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Memorandum submitted by the Aldersgate Group (PBR08006)
Summary
· Far from presenting a crisis for environmental policy making, the challenges posed by the recession actually reinforce the urgent need to accelerate the transition to a low-carbon, resource efficient economy, and align economic, environmental and societal benefits. The Aldersgate Group believe that: o Our long-term economic success depends on a healthy environment and the sustainable use of natural resources. o At the company level, good environmental performance translates to tangible economic benefits and is a major source of competitive advantage. o Better environmental regulation creates new business and employment opportunities in a fiercely competitive global marketplace. o Policy appraisals must accurately assess environmental costs and benefits. o The better regulation agenda must not lose sight of the need to maximise outcomes in the drive to reduce unnecessary costs. · The 2008 Pre-Budget Report was another missed opportunity for the systematic implementation of a green fiscal reform programme involving a significant shift in the overall tax burden from conventional taxes, such as those levied on labour and capital, to environmentally related activities, such as taxes levied on resource use. This is essential for the transition to a low carbon, resource efficient economy, while at the same time helping to stimulate the economy during the economic downturn and ensuring the UK's competitiveness in the short and long term. · Taxation is one of the main mechanisms, alongside trading and regulation, that must be harnessed to redress severe market failures and externalities such as climate change and resource depletion which threaten long-term growth and competitiveness. · The VAT tax cut and subsequent rise in National Insurance Contributions was a missed opportunity to apply tax cuts in ways that encourage resource efficiency and employment and reduces future costs of climate change. · Taxes on energy use can stimulate resource efficiency investments, fostering improvements in competitiveness that reduce costs in the short term and underpin rising levels of prosperity in the long term, while also smoothing out false price signals caused by short term economic pressures (such as the current collapse in the recycling market). · Substantially greater investment in environmental goods and services would help stimulate the economy and create jobs. · The government's Home Energy Saving Programme and wider policy framework for tackling the energy performance of the existing housing stock should be more ambitious in scope. Memorandum
1. The Aldersgate Group's recently published report, Green Foundations 2009[1], argues that far from presenting a crisis for environmental policy making, the challenges posed by the credit, resource and energy crunches actually reinforce the urgent need to accelerate the transition to a low-carbon, resource efficient economy, and align economic, environmental and societal benefits. It draws on a rapidly growing body of new evidence and research that substantiates a positive interaction between high environmental standards and economic growth - enabling companies to become more efficient and productive, and creating new opportunities to secure the jobs and wealth of the future. 2. It sets out five key points that justifies this argument. Firstly, it puts forward the case that our long-term economic success depends on a healthy environment and the sustainable use of natural resources. The economic fallout from the financial crisis is an opportunity to reconsider the relationship between business and society, and address the inherent problems of unsustainable growth. The natural capital assets that lay the foundations for our economy and society should not be off-balance sheet items similar to the risk exposures and subsequent heavy losses incurred in the banking sector during the 2008 credit crunch. Rapid resource depletion necessitates the adoption of new business models and requires a range of well-designed environmental measures to smooth the path towards a more sustainable economy - the 'green foundations' needed to underpin future growth and jobs. 3. Secondly, at the company level, good environmental performance translates to tangible economic benefits and is a major source of competitive advantage. In response to the upward trend in energy, water, raw material and waste disposal costs, systematically addressing environmental performance is one of the most cost-effective measures businesses can undertake to reduce expenditure. Achieving high environmental standards across the UK would produce significant cost savings and boost competitiveness - which currently lags far behind major trading partners such as Germany, France and Japan. The role of government in providing a clear policy framework is crucial, particularly in the long-term, where competitive advantage will increasingly depend on resource efficiency, innovation and energy security. 4. Thirdly, environmental regulation creates new business and employment opportunities in a fiercely competitive global marketplace. The economic downturn presents a unique opportunity to use public sector investment to fuel the economy with green jobs and growth. Environmental regulation is a key driver in this lucrative market and the government has a critical role to play in setting out an explicit industrial strategy with planned support for particular technologies and establishing the right policy frameworks that will stimulate business innovation through improving environmental performance. 5. Fourthly, policy appraisals must accurately assess environmental costs and benefits. Keystone policy objectives such as increasing resource efficiency and decarbonising the economy will only be achieved if they are adequately reflected in price signals, both in the valuation of policy options and in the market price. The policy appraisal process must allow for the potential of innovation to deliver cheaper solutions and the likelihood of inflated cost estimates emanating from industry. Non-monetarised environmental benefits must not be marginalised, while the government's approach to estimating the long-term costs associated with carbon emissions needs urgent reform. 6. 7. The report supports the views of the Network of Heads of European Environment Protection Agencies, which finds that good environmental regulation, management and performance assists competitive advantage by reducing costs, creates markets for environmental goods and services, drives innovation, creates and sustains jobs, improves the health of the workforce and the wider public, and protects the natural resources on which business and society depend[2]. 8. Maintaining these high environmental standards is even more crucial during an economic downturn, as businesses seek to consolidate, re-structure, reduce costs and exit non-core business activities. The long-term upward trend in fuel and energy prices are an incentive to improve energy efficiency and switch to renewable sources of energy, while a government led investment drive in low carbon goods and services could stimulate the economy and employment. 9. The report also supports the original Porter hypothesis, as explained by Martin Enevoldsen, Anders Ryelund and Mikael Skou Anderson in the Competitiveness Effects of Environmental Tax Reform Final Report to the European Commission (2007), namely:
High national environmental standards will encourage domestic industries to innovate and hence improve competitiveness, in particular when the regulatory standards anticipate requirements that will spread internationally. The main reason, according to Porter and van der Linde, is that environmental regulation puts a pressure on industry to innovate new and greener products that, in turn, create better demand conditions for the industry. Moreover, environmental standards encourage industries to find less resource intensive ways of production, thereby counteracting the initial rise in production costs caused by the regulatory demands. The earlier such regulatory pressures are introduced within a given country vis-à-vis other countries, the higher the chance that the innovative experiments arising from the pressure will lead to a competitive edge[3].
10. In response to current environmental challenges and the economic downturn, the 2008 Pre-Budget Report was another missed opportunity for the systematic implementation of a green fiscal reform programme that will be the prerequisite for the transition to a low carbon, resource efficient economy. A significant shift in the overall tax burden from conventional taxes, such as those levied on labour and capital, to environmentally related activities, such as taxes levied on resource use, is required. The substantial revenues generated from the auctioning of carbon allowances under the EU ETS, which could be in the region of €4 to €6 billion per year to the UK government under phase III of the scheme according to the Carbon Trust[4], should be used to accelerate green fiscal reform and on measures to tackle climate change and building a low carbon economy. 11. The economic downturn justifies accelerating green fiscal reform. Reducing taxes on incomes would increase disposable income for workers and decrease the cost of labour, thereby incentivising employment, a key government priority. Stefan Speck in the Competitiveness Effects of Environmental Tax Reform report to the European Commission (2007) argues that "high taxes on labour have been perceived as a cause for high unemployment rates and as an obstacle for employing additional people at a situation when economic growth was low and economies were in a depression"[5]. 12. A shift to environmental taxes would lead to greater internalisation of environmental costs in accordance with the polluter pays principle, so that the polluter pays for more of the environmental damage rather than society as a whole. Taxation is one of the key mechanisms, alongside trading and regulation, that must be harnessed to redress severe market failures and externalities such as climate change and resource depletion which threaten long-term growth and competitiveness. 13. If environmental tax reform is undertaken in an efficient and effective way, Professor Paul Ekins argues that it can result in a win:win:win outcome; "for society, which gets less pollution, climate change or other environmental bad; for non-polluting taxpayers, who get reduced other taxes; and for the Treasury, which is able to rebalance the tax base away from labour and firms, which are becoming more difficult to tax."[6] To gain credibility amongst the general public, it should be revenue neutral or negative and address any concerns over international competition and distributional effects. 14. In relation to specific measures in the 2008 Pre-Budget Report, the announcement that the standard rate of VAT will be reduced to 15% from the 1st December 2008 was a missed opportunity to apply tax cuts in a way that encourages resource efficiency. This measure was justified by the Chancellor at the time to "deliver a much-needed extra injection of spending into the economy"[7]. The overall result is a crude reduction in the price of general consumption on a whole range of goods or services, even if part of this consumption actually damages our long-term wellbeing. Environmental reforms to the VAT tax cut would be highly recommended. 15. The subsequent tax rise from April 2011 to increase by half a percent all rates of National Insurance Contributions (for both employees and employers) applies across the board. The effect of this will be to raise the cost of labour (employing people) relative to the cost of other factors of production in the economy. Again it is a missed opportunity, as tax rises in relation to unsustainable resource consumption could have encouraged both resource efficiency and employment (a key social and economic target). 16. The green stimulus package supporting low-carbon growth and jobs by accelerating £535 million of capital spending on energy efficiency, rail transport and adaptation measures is encouraging but falls a long way short of the investment that is required. More recently, Gordon Brown has indicated that the UK would embark on an ambitious programme of public sector investment, specifically targeting the environmental sector, to stimulate wealth and jobs that echoes President Roosevelt's New Deal of the 1930s to help America recover from the Great Depression[8]. The Prime Minister claims that the green proposals will be larger in scope relative to the size of Britain's economy than Barack Obama's planned 150 billion dollar programme to create 5 million new "green collar'' jobs in the Unite States[9]. If the UK programme materialises in full, it would help position the UK to capitalise on the huge new opportunities in the environmental sector. 17. Gordon Brown has repeatedly emphasised that job creation from tackling climate change is "the biggest prize of all - the chance to seize an economic future, securing our prosperity as a nation, by reaping the benefits of the global transition to a low carbon clean economy"[10], while David Cameron has outlined a Blue/ Green Charter for profound changes in the way we live our lives[11]. This political consensus strongly supports the need for an explicit industrial strategy with planned support for particular technologies, but as yet no such strategy has been developed and little of the employment created in the manufacture of renewable energy technology has been in the UK. Similarly, the EU requires a major new action plan to make Europe's environmental industry an engine for wealth creation, as proposed by the Environmental Industries Commission[12]. 18. Any industrial strategy must focus on the development of the UK skills base to ensure that the UK is fully equipped to meet the challenges posed by climate change and resource depletion and realise the government's ambition to be a world leader in skills. Hence, it is a welcome development that the government will convene a forum on low-carbon skills to identify the action needed to ensure that the right training and vocational qualifications are in place to successfully manage the transition to a low-carbon economy. 19. In regard to the announcement of installing 600,000 insulation measures this winter through the £6.8 billion Home Energy Saving Programme, the Aldersgate Group report Better Regulation for a Sustainable Built Environment[13] finds that whilst there is now significant policy and regulatory focus on improving the environmental performance of new buildings, enhancing the performance of existing stock presents a far bigger opportunity. This is crucial if we are to achieve national emissions reductions targets and wider policy objectives on resource efficiency and the reduction of energy bills. The current downturn in the construction of new homes is a golden opportunity to increase investment in the efficiency of the existing stock and maintain jobs in this important sector. 20. In the residential sector, fuel poverty is a major economic and public health issue which is currently being exacerbated by high energy prices and the economic downturn. It has recently been estimated that as many as one in six households are living in fuel poverty, the highest proportion in over 10 years[14]. Paradoxically, those that are most vulnerable to the impacts of increasing energy costs are those least able to access the capital needed to make themselves more resilient to it by making their home more energy efficient. 21. In the Better Regulation for a Sustainable Built Environment report, the Aldersgate Group recommends the following financial incentives: Align Stamp Duty Land Tax to asset ratings for energy performance, with a nil rating for A-rated stock; explore the potential for local Business Rates to be aligned to annual changes in the occupational energy rating; extend the current system of Enhanced Capital Allowances to include products and services which deliver improvements to the fabric of existing buildings; introduce a reduction in the VAT rate on refurbishment materials and systems which deliver environmental benefits and improve energy performance; introduce feed-in tariffs to incentivise the introduction of on-site renewable energy generation; and make capital allowances and low-interest loans available to homeowners to improve the energy performance of their dwellings, measured on a whole-house basis, linked to income or local tax rebates for those that improve their domestic energy performance and increased rates for those that take no action. 22. One of the major arguments against green fiscal reform are concerns about the potential competitive impacts on energy intensive producers that are exposed to intense international competition. Where this is a genuine concern, measures should be put in place that mitigate these competitiveness effects. 23. Policy makers must also bear in mind that although these costs can be significant in some cases, often they are exaggerated and the potential economic benefits ignored. For example, a recent Carbon Trust analysis is the "nail in the coffin for the myth that the EU ETS presents a threat to overall business competitiveness" as it finds that carbon costs remain trivial compared to other influences on international competitiveness for more than 90% of UK manufacturing activities[15]. In truth, when businesses decide on a production location, environmental costs tend to be low relative to considerations of the cost of capital, fiscal regime, wage costs, workforce skills, exchange rate fluctuations, infrastructure and proximity to the market. 24. Taxes on energy use can stimulate resource efficiency investments, fostering improvements in competitiveness that reduce costs in the short term and underpin rising levels of prosperity in the long term. It will also smooth out false price signals caused by short term economic pressures (such as the current collapse in the international recycling market) against long term energy and resource crunches. A good example is the introduction in the UK in April 2001 of the Climate Change Levy. The levy provided the incentive - especially for high energy users - to look at energy use across their operations. A survey of businesses completed eighteen months after the introduction of the levy, found that it had raised awareness amongst senior managers about the need to address energy use and greenhouse gas emissions; helped change energy management policies; and increased the use of renewables[16]. Crucially the survey found that though these changes had been considered before, it was the financial incentive brought by the levy that provided the immediate stimulus to the improvements. 25. Similarly, Climate Change Agreements (CCAs) have increased awareness and action on carbon emissions and resource efficiency. This in turn has improved UK business competitiveness and economic resilience, in complete contrast to the fear that an additional regulatory burden would damage company performance. CCAs have also enhanced data management techniques and robust measurement systems including sub-metering and software packages. This has been a driver for many high technology innovative products and high value services, which have underpinned a range of activities in understanding energy usage and targeting energy saving opportunities. Additionally, CCAs have been an early platform to demonstrate implementation of carbon savings, underpinning the design of the Carbon Reduction Commitment and providing opportunities to export know how. 26. As a share of the total tax burden, environmental taxes have fallen from 9.1% in 1993 to 7.3% in 2006[17]. To effectively tackle severe market failures such as climate change and resource depletion, it is clear that this proportion has to increase substantially, while a shift away from income tax will help stimulate employment during the economic downturn. While some of the individual measures announced in the Pre-Budget Report were positive, the government must adopt a much more integrated and coherent approach to environmental policy making. The 2009 Budget is an opportunity that the UK cannot afford to miss for the fundamental reform of the tax system, particularly as the first Climate Change Budgets will also be published at the same time. A comprehensive green fiscal reform programme is essential for the transition to a low carbon, resource efficient economy, helping to stimulate the economy during the economic downturn and ensuring the UK's competitiveness in the short and long term.
January 2009 [1] www.aldersgategroup.org.uk/reports [2] Network of European Environment Protection Agencies (November 2005) The Contribution of Good Environmental Regulation to Competitiveness. [3] Martin Enevoldsen, Anders Ryelund and Mikael Skou Anderson (2007) The Impact of Energy Taxes on Competitiveness, Output and Expoerts: a panel regression study of 56 European industry sectors in Competitiveness Effects of Environmental Tax Reform, Final Report to the European Commission. [4] http://assets.wwf.org.uk/downloads/auctioning_revenues.pdf [5] Speck, Stefan (2007) Overview of Environmental Tax Reforms in EU Member States in Competitiveness Effects of Environmental Tax Reform, Final Report to the European Commission, DG Research and DG Taxation and Customer Union. [6] Ekins, Paul (July 2008) Environmental and Behaviour Taxes in The Smith Institute (July 2008) Fair Tax: Towards a Modern Tax System. [7] www.hm-treasury.gov.uk/prebud_pbr08_speech.htm [8] www.guardian.co.uk/politics/2009/jan/04/gordon-brown-interview [9] www.barackobama.com [10] Brown, Gordon (26th June 2008) Speech on Creating a Low Carbon Economy, www. number10.gov.uk/Page16141. [11] Cameron, David (16th June 2008) Cameron: The choice isn't between economy and environment, www.conservativeparty.org.uk. [12] Environmental Industries Commission (November 2008) A Growth Plan for Europe's Environmental Industry. [13] Aldersgate Group (July 2008) Better Regulation for a Sustainable Built Environment. [14] www.guardian.co.uk/business/2008/jan/20/utilities.householdbills [15] Carbon Trust (January 2008) Press Release: EU ETS to have marginal impact on competitiveness of EU industry, www.carbontrust.co.uk/News/presscentre/EU_ETS.htm. [16] Ekins, P; Monkhouse, C; Skinner, I and Willis, R (November 2002) Next Steps for Energy Taxation: A Survey of Business Views, Green Alliance/Policy Studies Institute. [17] Ekins, Paul (July 2008) Environmental and Behaviour Taxes in The Smith Institute (July 2008) Fair Tax: Towards a Modern Tax System, p68. |