audit Committee Contents

Green taxation

Shifting the burden of taxation from 'goods' to 'bads'

40. In July 1997 the Treasury issued a "Statement of Intent on Environmental Taxation", setting out the Government's 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; and deliver a more dynamic economy and cleaner environment, to the benefit of everyone.[56]

The Treasury followed this with a number of bold moves, increasing the fuel duty escalator and introducing a range of new instruments, including the Climate Change Levy package and the Aggregates Levy. From 1999, however, this momentum stalled: in 1999 the fuel duty escalator was abolished; the main rate of Air Passenger Duty was halved in 2002; and Climate Change Levy rates were frozen between 2001 and 2007. Through our work on successive Pre-Budgets Reports we have tracked progress against the statement of intent.

41. Since the 2006 Pre-Budget Report there has again been a slight, if faltering, shift forward in momentum for all key environmental taxes (see Table 1). The main rate of Air Passenger Duty doubled in February 2007; fuel duty has increased each year since 2006-07; Vehicle Excise Duty has increased for all but the most fuel efficient cars; the Climate Change Levy has been revalorised twice since 2007-08 (i.e. raised in line with inflation); the Aggregates Levy increased by 5 pence per tonne (22%) in 2008-09 to take account of inflation since its introduction; and Landfill Tax continued its annual rise , increasing by £8 per tonne (33%) in 2008-09.

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
2000-01Revalorise2 FreezeIntroduction FreezeN/A Rise to £11/tonne
2001-02Freeze Reform (new bands), Cut for smaller cars, Freeze for other rates FreezeReform (avg. rate cut) N/ARise to £12/tonne
2002-03Freeze Freeze, plus Reform (new lower rate for lower emission cars) FreezeFreeze Introduction Rise to £13/tonne
2003-04Revalorise Revalorise, plus Reform (new lower rates for low emission cars) FreezeFreeze FreezeRise to £14/tonne
2004-05Freeze FreezeFreeze Freeze Freeze Rise to £15/tonne
2005-06Freeze Freeze for lower emission bands, Revalorise for highest FreezeFreeze FreezeRise to £18/tonne
2006-07Revalorise Cut for lower emission bands, Freeze for bands D & E, Rise for band F and a Rise / Reform : new band G for highest emitters FreezeFreeze until February 2007, then Rise (doubling all bands) FreezeRise to £21/tonne
2007-08Rise (2ppl in October 2007) FreezeRevalorise FreezeFreeze Rise to £24/tonne
2008-09Rise (2ppl in December 2008) Freeze for bands A & B; £5 rise for bands C to F; £100 rise for band G RevaloriseFreeze Rise from £1.60/tonne to £1.95/tonne Rise standard rate to £32/tonne.

Rise lower rate from £2.00/tonne to £2.50/tonne


1 Changes 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, 2008; and Supplementary Memorandum from HM Treasury to Environmental Audit Committee inquiry into Pre-Budget Report 2005

42. While we welcome these renewed initiatives, it is clear that the Treasury is continuing to fail in its avowed aim to shift the overall tax burden from 'goods' to 'bads'. In 1998 and 1999 green taxes as a proportion of all taxation peaked at 9.7%; since when the proportion has fallen almost steadily, although the figure of 7.4% in 2007 was a slight increase from the 7.2% recorded the previous year. During the same period, environmental taxation as a proportion of Gross Domestic Product (GDP) fell from 3.5% (1998) to 2.7% (2007). In all years since 2001 real terms income from environmental taxation has been below that recorded in 1998 (see Chart 1).Chart 1: Environmental tax receipts have gone down in real terms

Source: UK Environmental Accounts Autumn 2008, Office of National Statistics

Note: Income from environmental taxes has been revalorised into 2007-08 equivalents using the Treasury's GDP Deflators:

43. The Aldersgate Group believed that the Government was giving out a mixed message on the future direction of taxation.[57] This view was echoed by Tim Jackson who expressed concern about the effects of the cut in Value Added Tax and future rise in National Insurance Contributions.[58] Paul Ekins criticised the VAT cut in the PBR as "an undifferentiated stimulus to consumption."[59]

44. We asked the Exchequer Secretary what impact the overall package of tax measures announced in the Pre-Budget Report would have on shifting the burden towards green taxes. She did not tell us what changes would result to the measure of green taxes made each year by the Office of National Statistics but claimed that:

The way that we define green taxation in the Treasury is by things like the Climate Change Levy where we actually recycle the income. We have changed behaviour that way. I suppose you could say that we could make major structural changes to taxation, which would be very much larger than the changes we have made—for example, [… to] shift to green taxes away from income taxes. It has not been the Government's view that we should shift our structure to that extent. You can take radical or pragmatic approaches to this. We have taken a pragmatic approach.[60]

We recommend that the Treasury publishes with the Budget its assessment of how the tax changes announced in the Pre-Budget Report help to shift the burden of taxation from 'goods' to 'bads'. This assessment should quantify the expected changes to environmental tax receipts, as defined by the Office of National Statistics, in terms of their proportion both of total tax receipts and of GDP. The Minister's answer appeared to suggest—for the first time in our knowledge—that hypothecation of tax revenues to environmental ends, as in the case of the Climate Change Levy, is essential to the Treasury's concept of environmental taxation. We also recommend that the Treasury confirm whether its definition of an environmental tax is one in which the revenues are explicitly hypothecated to environmental ends.


45. For several years we have identified failings of taxation policy with regard to aviation. Emissions from aviation, especially on short-haul flights, continue to increase. Government policy on Air Passenger Duty (APD), however, has not addressed this at all. In 2000 the then Chancellor cut the short-haul reduced rate of Air Passenger Duty from £10 to £5, and it was not restored to its former level until February 2007, since when it has been frozen. The current rate per passenger represents a cut in real terms of 30% since March 1997.[61] Yet it is short-haul passengers travelling in economy class who have driven the overall increase in passenger numbers (Chart 2). The number of reduced rate short-haul passengers increased from 41.4 million in 2001 to 82.1 million in 2007 (a 98% increase); and in 2007 they accounted for over 76% of all passengers, compared to 67% in 2001.[62] The significant increase in Air Passenger Duty receipts in 2007 compared to 2000 reflects the restoration of the £10 rate for economy short-haul travellers; but this level of duty would seem unlikely to have a large influence on behaviour.

46. The 2007 Pre-Budget Report announced that the basis of Air Passenger Duty would be changed from a charge per passenger to a charge per plane. We welcomed this reform, which we had recommended in our previous two reports on the Pre-Budget Report, arguing it would tax air freight for the first time, and incentivise airlines to increase the efficiency with which they fill their flights. The 2008 Budget Report stated: "This [reform] will send better environmental signals and ensure that aviation duty better reflects environmental costs".[63]

47. We were therefore surprised and disappointed that the 2008 Pre-Budget Report announced that this change will not now take place.[64] When asked about this decision, the Exchequer Secretary explained that, according to the Treasury's analysis, the extra carbon that would have been saved by this reform was marginal, while economically it might have caused difficulties for freight transporters and regional airports.[65]Chart 2: Changes in passenger numbers, aviation CO2 emissions and Air Passenger Duty receipts, 2000 to 2006

Source: Air passenger numbers and APD receipts from HMRC, Air Passenger Duty Bulletin, November 2008 (; CO2 emissions from Defra, Estimated emissions by source, IPCC categories, 1970-2006: carbon dioxide, methane and nitrous oxide (

Note: Income from environmental taxes has been revalorised into 2007-08 equivalents using the Treasury's GDP Deflators:

48. The Government's decision was welcomed in written evidence submitted by Virgin Atlantic[66] and the Freight Transport Association.[67] WWF took the opposite view:

WWF-UK is disappointed that this opportunity [to switch from a per passenger to per plane tax] has not been taken, and concerned that the Government appears to have yielded to pressure from scheduled airlines and cargo operators, who wanted to preserve anomalous exemptions on transit passengers and air freight respectively. […] WWF has not seen convincing evidence that there would be a substantial switch of freight from aircraft to road; even if there were this would represent a saving in carbon terms … As well as excluding these two categories, the structural advantage of a per-plane tax—that it discourages operators from flying empty planes—has been lost.[68]

49. We are unconvinced by the reasoning behind the Government's decision not to go ahead with a per plane charge, the arguments for which the Treasury had formerly accepted. We are extremely concerned that the Government is abandoning a proposal that by its own admission would send better environmental signals and better represent the environmental costs. The decision to backtrack on this commitment means that air freight will continue to be entirely untaxed—in direct conflict with the Treasury's endorsement of the 'polluter pays' principle. We recommend that the Treasury reinstates its plan to reform Air Passenger Duty into a per plane tax.

50. In place of a per plane charge, Government has decided to reform the existing Air Passenger Duty. Currently, a lower rate applies to European Economic Area (EEA) destinations (£10 for economy class, £20 for first / business class), while a higher rate is charged for those flying to non-EEA destinations (£40 for economy class, £80 for other classes). From 1 November 2009 APD will be based around four distance bands, in rough terms meaning that the current 'long-haul' band is divided into three, so as better to reflect the distance actually travelled (see Table 2). As WWF put it to us last year: "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."[69] In evidence to the Treasury Select Committee, easyJet argued that, under the current system, a passenger travelling from London to Auckland would be responsible for more than 15 times the emissions of a passenger travelling from London to Marrakech, yet would be charged the same rate of tax.[70] Last year we recommended that the Treasury closely examine the merits and practicalities of better reflecting the emissions arising from longer intercontinental journeys by increasing the number of Air Passenger Duty bands.[71] We welcome the Treasury's introduction of the link in the Air Passenger Duty regime between distance travelled and tax payable.

51. However, we doubt whether the Band A economy class rate will be enough to discourage anyone from flying short-haul, and so curtail the increase in this market witnessed since 2000. Even though the rates of Air Passenger Duty are set to increase in each of the next two years, in real terms the Band A reduced rate in 2010-11 will still be 5% lower than in 1997. Equally, we doubt that the highest rate (from 2010-11) of £170 for Band D flights will do much to affect the number of such journeys, given it will add only 2.5% to an average business class return from London to Sydney, costing around £6640.[72] We recommend that the Treasury publish an explanation of why it believes the APD charges announced in the PBR will discourage unnecessary air travel.

Table 2: Revised Air Passenger Duty rates
Band and approximate distance in miles from the UK In the lowest class of travel (reduced rate) from In other than the lowest class of travel (standard rate) from:
1 November 2009 1 November 2010 1 November 2009 1 November 2010
Band A (0-2000)£11 £12£22 £24
Band B (2001-4000) £45£60 £90£120
Band C (4001-6000) £50£75 £100£150
Band D (over 6000) £55£85 £110£170
Note: If only one class of travel is available and that class provides seating in excess of 40" then the standard (rather than the reduced) rate of APD applies

52. Although the Chicago Convention prevents countries from imposing tax on aviation fuel, the Exchequer Secretary told us: "We have certainly been pushing as the UK for a renegotiation of the Chicago Convention, which is plainly anachronistic and prevents the appropriate taxation of fuel for aviation on a worldwide basis in what is clearly a global industry."[73] We recommend that the Government seek the support of the new US Administration in promoting reform of the Chicago Convention to allow governments to impose a tax on international aviation fuel. In the meantime, we note that the Chicago Convention does not extend to fuel for domestic flights, and that most other European countries charge Value Added Tax on domestic flights.[74] We recommend that the Treasury introduces both fuel duty and VAT on domestic flights, to encourage modal shift, especially to rail.


53. Since 1998 the number of road vehicles has risen steadily, with CO2 emissions also rising (but much less sharply); yet since 2001 tax revenue from road vehicles has fallen in real terms (see Chart 3). Indeed, the 2008 Budget stated: "By 2010-11, main fuel duty rates will remain at least 11 per cent lower in real terms than they were in 1999".[75]Chart 3: Changes in road vehicle numbers, road vehicle CO2 emissions and tax receipts from road vehicles in real terms, 1998 to 2006

Source: Tax receipts from road vehicles based on figures of revenue from duty on unleaded petrol, leaded petrol/LPR, ultra low sulphur petrol, diesel, ultra low sulphur diesel, a corresponding proportion of VAT on duty, and Vehicle Excise Duty, from UK Environmental Accounts Autumn 2008, Office or National Statistics. CO2 emissions from Defra, Estimated emissions by source, IPCC categories, 1970-2006: carbon dioxide, methane and nitrous oxide ( Road vehicle numbers is taken from Vehicle Licensing Statistics 2007 (

Note: Income from environmental taxes has been revalorised into 2007-08 equivalents using the Treasury's GDP Deflators:

54. The 2008 Budget announced a major reform of Vehicle Excise Duty (VED), with new first-year rates (designed to influence purchasing decisions, akin to a 'showroom tax'), and an introduction of several new bands, that would apply to cars already on the road (which had been purchased after March 2001)—in some cases introducing fairly significant rises in annual road tax for cars that had already been purchased. The 2008 Pre-Budget Report confirmed the introduction of the new bands in 2009. However, it also announced:

… that to reduce pressures on motorists during the current economic downturn, there will be no significant rate changes until 2010, and no driver in any given band will pay more than £30 more in that year. […] As a result of these reforms to graduated VED, no driver in any given band will pay more than £5 extra in 2009. In 2010-11, when more significant rate changes are introduced, a majority of drivers will either pay less or the same as in 2009.[76]

55. While we welcome the fact that the Treasury has retained plans to introduce a new first-year system of Vehicle Excise Duty charges, we are concerned that in the current economic circumstances the Treasury may postpone their implementation. We urge the Treasury to stick to its plans to introduce first year rates of VED in 2010-11, even if the economy continues in recession, and recommend that it should review the proposed increases in the standard rate for 2010-11 to assess whether they are sufficient to encourage people to purchase more fuel efficient vehicles.

56. Our biggest concern, however, relates to the Treasury's lack of a clear policy on how to reduce emissions from the second hand car market, given the decision to reduce the VED charged on higher emitting vehicles registered since 2001. We have previously recommended that the Treasury examine the merits and practicalities of introducing a 'car scrappage' scheme, such as has been introduced in France and proposed in Germany; this would pay people to trade in their existing, older cars, for newer, more efficient models.[77] The Treasury previously told us that they had no plans to introduce such a scheme, but that they were keeping the proposal under review.[78] We note that such a scheme has the potential both to combat emissions and to provide a stimulus to the beleaguered motor manufacturing industry in the UK. However, when we asked the Exchequer Secretary about the review process we were surprised by her claim that, according to the Department for Transport's initial analysis, the environmental costs of a car scrappage scheme would "outweigh the benefits even when the replacement vehicle has better than average fuel efficiency".[79] We recommend the Treasury set out the calculations which lead to its conclusion that under a 'car scrappage' scheme, the environmental costs of buying a new car would outweigh the benefits of trading an old vehicle for a more efficient model.

57. The 2008 Budget announced that the already postponed 2008-09 increase in fuel duty of 2 pence per litre would occur from 1 October 2008,[80] but in the event this was once more postponed. When the 2008 Pre-Budget Report announced that it would finally be implemented, from 1 December 2008, it went on to say: "However, as a result of the 2.5 per cent cut in VAT this December, the cost of petrol and diesel will fall for private motorists who should see no increase in the price they pay at the pump this year from this measure".[81] If the Government is serious about reducing CO2 emissions from private motorists it will need to increase prices at the pump, where people most regularly experience the cost of motoring. Were the Treasury to do this, it would be important that some portion of the revenue was seen to be used for the benefit of the environment, to help make such increases politically more acceptable. We recommend that the Treasury looks again at linking an element of fuel duty revenues to increased funding for public transport and the development of alternative technologies, such as electric cars, in order to develop public support for more consistent use of fuel duty as an environmental tax.

Other environmental taxes

58. The 2008 Budget announced that Climate Change Levy rates will be raised in line with inflation from 1 April 2009 and the 2008 Pre-Budget Report announced that Government will shortly consult on the form and content of new Climate Change Agreements (these complement the Climate Change Levy by allowing energy intensive industries to pay a reduced rate of the levy in return for making improvements in the efficiency of their energy usage). The 2007 Pre-Budget Report had already announced that the Government intends to extend the Climate Change Agreement scheme until 2017, subject to state aid approval. The Committee welcomes these announcements, along with the increase in Landfill Tax by £8 per tonne each year at least until 2010-11, and the increase in Aggregates Levy from £1.95 per tonne to £2.00 per tonne from 1 April 2009, announced in the 2008 Budget. But we note that in the past, rates for these taxes have been frozen or subject to below-inflation increases; and we may decide to look at these taxes in more detail in the future.

56   "Statement of Intent on Environmental Taxation", HM Treasury, 2 July 1997 Back

57   Q69 Mr Young Back

58   Q1 Back

59   " 'Green stimulus' fails to inspire environmentalists", ENDS Report, December 2008, p 45 Back

60   Q131 Back

61   Calculated using Treasury Deflators: "GDP deflators at market prices, and money GDP", HM Treasury, 23 December 2008, Back

62   HM Revenue and Customs, Air Passenger Duty Bulletin, November 2008 Back

63   HM Treasury, Budget 2008-Stability and opportunity: building a strong, sustainable future, March 2008, HC 388, para 6.38 Back

64   Cm 7484, para 7.55 Back

65   Q133 Back

66   Ev 52 Back

67   Ev 58 Back

68   Ev 72; see also Q39 Back

69   Ev 15 Back

70   Treasury Committee, Fourth Report of Session 2007-08, Climate Change and the Stern Review: The implications for Treasury policy, HC 231-I, para 110 Back

71   Environmental Audit Committee, Third Report of Session 2007-08, The 2007 Pre-Budget Report and Comprehensive Spending Review: An environmental analysis, HC 149-I, para 15 Back

72   Based on a fully flexible business class return from London to Sydney, quoted at £6642 for February 2009 Back

73   Q 135 Back

74   Qq 42 & 46 Back

75   HM Treasury, Budget 2008, HC 388, para 6.30 Back

76   Cm 7484, pp 134-5 Back

77   Environmental Audit Committee, Tenth Report of Session 2007-08, Vehicle Excise Duty as an environmental tax, HC 907, para 38 Back

78   Environmental Audit Committee, First Special Report of Session 2008-09, Vehicle Excise Duty as an environmental tax: Government Response to the Committee's Tenth Report of Session 2007-08, HC 72, p 6 Back

79   Ev 47 Back

80   HM Treasury, Budget 2008, HC 388, para 6.30 Back

81   Cm 7484, para 7.39 Back

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