Budget 2011 and Environmental Taxes

Written evidence submitted by Campaign for Better Transport


· The costs from road transport outweigh the revenue raised from road transport taxes.

· Tax levels should be set as part of a package to achieve policy outcomes, particularly the urgent challenge of climate change

· The principles that should be used in designing environmental taxes should be

· Fairness

· Effectiveness

· Transparency and accountability

· Environmental taxes can help achieve policy aims but should be used alongside regulation and spending. The "one-in, one-out" rule on regulation and spending cuts will weaken the Government's ability to achieve its environmental ambitions and could mean too much reliance is put on environmental taxes alone

· Travel behaviour is not a given and dependent on past trends and can be influenced by government action

· "Nudges" through smarter choices programmes can play a role but pricing should be part of strategies to encourage a shift towards less carbon-intensive modes of transport

· The spending review resulted in moves which are likely to add to the cost of public transport and the Budget was a missed opportunity to address this when the Chancellor only announced measures to help motorists

· The Plan for Growth published alongside the Budget could have supported green growth but includes attacks on the planning system which could lead to increased congestion and carbon emissions from transport

This submission from Campaign for Better Transport is informed by our work on transport taxation, including hosting the Transport Taxation Group, which brings together transport organisations, environmental groups, academics and consultants to discuss transport taxation issues, commission research and produce recommendations to Government.

1. Approaches to shifting the burden of taxation to "bads" and factors to be considered when designing and introducing green taxes

1.1 Definitions

The Committee has noted the lack of definition about what constitutes an environmental tax. Given the commitment in the Coalition Agreement to raise the proportion of environmental taxes within the overall tax take, the Committee may wish to ask Ministers how they will report back on progress. For instance the recent consultation on a carbon floor price from the Treasury defined fuel duty as a "transport tax…designed primarily to raise revenues for public expenditure" [1] , suggesting that HM Treasury may not view it as an environmental tax.

1.2 Approaches to shifting the burden

The costs of the current transport system, with its reliance on private cars for personal mobility and on lorries for freight, impose significant costs/externalities. These are greater than the revenue raised from fuel duty, VAT on fuel and vehicle excise duty.

1.3 The former Strategy Unit in the Cabinet Office in its report on urban transport estimated the following costs in urban areas alone [2] :

Summary of wider costs in all urban areas greater than 10,000 population

Costs (£bn per annum,

2009 prices and values)

Excess delays (2009)


Accidents (2008)


Poor air quality (2005)


Physical inactivity (1998)


Greenhouse gas emissions (2003)


Noise – amenity (2006)


1.4 Earlier work by the University of Leeds for the then Department for Environment, Transport and the Regions also sought to estimate these costs. Using this methodology gives us high and low estimates in pence per kilometre (1998 prices) for operating costs (.42 to .54), collisions (.82 to 1.4), air pollution (.34 to 1.7), noise (.02 to .05), climate change (.15 to .62) and congestion (9.71 to 11.16) [3] . In an earlier submission to the Transport Committee [4] , we adjusted these figures for inflation to give estimates in 2006 prices. This gave a figure of £70.6 billion per annum (low estimate) and £95.3 billion (high estimate) in 2006 prices; roughly two to three times the revenue raised by central Government.

1.5 Tax revenue from heavy goods vehicles also fail to cover their costs. Taking the lowest HGV costs and greatest income, calculations from various studies show that at best HGVs cover 61% of their costs – a shortfall of up to £3.35 billion a year. [5]

1.6 Not all of motoring’s impacts can be quantified satisfactorily. The permanent loss of ancient woodland to road building, or the impact of noise on once tranquil environments simply cannot be quantified and efforts to do so merely trivialise the impact. Similarly the impact of nocturnal traffic noise on sleep varies according to the amount of sleep lost; few would begrudge being woken once by a particularly loud vehicle, but the aggregate impact of being woken every night is far more costly than the sum of its parts. Recent research has also suggested that the costs from noise may not just be to amenity, but will also have health impacts.

1.7 There is no agreed consensus as to which marginal external costs should be included, and therefore how much damage roads traffic can be said to cause. Pro-motoring organisations dismiss many of the external costs included in the above calculation, and therefore arrive at a much smaller figure (conveniently below that taken by the Treasury in motoring taxation) [6] . Environmental groups would broaden those externals even wider, including, for instance, the cost of social exclusion caused by the centralisation of services designed around car use (such as the closure of local post offices or hospitals, and the resultant impact on rural communities). There will also be costs to society from the impacts of traffic on social capital, including its severance effect between neighbourhoods and also in terms of affecting neighbourhood friendships. [7]

1.8 All of this means that, given the lack of consensus over the true level of costs, it is difficult to expressly link the level of taxation to the external costs. Instead, it may be useful to think of taxation as part of a package for achieving environmental goals and targets. This is especially important with respect to climate change, where scientific consensus is that climate changing emissions should be controlled so that global temperature increases are kept to within 2ºC, and that beyond this point substantial changes to the world’s climate are likely. In this case debate about external costs and values of carbon become academic, and the focus of taxation and other policy must be to meet these scientifically-based limits. The Government should therefore clearly set out how it is using the money raised from fuel duty and VED to reduce dependence on oil, especially for transport, and enable us to meet our climate change targets.

1.9 There is in fact no conflict between this and supporting a strong economy. Peak oil is now widely accepted as a phenomenon and this will imply continued high/unstable oil prices with consequent economic impacts. There is therefore a strong economic as well as environmental imperative for reducing dependence on oil for transport.

1.10 Factors to consider for designing and introducing environmental taxes

In our view, there are three key principles for the design of new environmental taxes. These should be:

· Fairness

o Taxation that recovers some of the costs from activities that are environmentally damaging should be focussed on those who benefit from that behaviour, rather than from taxes on the general population. Within this, it should focus on those whose behaviour adds most costs

o There should be opportunities for people and organisations to shift away from environmentally damaging behaviour in response to environmental taxes. In particular, Government should take active steps to ensure that those on lower incomes have alternatives

o The intended outcomes need to be fair between generations, for instance ensuring action now on CO2 rather than down the line when the impacts of global warming become more severe

· Effectiveness

o Transport taxes should be simple to operate, for instance focussed on market transactions in transport rather than related to overall emissions where the information required may be overly onerous or allow avoidance by polluters

o Taxes should give a clear price signal at the point at which organisations or individuals are making decisions

o Taxes should influence decisions to shift to less environmentally damaging behaviour and avoid shifting behaviours to other actions which are environmentally damaging. As such, taxes should work as a package and be combined with regulations or incentives (such as feebates) to encourage shifts to less environmentally damaging behaviour.

· Transparency and accountability

o The Government’s stated purpose for a tax should be consistent with what any revenue from that tax is spent on. It would be inconsistent, for instance, to state that motoring is taxed to cover the damage it causes to society but to invest the revenue in defence or education, because neither addresses the stated cause for the tax.

o Taxation policy which links the penalising of polluting behaviour with the funding of greener behaviour is more politically acceptable than just penalising damaging behaviour. With ‘green’ taxes, public support hinges on whether the revenue is earmarked for environmental ends; ie whether the revenue tackles the problem or expressly encourages less damaging behaviour. A poll by the Green Fiscal Commission showed that while 51% of people supported green taxes, this rose to 73% where revenue was hypothecated towards reducing CO2 emissions [8] .

1.11 Environmental taxes are one of the measures available to Government to achieve environmentally positive outcomes. HM Treasury, in their written evidence to the recent Treasury Committee inquiry on the principles of taxation said that "the tax system can be used to support wider objectives, but if tax policy is used to support these objectives it should be judged as representing the best value for money with respect to alternatives such as regulation or spending." [9]

1.12 The Government’s inflexibility on new regulation (the one-in, one-out rule) coupled with spending cuts means that there may be a temptation to see environmental taxation as the default move to promote environmental objectives. The planning system also plays a strong role in delivering positive environmental outcomes and mediating between competing interests but is in danger of being weakened (as discussed in the final section of this submission).

1.13 There is in fact good evidence that travel behaviour can be changed. There has been a lot of attention to the changes in travel behaviour in London since the introduction of the congestion charge and other measures, which have led overall to a 6% decline in distance travelled by car from 2000 to 2009 compared to a national increase of 8%.

1.14 However, there is also evidence that travel behaviour can be changed in smaller settlements and among a wide range of individuals. The Sustainable Travel Towns and Cycling Demonstration Towns have shown increases in cycling use and in public transport and reductions in car use. These were achieved through the application of "nudge"-type measures known as "smarter choices": a 2004 literature review for DfT identified the potential for significant shifts in travel behaviour and cited significant changes in behaviour in journeys to schools and workplaces and in car use and car sharing. [10]

1.15 The DfT is taking this forward with the Local Sustainable Transport Fund. Reinforcing such measures with local/national fiscal measures will enhance their effectiveness – and by the same token smarter choice measures will give more people real choice in how they travel and help enable them to reduce the motoring taxes they pay.

2. Scope for tax system to create modal shift to lower carbon alternatives

2.1 Role of fuel duty, VED and pricing in modal shift

Fuel duty and VED meet some of the factors above. They:

· Recover costs from those whose behaviour creates the costs to society and will recover more from those travelling longer distances or in more polluting cars

· Are relatively simple to operate

· Can give clear price signals (eg the showroom tax element of vehicle excise duty)

· Influence decisions to move to less environmentally damaging behaviour

2.2 However, there are some problems:

· The variability of convenient alternatives to the car or lorry

· The price of alternatives may be higher or perceived as higher

· Lack of transparency and accountability over how the sums are used and how they help people to move to less damaging behaviours

2.3 In general, transport taxes can play a helpful role in reducing emissions. Comparisons of carbon emissions by transport mode suggest that rail and bus generally result in substantially fewer emissions per passenger-km than either car or air travel. Therefore a transport policy that supported an increase in the modal share of public transport within a given overall level of transport demand could help to deliver significant reductions in emissions.

2.4 In principle, such a policy would include measures designed to ensure that the costs of carbon emissions were properly reflected in the price of each mode, thereby encouraging greater use of public transport in preference to higher emission alternatives. However, over the last two decades, public transport fares have increased significantly while the overall costs of motoring have been falling. Public transport fares in the UK are some 20 per cent above the European average. Together with the Netherlands, we have the highest modal share for car of all the EU 15 countries.

2.5 These outcomes support the view that, in practice, relative transport prices in the UK have tended to encourage car ownership and use and suppress the demand for public transport. They also suggest that Government does not apply a holistic pricing policy across transport modes. Such a policy is essential if the trends in relative prices experienced in recent years are to be reversed. The graph below shows the changes in the costs of different modes since 1980 compared to disposable income.

2.6 Changes in the real cost of transport and in income: 1980 to 2009, United Kingdom [11]

2.7 At the same time, the growth of car travel has been moderated and even reversed during periods of high motoring fuel costs, as can be seen at the present time. Further, the introduction of concessionary bus fares for the over 60s across the UK appears to have stimulated demand, while growth in some rail markets has been partly achieved by competitive pricing on the part of train operators. This experience highlights the potential for using transport pricing in order to influence travel decisions in general and modal choice in particular, and demonstrate that Government is sometimes willing and able to send strong signals through price mechanisms.

2.8 In order to test this potential further, we commissioned Steer Davies Gleave to develop a simple Transport Demand and Emissions Model, drawing on the results of research into the price elasticity of demand for different types of travel undertaken in recent years. The model allowed SDG to assess the effect of changes in relative transport prices in terms of changes in modal demand and emissions levels from a base case. Their model results suggested that a 20 per cent reduction in public transport fares would increase bus travel by 13 per cent and rail travel by 17 per cent within eight years. This would have grown the use of bus and rail travel combined so that it would now be at a level of public transport use not achieved since 1960.

2.9 However, the model also demonstrated that changes in motoring costs as well as fare reductions are needed to make a significant impact on carbon emissions. The results indicated that a package of measures, involving increases in motoring taxation combined with substantial reductions in bus and rail fares, would reduce the share of car travel in overall transport demand from 87 per cent in the base case to around 78 per cent by 2025. They also suggested that the use of aviation taxation to improve the competitiveness of rail in longer distance markets could secure a significant reduction in aviation emissions. SDG estimated that overall, under a Maximum Impact Scenario, carbon emissions from transport could be reduced by some 16 million tonnes per annum, around 13 per cent of base case emissions, by 2025. [12]

2.10 Impacts of changes announced in the Budget

The recent cut in fuel duty and new policy on future increases will not make major differences to the price of fuel but will reduce revenue. If the Government were to attempt significant interventions to cut prices by cutting fuel duty it would be unaffordable. To bring the price of fuel down to December 2009 levels would potentially cost the taxpayer almost £6bn in the first year alone. [13]

2.11 Neither would it be sensible to introduce a fuel duty stabiliser. Last summer, the Office of Budgetary Responsibility (OBR) produced a short report exploring the impact a stabiliser would have. It concluded that, contrary to expectations, overall tax take fell as the price of fuel rose, because increase fuel duty was offset by lower spending across the economy as a whole.

2.12 Even if we could afford to, we should not embark on a futile attempt to hold prices down by cutting fuel duty. The cost of fuel is high at the moment because of temporary instability in the Middle East. That will not last forever, and prices will come down in the medium-term. But in the long-term, the price of oil can only go in one direction. There is not enough oil to keep track with rising demand; extracting what little is left will only get harder and more expensive.

2.13 The increasing necessity to cut carbon emissions from transport (the sector where least fundamental progress has been made) means that we need to enable changes to the way that people travel, and attempts to have cheap fuel would merely delay the ability to make those changes.

2.14 Whilst the Government is keen to be seen to be addressing the concerns of drivers over the costs of fuel, they have decided that most rail fares will rise by 3% above the RPI rate of inflation from 2012 (up from the current RPI+1% formula) and they are cutting the direct support for bus services by 20%.

2.15 Campaign for Better Transport recognises that the high price of fuel is putting a significant burden on some lower income households who have fewer transport options and rely on the car, particularly in rural areas. However, the overall impacts on the poorer households of higher fuel duty is less than for middle income households as many of those on low incomes do not own a car (as the IFS have shown). [14] Instead, they will be much more affected by rises in bus fares. [15]

2.16 As Chancellor, Gordon Brown promised in 1999 that any rises in fuel duty above the rate of inflation would "go straight to a ring-fenced fund" to modernise the transport system. [16] That never happened. The Government should learn from Gordon Brown’s mistake and use fuel duty revenue to make sure alternatives are affordable and that our mix of transport is not so dependent on oil.

2.17 On aviation, Campaign for Better Transport welcomes the proposed extension of air passenger duty to business jets, which we have called for previously. These journeys contribute 30 times more carbon dioxide per passenger than similar scheduled flights. [17] We are disappointed that the Government does not feel able to progress the proposal for a per plane duty. The Government should work with other partners internationally to remove barriers to the introduction of a per plane duty and look at how freight and transit passengers could be covered.

2.18 Our submission to the Treasury before the Budget also recommended introducing emissions based VED differentials for vans and to remove the distortion resulting from not charging employee national insurance contributions on company cars which would reduce the incentive to skew remuneration packages.

3. Plan for Growth

3.1 The Plan for Growth announced alongside the Budget contains a number of proposals that could have a negative impact on the environment for little in the way of sustainable economic development. The Department for Transport’s white paper on local transport has an approach which focuses on delivering CO2 reductions which can also support local economies. [18] In contrast, it is disappointing that the Plan for Growth proposals seem to consider that these are in opposition and that facilitating economic growth requires the removal of measures in the planning system which can protect the environment. There are three particular concerns.

3.2 Firstly, the effect of the presumption in favour of sustainable development could have a negative impact on the environment but will depend very much on the new National Planning Policy Framework (NPPF). An important purpose of the planning system, as presumably it will be of the NPPF, is to mediate between competing interests, such as

· Different commercial interests

· Private / commercial and public interests

· Short and long term interests (particularly long-term need to cut carbon and address long-term rises in energy and fuel costs)

· Local benefits or costs and those that are spread over a wider area (for instance the costs arising from traffic and congestion elsewhere f rom a decision to approve an out-of-town business park which may be thought to create jobs in the local area).

3.3 It is essential that the NPPF should underline the strong connection between transport and planning and that it should attach the highest importance to reducing carbon and other environmental impacts and to tackling congestion. The Government has said in the Coalition Agreement that it needs to use a wide range of levers to cut carbon emissions, decarbonise the economy and support the creation of new green jobs. The planning system is one of the strongest levers at its disposal. The NPPF should require that development be sustainable, making clear that sustainability requires reduced carbon emissions and reduced energy consumption and that development should be planned for the long term not just to obtain short term benefits.

3.4 The second concern is that the proposed Enterprise Zones will repeat from the mistakes of the past. The locations should not be out of town office or retail centres which can suck the economic life away from city and town centres. The prospectus for enterprise zones published by CLG included the recommendation that Enterprise Zones should be based on "clean" sites which have few or no current businesses and under the ownership of one landowner. This will mean that many Enterprise Zones will be located on greenfield sites.

3.5 It is also proposed that planning in Enterprise Zones can be simplified through the use of local development orders (LDOs) which would exempt certain classes of development from the planning system. The prospectus suggests that an LDO can be approved in just two months but this appears to be based on the shortest possible consultation and runs against guidance on LDOs which calls on local authorities to carry out informal consultation in the first instance, and then to consult on a draft for a minimum of six weeks, followed by revisions to produce a final LDO.

3.6 Finally, the Plan for Growth also suggests changes to policies to localise planning to give private companies a greater role. This includes the suggestion that for the purposes of developing a neighbourhood plan, a private company could be considered as a neighbourhood group. This risks subverting proposals to give communities greater say in the planning system which would discredit the process.

21 April 2011

[1] See para 2.10, Carbon price floor: support and certainty for low-carbon investment, HM Treasury, December 2010

[2] The Wider Costs of Transport in English Urban Areas in 2009, Strategy Unit, November 2009 http://webarchive.nationalarchives.gov.uk/20100407162256/http://www.cabinetoffice.gov.uk/media/307739/wider-costs-transport.pdf

[3] Surface Transport Costs and Charges: Great Britain 1998, Sansom et al., 2001, http://www.its.leeds.ac.uk/projects/STCC/downloads/SurfaceTransportCostsReport.pdf

[4] See http://www.parliament.the-stationery-office.co.uk/pa/cm200809/cmselect/cmtran/103/103we23.htm

[5] Heavy Lorries: do they pay for the damage they cause, MTRU 2008, http://www.bettertransport.org.uk/system/files/heavy_lorries_MTRU_research.pdf

[6] See, for example, the Taxpayers Alliance report, ‘The Burden of Green Taxes’, which dismissed every external save the cost of highway maintenance. It justified ignoring the cost of road traffic collisions and fatalities because the measures taken to reduce collisions, such as “driving tests, speed limits, speed cameras and… speed bumps… impose significant costs on drivers”, as though the cost of travelling within the speed limit equated to the cost of being hit (and possibly killed) by a driver.

[7] See Driven To Excess: A Study of Motor Vehicle Impacts on Three Streets in Bristol UK, Joshua Hart, University Of The West Of England http://www.walk21.com/papers/Josua_Hart.pdf

[8] Green Fiscal Commission, Public Attitudes to Environmental Taxation, November 2007, http://www.greenfiscalcommission.org.uk/images/uploads/baselinepoll.pdf

[9] See evidence from HM Treasury to Treasury select committee on the principles of taxation http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/753/753.pdf

[10] Smarter Choices – Changing the Way We Travel, DfT, 2004

[11] Taken from p36 of Transport Trends 2009, DfT, 2010

[12] Transport Costs and Carbon Emissions, SDG for Campaign for Better Transport, December 2008 http://www.bettertransport.org.uk/system/files/Transport_costs_and_carbon_emissions.pdf

[13] See Green Alliance report http://www.green-alliance.org.uk/uploadedFiles/fuel%20stabiliser%20brief%20-%20final.pdf

[14] See IFS briefing note 8 ( http://www.ifs.org.uk/bns/bn8.pdf ). See http://www.ifs.org.uk/publications/5503 on the real terms fall in fuel duty over much of the period since 2000.

[15] See Citizens Advice and Campaign for Better Transport report Transport, Social Equality and Welfare to Work http://www.bettertransport.org.uk/system/files/Transport_social_equality_welfare_work.pdf

[16] Pre-budget report speech, November 1999. See http://webarchive.nationalarchives.gov.uk/20100407010852/http://www.hm-treasury.gov.uk/prebud_pbr99_speech.htm

[17] See http://www.bettertransport.org.uk/system/files/BetterTransport-Bizjets-fuel-tax-report-Mar10.pdf for information on emissions from private jets.

[18] Creating Growth, Cutting Carbon: Making Sustainable Local Transport Happen, DfT, January 2011