Budget 2011 and Environmental Taxes

Written evidence submitted by the Royal Society for the Protection of Birds


· The RSPB believes that a fair and effective approach to green taxation should involve taxing bads rather than goods, focus on behavioural change and consider the use of hypothecation to reinforce environmental outcomes. It can also be used as a stick when other tools, such as voluntary initiatives, demonstrably fail to deliver environmental objectives.

· The RSPB does not feel that the 2011 budget has done nearly enough towards meeting the Government’s overarching green objectives, particularly in respect to the natural environment.

· The Chancellor has failed to address damages being done to the natural environment, omitting any further measures that seek to internalise current damages that are occurring into private decision making. Peat use in horticulture is a prime example where fiscal policy could help prevent habitat destruction and damage, and work towards the UK Government’s conservation and carbon objectives.

· The reduction in fuel duty and freezing of air passenger duty have signalled a move away from taxing bads, such as air pollution and greenhouse gases, rebalancing the overall tax burden to lie more heavily on goods. Such a move will reduce societal welfare in the long-run.

· This budget has jeopardised the Coalition’s chances of meeting their stated aim to increase the proportion of the total tax take made up of environmental taxes.

· The RSPB is concerned that the Coalition’s soft-touch approach to environmental taxation in favour of promoting short-term growth will prevent the UK from tackling urgent threats to our natural environment which, in turn threaten long term, sustainable economic welfare.

The RSPB and Environmental Tax Reform

1. The RSPB is Europe’s largest wildlife conservation charity. We have over a million members, the support of over 16,600 volunteers and manage over 200 nature reserves covering over 143,000 hectares, home to 80% of our rarest or most threatened bird species. Internationally, the RSPB is part of the Birdlife Partnership and are involved in numerous conservation projects including three large scale tropical forest and peatland restoration projects.

2. The RSPB believe green taxation and fiscal reform should be seen as a fundamental part of an overall package of measures designed to internalise environmental externalities, and promote more sustainable patterns of production and consumption.

3. The purpose of environmental tax reform should be to change behaviour, protect the environment and ensure economic actors pay for the damage they do. The rationale is not primarily therefore to raise revenue.

4. A fairer tax structure would be one based on wealth and which focuses on taxing bads, such as environmental damages, rather than goods, such as employment, and one that truly accounts for environmental externalities. We overexploit and undervalue natural resources (beyond the marketable ones) because of their public goods characteristics. As we grow ever more aware of the looming ecological problems, as highlighted by the TEEB and National Ecosystem Assessment reports, far greater attention should be given to accounting for the benefits nature provides.

5. The RSPB supports the hypothecation of green taxes. Hypothecation uses the proceeds of taxes on environmentally damaging activities to support environmentally beneficial ones. We believe there is scope for increasing the amount of environmental tax revenue recycled specifically for environmental purposes.

6. The RSPB also advocates the introduction of new taxes on empirical grounds, where alternative approaches, such as voluntary agreements, have proven to be ineffectual. One example of this would be in the use of peat in horticulture, as discussed later in this response.

Key themes for the Inquiry

Whether Budget 2011 furthers the Government’s green objectives, including the impact of the cut in fuel duty on greenhouse gas emissions and air pollution.

7. The RSPB does not feel that overall the 2011 budget has done enough towards meeting the Government’s overarching green objectives. Whilst we cautiously welcome the carbon floor price measure and the extension of Climate Change Agreements, the limitations on the Green Investment Bank, alongside fiscal incentives for highly damaging modes of transport, have called into doubt the Coalition’s commitment to meeting UK carbon commitments.

8. Although not explicitly designed as a green tax, fuel duty is a proven and effective way to incentivise reduced fuel use and carbon emissions and should thus be considered as an important instrument of climate policy. Transport accounts for a significant and rising proportion of UK carbon dioxide emissions. Until now transport has been the worst performing sector under Kyoto, growing by 34% between 1990 and 2008 in the EU, despite the fact that other sectors reduced their emissions by 14% on average over the same period. [1] These emissions, particularly from road transportation (and aviation), will need to be reduced if the UK’s carbon dioxide reduction targets are to be met. Taxation is the best way to affect these changes in as cost-efficient a way as possible.

9. Therefore, the decision to cut fuel duty and abolish the fuel duty escalator in the budget was particularly disappointing. This new round of measures further weakens incentives, particularly given the fact that the costs of alternative (substitute) modes of transport are rising. There has been a large shift in the relative costs of public and private transportation in the last two decades; the price of private transport has fallen relative to income whilst public transport costs have risen.

10. In terms of carbon emissions, the scheduled fuel duty increases under the escalator (introduced in 2007-2008) were expected to save 1.7 MtCO2 per year by 2014-15 (compared to inflation only increases). UK fuel taxes have dropped by 32% in real terms since their high point in 2000. [2] If the Labour government had stuck with its fuel duty escalator policy of a 6% above inflation rise every year, the subsequent reduction in demand since 2000 would have lead to a 5% reduction in total UK carbon emissions. Not only that, but an extra £100bn of tax would have been collected by 2010. The additional annual revenue by the end of the period would have been sufficient to fund a reduction in employers’ national insurance contributions of around 25%, or a reduction in household income tax of around 10%. [3]

11. Abandoning these policy makes little economic or environmental sense given the long-term upward trend in the price of oil, the significant negative externalities associated with motoring, and the decline in the real cost of motoring relative to other forms of transport. High fuel prices are here to stay and so, although it may be possible to reduce short-run price volatility, it is infeasible to keep fuel prices artificially low in the long-run through reductions in fuel duties as this would impact negatively on both government revenues and the environment. Government needs to send a consistent and durable signal to consumers, producers, and investors that we will need to adapt our transport systems and behaviours in the long-run. They are currently providing the wrong kind of signal.

12. Although the implied carbon price associated with motoring is relatively high, carbon emissions are just one of the many negative externalities associated with driving. Aside from emissions of greenhouse gases and other pollutants, the externalities associated with motoring include noise, accidents, health, road building and maintenance, and congestion. Designing optimal taxes to internalise all of these external costs accurately and optimally in the prices paid for motoring by consumers is very complicated, and sometimes the appropriate instruments will differ for different externalities. For example, by far the largest external cost of motoring is related to congestion. These external costs vary hugely according to the location and time of driving and are thus poorly target by the relatively blunt instruments of fuel duty and vehicle excise duty. [4] , [5] In theory, it has been suggested that this is best tackled using a road pricing scheme that charges motorists for the distance driven according to where and when they drove. It appears likely that road user charges could become a major part of the taxation system in the coming decades. In this situation, the RSPB urges that fuel and vehicle duties should remain in place as they serve important transport and environmental policy objectives that are not addressed by road pricing.

13. Finally, the RSPB believes that there are other ‘environmentally related’ motoring externalities that are often overlooked, including a number of potentially important ecological effects such as wildlife roadkills, road avoidance (due to traffic noise), barrier effects (limiting connectivity), ecosystem effects on local hydrology, erosion, sediment, and chemical effects, not to mention direct habitat loss, fragmentation, and degradation. [6] Roads can interrupt and modify natural processes altering community structures and in the longer term, population dynamics. Road vehicles are prolific killers of terrestrial vertebrates and have ecological effects on a large proportion of the landscape. [7] , [8] In the intensively used, densely populated UK landscape, roads affect almost half the designated sites of special scientific interest for nature conservation while up to 25% of all protected areas may be disturbed by their proximity to a road. [9]

14. We also regret that the Chancellor announced no new fiscal measures to tackle the deterioration of the UK’s natural environment. In particular, the Coalition has missed an opportunity in this budget to introduce fiscal measures to address the use of peat in UK horticulture. This practice is responsible for 630,000 tonnes of CO2 emissions per year, as well as significant habitat destruction on raised lowland peat bogs, of which only around 6% remain undamaged across the UK. Clear environmental externalities in this industry have prompted Government targets to phase out peat use; however, the voluntary route adopted over the past 15 years has ended in failure, with peat still making up 70% of growing media consumed in the UK. This consumption pattern is driving damages both at home and abroad, despite the existence of working alternatives to peat, predominantly using waste products, the use of which also contributes to recycling and landfill reduction.

15. Organisations across the UK, including those from within the peat growing media industry, have been calling for a regulatory approach. A levy of just 4 pence per litre of peat growing media could make alternatives more price competitive, reduce peat use and its associated damages, stimulate investment in the renewable alternatives industry, and generate significant funds for the public purse. Internalising the environmental externalities around peat use, by making the price better reflect the social costs of its extraction, would have also contributed to a better fiscal balance between taxes on bads and on goods.

16. We also regret the decision to discontinue of the Aggregates Levy Sustainability Fund (ALSF). The ALSF was a hypothecated fund from the Aggregates Levy which delivered substantial and tangible environmental benefits. In terms of direct industry carbon emission reductions, the ALSF was also responsible for savings of 160,000 tonnes of CO2 in the aggregates sector by 2011/12, and had an estimated potential for a total reduction of 560,000 tonnes from 2015-2020, the monetary value of which is estimated at £58.4m. Regarding improvements in waste management, over 12.5 million tonnes of waste has been diverted from landfill since 2008. This work has saved over 500,000 tonnes of CO2 emissions annually, and would have delivered savings of £123 million over the period to 2020.

17. The ALSF has proven to be excellent value for money. The overall cost:benefit ratio of all the ALSF work which can be monetised is just under 1:10, with £20 million invested giving rise to £195 million in benefits. This represents only the measurable environmental benefits, and in fact there have also been significant additional gains in societal welfare from other activities relating to the restoration of habitat affected by extraction. For example, the Nature After Minerals project, which received a small amount of funding from the ALSF, has assisted in the restoration of over 2,100 hectares of minerals sites, creating rare and fragmented UK Biodiversity Action Plan (BAP) priority habitats such as lowland heathland, wet woodland and fenland.

Approaches to shifting the burden of taxation from ‘goods’ (e.g. labour) to ‘bads’ (e.g. emissions) and factors that need to be considered when designing and introducing green taxes.

18. We feel that the recent budget performed poorly against this criterion due to measures reducing tax on carbon intensive travel, and the failure to incorporate any fiscal measures around conservation of the natural environment.

19. The introduction of a carbon floor price in the budget, while welcome, does little to address the complex set of existing carbon regulations that continue to provide insufficient incentives to consumers and producers to reduce their environmental impacts. The rationale for introducing a price floor is in order to correct for the fact that the (traded) carbon market price is currently too low and too uncertain for the long-term investment decisions that need to be made. However, the policy the government announced in the Budget may not correct for either of these problems. The carbon price that has been chosen is too low and replaces market uncertainty with further regulatory uncertainty. It has been argued that the carbon price floor will "increase abatement costs for the UK and the EU, provide windfall profits to existing low carbon generators (especially nuclear) and may deliver no additional emission reductions at least until 2020 and possibly not beyond. [10]

20. Solving these issues requires a higher carbon price and for the carbon price floor commitment to be embedded in a contractual obligation, which would provide investors with the long-term credibility they require to invest, rather than simply a tax that is vulnerable to future political pressures. More generally, the carbon price floor adds further complexity to the already complex policy mix of different incentives, widens the range of carbon prices, and fails to price carbon consistently between sectors and fuels. Many consumers in the public, commercial and industrial sectors will effectively face double or even triple regulation of their carbon emissions – directly through the climate change levy on electricity use and indirectly through the impact on electricity prices of both the carbon price floor and EU ETS allowance price. A rationalization of existing policies is called for. Inefficient climate change policy costs more than it needs to and achieves less, directly because of limited resources available to tackling it, and also because of the sensitivity of public support for tackling climate change to the costs of doing so.

21. There have thus been suggestions that the existing set of climate change instruments be merged [11] in order to address the disproportionate complexity relative to a lack of environmental ambition. It is often overlooked that much of the UK legislation that overlaps with the EU ETS results in no net carbon emissions reduction at the EU level. Less demand for carbon permits in the EU simply lowers the carbon permit price and thus subsidises emissions elsewhere in Europe. In the long-run, it would be desirable in theory to move as far as possible towards a single price of carbon (i.e. via a carbon tax) for all sectors of the economy as a means to reducing emissions to levels consistent with future abatement targets in the most economically efficient way possible, preferably at an EU level. However, we are a long way from that point at present. [12] , [13]

22. The Coalition has pledged to increase the proportion of the total tax take that is made up by environmental taxes. Whilst this is hardly the best measure of overall environmental performance, it indicates a positive intention to shift the burden of taxation towards bads. The OBR produced a fiscal outlook in 2010 mapping expected future revenues from taxation. [14] The IFS used this report in 2011 to predict that the UK Government was on course to meet its green tax pledge, with the proportion of green taxes set to increase from 7.9% of receipts in 2009-10 to 8.3% of receipts in 2014-15. [15] However, this calculation included a rise in tax receipts between 2010-11 and 2011-12 of £1.6 billion from fuel duty and £0.4 billion from APD. Whilst the freeze in APD and reduction in fuel duty do not prevent these increases from occurring (as car and air travel may increase, causing overall revenues to rise), it is far less likely that the predictions will be valid compared to if the planned fuel duty escalation and shift towards PPD had occurred. Therefore the chancellor in the 2011 budget has probably hindered the ability of this government to achieve its green taxation pledge.

The scope for the tax system to create a ‘modal shift’ from high carbon transportation to low carbon alternatives, including Fuel Duty, Vehicle Excise Duty, and Air Passenger Duty and issues the Government should consider when developing strategies for sustainable aviation and motoring;

23. The UK Government’s agreement committed to the introduction of a Per-Plane Duty (PPD) to replace APD. Taxing aviation based on actual flights rather than passenger numbers would have made the tax more aligned with carbon dioxide emissions from air travel, increasing the efficiency and effectiveness of the tax, as well as increasing the total tax take from an industry which is responsible for significant environmental externalities.

24. Transport is responsible for almost 25% of all carbon dioxide emissions in the UK. Influencing market incentives to reduce aggregate demand for carbon based transport, as well as shifting demand towards lower-carbon alternatives such as rail, will be essential for the UK Government to meet the nation’s commitments.

25. The RSPB welcomes the current consultation on business jets, which at the very least should be included into current aviation tax schemes such as APD.

The impact of the taxation system in general on sustainable development;

26. The impact of taxation on economic activity and competitiveness is clearly important. However, it is broadly accepted that gauging performance by measures of aggregate income or activity (like GDP) which fail to take into consideration the depletion of natural capital, will be hazardous. We also know from the Stern Review and the Millennium Ecosystem Assessment that we are depleting natural capital at ever accelerating rates. All environmental assessments, at virtually all scales, whether it be fisheries, soil productivity or forests, underline this trend. If we are to remain within ecological limits, then these limits must then inform decision making at all levels, and taxation can be one of the most effective, and appropriate means to address environmental externalities.

27. Taxation should be a principal means of realigning market incentives by internalising the external costs private actors impose on society. We believe it is legitimate to use them to change behaviour even if the outcome is a reduction in short term GDP growth. For example, if a factory enhances it profits by polluting a river, taxing their emissions may well reduce GDP but will increase societal wellbeing – the proper metric for assessing taxation.

28. Traditionally, economic management focuses on static efficiency and stability. Questions of sustainability are naturally more dynamic. Growth can only be sustainable if activity today does not undermine the prospects for growth in future. There is overwhelming evidence that, on current trajectories, it will. If that is accepted, the question becomes what do we need to be doing now to ensure we can sustain the economy. Knowing the scale of CO2 emission cuts required by 2020, for example, should be informing present tax policy as much as the static efficiency of different tax options (in a cost benefit sense).

How policy proposals in ‘The Plan for Growth’ will affect sustainable development and environmental protection (i.e. planning, green growth, low carbon investment, regulations etc);

29. The UK is facing unprecedented challenges for the 21st Century - economic recovery, climate change and biodiversity loss, increased urbanisation and the need for greater social equity. The need for us to strive to achieve sustainable development and effectively address these issues has never been more pressing. An effective, strategic planning system has an essential role to play in delivering true integration of economic, social and environmental priorities and objectives at all levels.

30. However, recent budget announcements (both 2010 and 2011) have presented planning as a barrier to economic growth. Speaking at the Conservative Party’s spring conference in Cardiff, the Prime Minister has recently described planning officials as "enemies of enterprise" and declared that the forthcoming budget will be the most pro-growth friendly for generations. As a result, current measures put forward by Government restrict the planning system to a statutory land-use activity. While it might hinder economic growth by filtering out inappropriate development and setting (environmental) limits, there is a lot of evidence that suggests that effective strategic (spatial) planning can help support economic development (planning for minerals). Government should view the role of planning as providing an essential strategic co-ordinating mechanism for economic, social and environmental priorities and ensuring that nature is at the heart of decision-making.

31. We believe that achieving sustainable development must be at the heart of the planning system. Currently decisions about land-use are made by different organisations and government departments all with their own priorities and interests. If we are to reverse the decline in biodiversity, we must ensure that decision-making is aligned and suitably integrated towards achieving a common vision for sustainable development.

The announcement in Budget 2011 on the Green Investment Bank.

32. The RSPB welcomed the announcement that a Green Investment Bank (GIB) will be established in 2012-13, with an initial capitalisation of £3 billion. However, we feel that as currently envisioned, it will not deliver in the ways that will be required if our 2020 and 2050 carbon emissions reduction commitments are to be achieved. The delay in full borrowing powers until 2015, and the relatively small start-up capital mean that the bank is predicted to leverage only an estimated £18 billion investment in low carbon infrastructure by 2014-15. Given that the Green Investment Bank Commission estimates that the investment needed by 2020 to meet UK carbon targets is £550 billion, this measure clearly does not even begin to go far enough to ensure the government’s green objectives will be met.

33. The RSPB supports the recommendations made by the Green Investment Bank Commission, and the Environmental Audit Committee for borrowing powers to be granted to the GIB as soon as possible.

21 April 2011

[1] European Federation for Transport and Environment. April 2011. Fuelling oil demand: What happened to fuel taxation in Europe?

[2] European Federation for Transport and Environment. April 2011. Fuelling oil demand: What happened to fuel taxation in Europe?

[3] PSI (Roger Salmons), February 2011. Road transport fuel prices, demand and tax revenues: impact of fuel duty escalator and price stabiliser.

[4] IFS Mirrlees Review . 2010. Reforming the Tax System for the 21 st Century: “ Dimensions of Tax Design Chapter 5. Environmental Taxes ” (Don Fullerton; Andrew Leicester; Stephen Smith).

[5] Sansom, T., Nash, C., Mackie, P., Shires, J. & Watkiss, P. (2001). Surface Transport Costs and Charges – Great Britain 1998. Final Report for the DETR. Institute of Transport Studies, Univer sity of Leeds.

[6] Forman , R.T., Alexander , L . E. 1998. Roads and their major ecological effects. Annu. Rev. Ecol. Syst. 29:207–31

[7] Underhill, J.E., Angold, P.E., 2000. Effects of roads on wildlife in an intensively modified landscape. Environmental Review 8, 21–39.

[8] Forman RTT, Alexander LE. 1998. Roads and their major ecological effects. Annu. Rev. Ecol. Syst. 29:207–31

[9] Underhill, J.E., Angold, P.E., 2000. Effects of roads on wildlife in an intensively modified landscape. Environmental Review 8, 21–39.

[10] MacKerron, G., Sorrell , S. & Watson , J. 8th March 2011 . Response to DECC Consultation on Electricity Market Reform. Sussex Energy Group, SPRU, University of Sussex


[11] http://www.decc.gov.uk/as s ets/decc/What%20we%20do/A%20low%20carbon%20UK/crc/1195-reducing-the-overlap-between-schemes-crc.pdf DECC C onsultation on CRC: Reducing the Overlap Between Schemes

[12] Helm, D. 2010. The Case for Carbon Taxes, in Less, S (ed) Greener, Cheaper, Policy Exchange, London

[13] The IFS Green Budget: February 2011. London. Ch. 11 Environmental Policy.

[14] Office for Budget Responsibility, 2010, Economic and fiscal outlook .

[15] Institute of Fiscal Studies, 2011, Green Budget 2011.