Budget 2011 and Environmental Taxes

Written evidence submitted by the Aldersgate Group

EAC Inquiry

The Environmental Audit Committee (EAC) is launching an inquiry into the environmental impact of Budget 2011 and green taxes. The Committee will examine how well green taxes are being used to deliver environmental goals and aid the transition to a low carbon economy, and whether Budget 2011 strikes the right balance between these aims and broader economic objectives. The Committee also wishes to examine sustainable development and environmental protection aspects of 'The Plan for Growth' published alongside the budget.

Aldersgate Group (AG)

The AG is an alliance of leaders from business, politics and society that drives action for a sustainable economy. The views expressed in this document can only be attributed to the AG and not individual members.

Summary

· The UK requires a comprehensive green growth strategy that goes beyond reducing the budget deficit and drives a dynamic economic recovery. The UK is losing momentum in the green economy race and there is only a small window of opportunity to assert leadership in the years ahead. A strong regulatory and fiscal framework that is credible, consistent and bankable will be vital for success.

· In this context, the 2011 Budget and corresponding growth strategy is a missed opportunity and there will be only a marginal impact to the development of the green economy relative to international competitors. The Roadmap to a Green Economy, to be published shortly, should adopt a more comprehensive approach.

· The key measurable for "increased investment in low carbon technologies" in the Plan for Growth is being achieved by the majority of G20 nations and should be a relative target as opposed to an absolute target.

· The AG supports the Government objective to introduce a carbon floor price to provide more stability to carbon prices. Further consideration needs to be given to making the trajectory of the floor price more credible with investors, such as through contractual obligations. Measures to avoid windfall profits for low carbon projects that pre-date this measure should also be considered.

· Carbon regulation should be streamlined to move towards alignment of carbon prices that apply to different sectors of the economy.

· Well-designed regulation can spur growth, innovation and competitive advantage. As such, the regulatory reform framework needs to advocate and articulate what is good regulation and focus on removing bad regulation. The general portrayal of regulation as anti-growth in the 2011 Budget is misguided.

· The sectoral growth reviews should incorporate an explicit greening element and future growth reviews should focus on sectors that must play a leading role in the transition to a sustainable economy.

· The changes in the zero carbon homes policy risk undermining not only the confidence in firms that have developed innovative solutions to deliver what was a progressive policy, but wider investor confidence in early markets supported by ground breaking green policies. Additional policy is required to reduce significantly non-regulated emissions (where the agents of the emissions are the occupiers rather than the housebuilders) and encourage industry leaders to build homes that are truly capable of being carbon neutral.

· The additional funds for the GIB are welcome but the date the bank can borrow should be brought forward to maximise private sector leverage. A fully independent, accountable and enduring institution must be established in statute in 2011-2 with a clear low carbon investment mandate.

· The Government needs to clarify its commitment to increase green taxes as a proportion of total tax revenues, such as adopt a target for at least 10% by 2015.

· The Fair Fuel Stabiliser is a missed opportunity to reduce taxes on income rather than petrol.

· The announcements on additional apprenticeships and strengthening STEM skills are welcome but there is no explicit strategy to prioritise the skill needs to drive the economy through the environmental transition.

· It is welcome that the Plan for Growth is committed to use "the £236 billion pubic procurement power to drive new markets in green products and services" but there is a significant disconnect between this objective and the current policy environment where the short-term, lowest cost solution dominates. Further clarification is required on how the Government seeks to achieve its aim.

· The National Planning Policy Statement must introduce robust criteria for "sustainable development" in the planning process. This announcement puts a great deal at stake in getting this definition to be demanding and robust, to avoid the environment suffering at the hands of inappropriate development.

AG Response

1. On the 1st March 2011, the AG launched a report entitled Greening the Economy: A strategy for growth, jobs and success. The report sets out the case for a comprehensive green growth strategy that goes beyond reducing the budget deficit and drives a dynamic economic recovery. The UK is losing momentum in the green economy race and there is only a small window of opportunity to assert leadership in the years ahead. A strong regulatory and fiscal framework will be vital for success, combined with a concerted push to get behind those sectors that have competitive advantages.

2. This response to the EAC inquiry summarises the main points from Greening the Economy and outlines to what extent the 2011 Budget announcements meet the AG’s recommendations.

Background

3. Greening the Economy argues that how each nation addresses the challenges of a resource constrained world will increasingly determine its future economic competitiveness. Economies must be transformed to provide rising prosperity to citizens, strengthening new growth sectors and modernising traditional sectors. UK policy should focus on three core elements: building a globally competitive green economy, stimulating export growth and attracting inward investment from foreign based firms.

4. Policies to enable the transition to a sustainable economy will generally require investment in the short term to maximise returns in the long term. Not only is the scale of the task enormous and the timetable challenging, but the pressure on public finance is considerable. Nonetheless early mover advantage is essential to drive success and a number of interventions have the potential to raise significant funds for the public purse.

5. The world is engaged in a green economy race and acting early will ensure that the UK is well positioned to attract global investment, stimulating job creation and export growth. While the UK’s economy has strong green foundations on which to build, it is rapidly losing ground to developing nations and other competitors. This trend is directly related to aggressive regulatory and fiscal policy packages that countries are putting into place, not least China’s new Five Year Plan that seeks to underpin a ‘clean revolution’ in its economic development and India’s National Action Plan on Climate Change that is projected to stimulate US$1 trillion of investment over the next decade.

6. To lay the foundations for a more resource efficient and competitive economy, the UK needs an intelligent and dynamic policy framework that corrects market failures. Otherwise green investments will flow to more attractive markets or develop at too slow a pace. The most effective policies will provide as much certainty as possible by being:

· Credible. Legal, enforceable, fully deliverable and supported by an overarching vision.

· Consistent. Providing confidence that a policy direction will be maintained, implementing progressive, and avoiding retrospective, changes.

· Bankable. Risk and reward levels are attractive over clear investment timeframes, with no shocks to damage early investors.

Growth strategy

7. The Plan for Growth [1] , published alongside the 2011 Budget, recognises that "Britain has lost ground in the world’s economy, and needs to catch up". It states that "if we do not act now, jobs will be lost, our country will become poorer and we will find it difficult to afford the public services we all want. If we do not wake up to the world around us, our standard of living will fall, not rise." Although this is intended to be a general statement, the AG believes that it is particularly relevant to addressing environmental challenges and the opportunities presented by the green economy.

8. The Chancellor made clear that last year’s emergency Budget was about "rescuing the nation’s finances" and the 2011 Budget was focused on creating "enduring growth and jobs in the future". However, "the green energy revolution and our determination to be the greenest government ever" has been shown to be only marginal to the Government’s overall growth strategy and this is a missed opportunity. The Roadmap to a Green Economy, to be published shortly, should adopt a more comprehensive approach.

9. To be successful, green growth measures need to be incorporated into all policy decisions. A number of the policy announcements, such as the sectoral growth reviews and introduction of enterprise zones could have incorporated a greening element without changing the overall policy direction significantly. There must be greater recognition of the role of regulation to drive new markets and stimulate innovation. Furthermore, the level of overall ambition must match the green growth strategies that are being implemented around the world. At best, there will be incremental development in the green economy relative to competitors and not the step change that is required.

Driving growth in green technologies

10. An important aspect of the green economy is a flourishing low carbon and environmental goods and services (LCEGS) sector, including renewables, waste management, energy management, water management and low-carbon vehicles.

11. While the industrialised world has been the mainstay of the green economy over the past decade, the UK and EU are losing momentum to competitors. Many developing countries are winning market share and increasing their carbon productivity, driven by the high proportion of green spending in stimulus packages and a strong turnaround from the global recession.

12. Ernst & Young’s analysis of the relative attractiveness of countries for renewable energy investments demonstrates that "a new world order is emerging in the cleantech sector with China now the clear leader in the global renewables market" [2] . The research finds that manufacturers in the West need to be particularly innovative if they are to preserve their share of the market, and are likely to need a greater proportion of Asian product to remain cost competitive.

13. HSBC predicts that the share of the three largest industrialised low carbon markets (EU, USA and Japan) will fall from 60% in 2009 to 53% in 2020, while the share of the three leading major emerging markets (China, India and Brazil) will grow from 25% to 34%. Its research also suggests that the market will primarily be driven by energy efficiency themes, notably low carbon vehicles such as plug-in hybrid and full electric vehicles, that will surpass low carbon power as the major investment opportunity [3] .

14. Green growth is directly related to aggressive regulatory and fiscal policy packages that countries are putting into place around the world. The market in 2011 is fiercely competitive as businesses strive to achieve first mover advantages. In the words of Barack Obama; "nobody in this race is standing still". The UK must ensure it has the right policy framework in place to deliver growth, innovation and decent jobs in the markets of the future.

15. It is therefore welcome that "increased investment in low carbon technologies" is a measurable benchmark to meet the Government’s ambitions to encourage investment and exports as a route to a more balanced economy. It is likely that the five actions outlined in the low carbon section, including energy market reform, the creation of the Green Investment Bank and support for CCS demonstrations, will be sufficient to meet this objective. However, the target of "increased investment" is lacking in ambition. Almost every country in the G20 increased its investment in clean energy in 2010 and this trend is forecast to continue over the next decade. The bar should be raised so that the target is a relative measure rather than an absolute measure. It should be noted that the Plan for Growth uses relative measures to ascertain the UK’s overall competitiveness and export growth.

16. In comparison to international competitors, the UK is losing ground in the green economy and policy uncertainty is damaging investor confidence. A report published after the 2011 Budget by the Pew Charitable Trusts on the global green economy race finds that investment plummeted in the UK in 2010 relative to competitors. After achieving a fifth-place ranking for clean energy investments in 2009, it finds that the United Kingdom dropped out of the top ten in 2010. It states that:

"Investment levels in 2009 were driven by large volume financings for offshore wind energy and the government’s commitment to strong action on climate change. But 2010 brought a new government to Great Britain, and investors appear to believe that there is a high level of uncertainty about the direction of clean energy policymaking in the country." [4]

17. Greening the Economy argues that an important element of policy certainty is "consistency" and ensuring that "a policy direction will be maintained, implementing progressive, and avoiding retrospective, changes." A lack of consistency in one policy area can damage investor confidence in another area by increasing policy risk.

18. For example, the Government’s recent announcement that it will reduce feed-in tariff (FIT) support for large solar projects from August risks damaging investor confidence significantly. The AG considers this to be a retrospective change that penalises investors, as projects are generally expected to take around eighteen months to complete but were given less than a six month deadline to register. This is compounded by the Budget announcement that FIT businesses will be excluded from tax reliefs afforded by Venture Capital Trusts (VCT) and the Enterprise Investment Scheme (EIS). This comes at a time when, according to Pew Charitable Trusts, "purchases of small-scale, distributed, clean energy technologies were a new and important force driving clean energy investment to record levels in 2010. Investment in small-scale projects among G-20 members grew by 100 percent, doubling annual investment to $56.4 billion. A massive surge in rooftop solar energy projects in Germany accounted for more than half of all smallscale investments. Significant investment in small-scale and residential projects also occurred in Japan, the European Union (especially France and Italy) and the United States" [5] .

19. The Budget commitment that all four CCS demonstrations will be funded by general taxation is welcome and, if enacted effectively, will help drive competitive advantage for the UK in this area. According to AG member Matthew Spencer, Director of Green Alliance, this "will create more certainty, and raises the chances that the UK can win the lion’s share of EU CCS funding." The review of CCS needs to consider a wider role for industries beyond fossil fuel power plants.

20. There is also a strong case for the Government investment target in the Plan for Growth to go ‘beyond carbon’ by seeking to promote and assist the whole LCEGS sector. The Environmental Industries Commission’s 2011 Policy Manifesto argues that "by focusing on ‘low carbon’ growth and not the other, equally important, environmental and sustainability issues, we risk forfeiting a large share of the £3 trillion global environmental marketplace". It recommends that "an overall strategic approach to green jobs and skills must address issues related to water pollution, air quality, land contamination and soil quality, and the efficient use of resources." [6]

Transforming the whole economy

21. Building a more competitive economy is not just a question of establishing a flourishing environmental technologies sector. Primarily, it is concerned with modernising the entire economy and transforming conventional business models. To ensure success, the Government’s regulatory and fiscal framework should adopt a broad approach. The entire economy must be made more sustainable with greater prioritisation given to energy efficiency and technological innovations for improving the processes of established industries. This must

· Ensure that prices reflect environmental realities;

· Adopt a regulatory approach that prioritises long-term value;

· Embed sustainability across public policy;

· Incorporate a lifecycle approach to resource use;

· Address climate and resource risks; and

· Enable a socially just transition.

Pricing externalities

22. Current prices are a long way off providing a sufficient incentive for investments at the pace and scale required to meet environmental challenges. This can most clearly be illustrated by the inadequacy of current policy to create a sufficiently stable, high and credible carbon price, primarily through the EU ETS.

23. The AG supports the Government objective to introduce a carbon floor price to provide more stability to carbon prices. Further consideration needs to be given to making the future trajectory of the floor price bankable, especially as it rises to 2020 and beyond. One option would be to distance the price from government control by giving the Committee on Climate Change the power to set the floor price, according to progress towards meeting the statutory carbon budgets, in a similar way to the process by which the Monetary Policy Committee sets interest rates. Another mechanism would be if the carbon floor price commitment was embedded with a contractual obligation [7] . As a result of the increase in energy bills, some of the revenues from the carbon floor price should be directed to alleviate fuel poverty and/or increase take up of the Green Deal. Measures to avoid windfall profits for low carbon projects that pre-date this measure should also be considered.

24. More widely, the carbon floor price will add further complexity to the regulatory framework that has resulted in a wide range of carbon prices that apply to different sectors of the economy. The AG recommends that these should be streamlined to ensure that climate mitigation is undertaken in the most efficient way. For example, the AG believes that the regulatory burden on both businesses and the public sector could be eased by more considered design of the different schemes for reporting and reducing emissions. Organisational boundaries, scope rules, period of reporting and evidence/audit requirements should be unified as far as possible. The delay in the CRC Energy Efficiency Scheme (CRC) Phase 2 offers an opportunity to achieve this (at least for the CRC scheme and for mandatory GHG reporting) so that organisations can collate data once for multiple reporting purposes. Such streamlining should be designed in such a way as to maintain or increase projected carbon emission reductions, protect revenues to HM Treasury and provide stronger signals for good performance (by building in a reward system above the threshold for the revenues that are directed to HM Treasury).

25. The Chancellor also announced that the Government are "extending the Climate Change Agreements (CCAs) to 2023, and increasing the Climate Change Levy discount on electricity for those who sign up from 65% to 80% from April 2013… (to) help our most energy intensive industries." This move clearly acknowledges the value of incentives and the government must use the review of the CRC to give a similar differential advantage to top performers, for example by increasing the price of allowances and providing the opportunity for participants to receive that increase back for good performance. This could be constructed in stepped rebates and would re-activate the larger energy efficiency investments which have stalled since the CRC was reduced to a single rate tax. Consideration of amalgamating the CRC with the CCA should be addressed in the consultation on proposals to simplify the CCAs that will be published in summer 2011.

26. The current policy framework to drive carbon prices may be developing, but we have only started to scratch the surface in terms of accurately pricing other resources. In a world where the efficiency of resource use matters more and more, this is critical. The AG’s Beyond Carbon report notes that there are significant political and economic difficulties in pricing externalities even when we think we understand them, but that there are also many externalities which are poorly understood. A major international research effort on the economics of ecosystems and biodiversity (TEEB) draws attention to the long-term costs and benefits of ecological systems but we are a long way from being able to calculate or allocate the external costs accurately.

27. The current policy framework to drive carbon prices may be developing, but we have only started to scratch the surface in terms of accurately pricing other resources. In a world where the efficiency of resource use matters more and more, this is critical. The AG’s Beyond Carbon report notes that there are significant political and economic difficulties in pricing externalities even when we think we understand them, but that there are also many externalities which are poorly understood. A major international research effort on the economics of ecosystems and biodiversity (TEEB) draws attention to the long-term costs and benefits of ecological systems but we are a long way from being able to calculate or allocate the external costs accurately.

28. There is significant scope for the taxation system to protect and increase stocks of natural capital. For example, the tax system could reward those businesses delivering environment goods such as new native woodland creation as actions such as this deliver on both climate change mitigation (carbon absorption) and adaptation through the creation of habitats for wildlife. However, the justification for such taxes should not be based on the idea that prices can accurately and comprehensively internalise the external cost. Taxation policy should be informed by the general knowledge that natural capital is valuable and seek to protect natural capital stocks effectively and efficiently.

Regulation

29. Pricing policy alone is not sufficient to drive investment in environmental technologies and resource efficiency. As a result, a regulatory approach that prioritises long-term value is required that addresses the full range of barriers and does not ‘lock in’ existing technologies or practices.

30. The AG is concerned with the general portrayal of regulation as anti-growth in the 2011 Budget and the lack of flexibility in the Government’s regulatory reform proposals. For example, the Plan for Growth states that the "burden" of regulation is damaging the competitiveness of the UK economy and justifies this with a crude measure of the cumulative additional cost to business of new regulations introduced since 1998 at £90 billion a year. "A lower domestic regulatory burden" is a key measurable to make the UK one of the best places in Europe to start, finance and grow a business.

31. A more informed debate on regulatory reform is required which makes a distinction between:

· Outdated regulations that have not kept up with changing cultural attitudes and technological developments; and

· Addressing fundamental market failures that protect society and the economy from systemic risks (such as in the areas of finance and the environment).

The Government believes that climate change, for example, is one of the "gravest" challenges we face. It is widely recognised that the costs associated with addressing this challenge effectively will rise and that in these fiscally constrained times, regulation will increasingly be the most effective way to change behaviour, provide certainty and encourage investment. Therefore, an overly rigid regulatory reform framework alongside the objective of "a lower domestic regulatory burden" risks hampering the Government’s environmental objectives and damaging UK competitiveness in the long-term. The debate on regulatory reform should not be presented as a trade off between markets and regulation but how each work in mutual support with aligned objectives to deliver sustainable outcomes [8] .

32. This point is illustrated by recent media reports that the provisions to introduce mandatory carbon reporting in the Climate Change Act may not be enacted due to the Government’s drive to reduce the regulatory burden. This is despite significant support from the business community, including the Aldersgate Group, and the CBI. Such a framework would help companies to identity cost savings and lead to a level playing field, allowing investors and consumers to make meaningful comparisons. A final decision on mandatory carbon reporting should be made on reflection of the perceived costs and benefits of the policy, rather than due to restrictions in the introduction of new regulations.

Lifecycle approach

33. The AG argues that physical accounting for the use of key resources on an economy wide basis, alongside monetary accounting, would help to make more balanced and robust decisions. This would systematically track the flow of materials through the economy with the associated environmental impacts (including an analysis of embodied carbon).

Dynamic sectors

34. The most effective way to stimulate green investment is on a sectoral basis due to the large number of specific barriers and solutions that each sector faces. This will be crucial to deliver the Prime Minister’s vision for a new economic dynamism that seeks to create the right framework for business investment. It will drive growth in those industries where Britain enjoys competitive advantages, making it easier for new companies and innovation to flourish.

35. The lack of an explicit greening element to the sectoral growth reviews in the Plan for Growth demonstrates a lack of a joined-up approach to accelerate the transition to a sustainable economy. For example, the Government could have provided incentives to promote innovation for green technologies in advanced manufacturing, strong policy frameworks to drive demand for green ICT in the digital and creative industries, adopt a number of recommendations from the IGT report by Paul Morrell to drive opportunities in low carbon construction and instigate measures to incentivise eco-tourism. The Government should address how each of the growth sectors can address environmental challenges to drive UK competitive advantage and ensure that future sectoral growth reviews adopt a greening element from the outset.

36. The Government must also ensure that future growth reviews focus both on sectors that must play a leading role in the transition to a sustainable economy (such as automotive, aerospace, the built environment and farming) and the LCEGS sector (such as offshore wind, CCS, wave and tidal technologies and water treatment). In the LCEGS sector, demand side policy must be matched by the development of the supply side. For offshore wind, this includes the explicit development of UK-based engineering and construction capacity. A failure to do this effectively over the past decade has meant that only 10–20% of the investment for recent UK offshore wind projects (such as the London Array and Thanet) has gone to British based firms. It is envisaged that benefits for UK firms will be increased through a recent package of measures, such as the commitment for public investment in port infrastructure in the 2010 Spending Review, that has been rewarded with a number of turbine manufactures committing to a UK presence (such as Siemens, Clipper, Mitsubishi and GE).

Zero carbon homes

37. Before the 2011 Budget, construction was one area where the UK had a pioneering policy instrument, zero carbon homes, which put the UK in the lead globally. The Plan for Growth announced the regulatory requirements for zero carbon homes. It outlined that the Government will hold housebuilders accountable only for those carbon dioxide emissions that are covered by Building Regulations (which are associated with the energy use through heating, fixed lighting, hot water and building services). They do not cover emissions related to energy use from cooking or from plug-in electrical appliances such as computers, "as these are beyond the influence of housebuilders and will be addressed by other policies, for example the EU Emissions Trading Scheme".

38. The changes in the zero carbon homes policy risk undermining not only the confidence in firms who have developed innovative solutions to deliver what was a progressive policy, but wider investor confidence in early markets supported by ground breaking green policies. Just two weeks before the Budget, the Carbon Plan stated "the government is committed to ensuring that new-build homes are zero carbon from 2016 and do not add extra carbon dioxide emissions to the atmosphere" [9] . This will no longer be the case.

39. It is also questionable if the policy changes "ensure that it remains viable to build new houses" as the projected costs of the zero carbon homes policy were falling significantly (and were set to fall further by 2016) and there was considerable support for a more ambitious definition within the industry. For example, AG member Paul King, Chief Executive of the UK Green Building Council, said:

"In the space of two weeks, this government has gone from a firm commitment on zero carbon homes, to a watered down policy. A zero carbon home will no longer do what it says on the tin. The world leading commitment that new homes would not add to the carbon footprint of our housing stock from 2016 has been scrapped despite a remarkable consensus between industry and NGOs in support of it… Low carbon construction has been one of the few sectors showing genuine green shoots of growth. This U-turn will result in loss of confidence leading to lower investment, less innovation, fewer green jobs and fewer carbon reductions."

40. The announcement on zero carbon homes must be accompanied by additional measures to ensure that emissions that fall outside the scope of the definition (which are the responsibility of the occupier rather than the housebuilder) are reduced effectively. Policy must be designed to promote low-carbon choices by occupiers and make renewable technologies economically attractive. In addition, there must be the ability to distinguish leading-edge home design through the Code for Sustainable Homes so that the market can reward builders who also seek to eliminate non-regulated emissions.

Addressing barriers to growth

41. There are a number of market or system failures that are holding back the transition to a more sustainable economy. The Government must examine fully the barriers to growth and set out what it will do to address these in a way that is credible, consistent and bankable. While each sector will face its own particular set of barriers that need to be addressed on an individual basis, the most common barriers across the economy that stakeholders identified are as follows:

· Finance;

· Taxation;

· Skills;

· Innovation;

· Public procurement; and

· Planning

Finance

42. The shift to a green economy generally involves higher upfront capital costs and lower operating costs. Following the credit crunch, capital and private equity investment in environmental sectors has fallen dramatically and long term finance remains scarce. The funding gap between business-as-usual and what is required to meet environmental targets is becoming ever more stark, with Ernst & Young estimating that the UK funding gap for low carbon technologies alone to 2025 is approximately £330–£360 billion [10] .

43. To address this immense financing challenge, the UK must seek to reduce risks and mobilise finance at scale from institutional investors. The government commitment to create a Green Investment Bank (GIB) is welcome and the Bank must be designed to make a transformational impact. In the global green economy race, there will be competitive advantage for the countries that are able to cut the costs of capital. For example, KfW in Germany has a long track record with many decades’ head start. It provided €19.8bn of investment in environment technologies in 2009 – up 12.5% on the previous year [11] .

44. It is welcome that the Budget confirmed the Government’s commitment to the GIB with the intention for the institution to be a driving force for the economic recovery in the Plan for Growth. The £3 billion initial capitalisation represents a significant improvement from the £1 billion announced in the Spending Review but is still short of the £4 billion that the AG recommended in our report Financing the Future. As the Government predicts that £3 billion will leverage in £15 billion additional private sector investment, an extra £1 billion would leverage another £5 billion private sector investment using the same ratio.

45. The GIB would be able to leverage significantly more private sector investment if it was not prevented from borrowing until 2015 at the earliest and on the condition that "the target for debt to be falling as a percentage of GDP has been met". This means that the bank will be a fund for the duration of this Parliament. In order to be more effective and make a transformational impact, the 2015 date should be brought forward, and the condition that the budget deficit must be eliminated first must be dropped. Responding to the Government announcement on budget day, Andrew Raingold, Executive Director of the AG, said:

"Public banks are driving the economic recovery around the world. This is leading to growth in jobs and not deficits. We welcome the additional finance for the Green Investment Bank but it must have the power to borrow from day one. This would put the bank at the heart of the Chancellor's plan for growth."

46. The detailed proposals for the GIB, due to be published in May, must ensure that the power to borrow is enshrined in the constitution. A fully independent, accountable and enduring institution must be established in statute in 2011-2 with a clear low carbon investment mandate.

Taxation

47. A strong driver for the transition to a sustainable economy is a green tax shift, reducing taxes on income and increasing taxes on pollution. An extensive research project by the Green Fiscal Commission demonstrates that this will be vital to put the UK on a sustainable trajectory; help develop the new industries that will provide competitive advantage for the UK in the future; and contribute to restoring UK fiscal stability after the recession [12] .

48. Greening the Economy recommended that the 2011 Budget should be the first to set out a clear framework for a far-reaching green tax shift. While this was not undertaken, the Chancellor did reaffirm that "green taxes will increase as a proportion of our total tax revenues, as we promised." Moving forward, further clarity is required. HM Treasury have been undertaking an initiative on opportunities to green the tax base and using fiscal measures to drive behaviour change. The outcomes must be suitably ambitious to ensure the UK meets its environmental targets, including statutory carbon budgets.

49. Before the 2011 Budget, the Institute of Fiscal Studies demonstrated that "in 2009–10, total receipts were £513.8 billion, of which green taxes made up £40.7 billion or 7.9%. In 2014–15, total receipts are forecast to be £698.0 billion, of which green taxes are £57.9 billion or 8.3%. This would allow the government to meet its objective (of increasing the proportion of green taxes) with around £2.6 billion to spare." Taking into account the measures announced at the Budget, the Institute for Fiscal Studies now estimates that this difference will fall to £1.4 billion. This demonstrates that while the Government is on course to meets its pledge to increase the proportion of green taxes, much greater ambition is required. For example, the Liberal Democrats’ 2010 party conference passed a motion calling for the share of receipts to reach 10% by 2014-5 and the Green Fiscal Commission recommends a target of 15-20% by 2020.

50. In this context, the Fair Fuel Stabiliser announced by the Chancellor is a missed opportunity. The revenue generated from the increase in taxation on oil and gas production should not have been used to fund a decrease in fuel duty in order to accelerate the transition towards, in the words of Chris Huhne, "getting off the oil hook… (to) make our economy more independent, more secure and more stable" [13] . Instead, income tax or National Insurance contributions could have been reduced (thus incentivising employment) and providing additional support for fuel efficient vehicles or public transport.

51. With the Government committed to increase the proportion of green taxes, it is counterproductive to cap the cost of policies funded through energy bills (which is considered a green tax by the Office of National Statistics) and further clarification of an approximate level is required. The Plan for Growth states that "Government is introducing a new framework to cap the impact of levy-funded support on energy bills… to ensure that costs to energy consumers of climate and energy policies continue to be controlled in the future." The cost of policies funded through energy bills should not be dictated by an artificial cap but a robust cost-benefit analysis, particularly if this leads to significant cost-savings for energy consumers in the long-term.

52. To illustrated this point, DECC Secretary of State, Chris Huhne, recently said: "If we relied on oil and gas, and their prices were around $80 a barrel and its equivalent for gas, then consumers would pay more under our policies – about an extra 1 per cent on their bills by 2020. But the oil price reached $100 a barrel in January, which just happens to be the point at which our economists calculate the British consumer breaks even. And the oil price, as we see, could well be higher. In the medium term, the US Department of Energy forecasts $108 a barrel by 2020. If oil prices continue on this trend, and gas prices rise to meet them, then our consumers will be winning hands down. Paying less through low carbon policies than they would pay for fossil fuel policies." [14]

Skills

53. A crucial component of the transition a green economy is the development of new skills in rapidly growing environmental markets (mainly building on existing skill sets) and sustainable literacy skills in all sectors and businesses (such as project management and communication skills). Strong evidence suggests that the UK does not have the necessary skills to make the transition at the pace required, or the training arrangements in place to fill the gap.

54. It is welcome that "to create a more educated workforce that is the most flexible in Europe" is one of the four priorities for the Plan for Growth, and that the Budget announced funding for additional apprenticeships. The AG also welcomes the measures in the Plan to Growth to strengthen the STEM skills of young people through improving career guidance, increasing the number of industry-school visits, improving teaching and strengthening STEM promotion activities. However, there is no explicit strategy to prioritise the skill needs to drive the economy through the environmental transition. The Government cannot rely on the market to respond to environmental targets at the required scale and urgency, and it is vital that all major environmental policies, such as the Green Deal or offshore wind subsidies, are accompanied with a corresponding skills strategy. An extensive research project by the International Labour Office and Cedefop urges Europe’s policy-makers to ensure that their support for skills and training matches the focus and ambition of their strategies for promoting investment in green innovation and infrastructure. It finds that France is the most advanced in this respect with the publication of a mobilisation plan for green jobs [15] . Government funding for up to 1000 Green Deal apprenticeships in March is a positive development but this programme needs to be expanded in order to meet the Government ambitions for 100,000 new jobs in home refurbishment by 2015.

Innovation

55. The competitive advantage of the UK in the green economy will depend on companies commercialising innovative goods and services and adopting novel resource efficient practices. Greening the Economy recommended, in line with Committee on Climate Change, that current levels of public expenditure for RD&D in environmental sectors should be regarded as a minimum and any cuts would be detrimental to the achievement of the UK’s climate goals and the Government’s objective to build a green economy. No significant budget cuts were announced in the 2011 Budget. However, the AG is concerned with the impact of the grant reduction for the Carbon Trust (such as 40% for 2011/12) which will constrain its support for low carbon technology development and R&D.

56. A further concern is the withdrawal of funding from sector based activities such as the Accelerator Programme and the Aggregate Levy Sustainability Fund. These sector based programmes have been aimed at:

• Making sectors more dynamic in their ambition to develop and deploy new technologies;

• Helping overcome skills gaps by pooling expertise and spreading the cost of any external expertise;

• Creating UK jobs as new technologies and services are developed for UK and overseas markets

• Reducing the risks associated by innovation by pooling experience.

There is no free market mechanism for achieving these advantages and the benefits to the economy are considered to outweigh the funding commitment required for their re-instatement.

Public procurement

57. One of the most direct ways that Government could stimulate demand for more sustainable goods and services is by exemplary action as the UK’s largest purchaser. It is therefore welcome that the Plan for Growth states that the Government will seek to leverage "the £236 billion public procurement power to help drive new markets in green products and services". However, there is a significant disconnect between this objective and a policy environment where the short-term, lowest cost solution dominates. Further clarification is required on how the Government seeks to achieve its aim. To date, greening public procurement has been a relatively low priority and, for example, was not included in the remit of the recent government spending efficiency review by Sir Philip Green. Practices such as Forward Commitment Procurement (FCP) need to become mainstream and objectives in this area will only be achievable if civil servants have the relevant skills and in-house expertise by providing more extensive training, real opportunities in terms of career progression and strengthening links between the public and private sectors through secondments.

Planning

58. The UK planning system has historically been a major barrier to investments in green technologies. At the same time, the planning system must provide the right balance between fostering economic growth, protecting the environment and achieving fairness and social justice. The Chancellor announced that the Government will "introduce a new presumption in favour of sustainable development, so that the default answer to development is ‘yes’." It is essential that the National Planning Policy Statement introduces robust criteria for "sustainable development". In their Budget reaction, AG member Friends of the Earth state that "if new housing development is granted without proper planning and new communities spring up without linked services, there could be extreme pressure on schools, hospitals, doctor’s services and public transport in the area. Without a decent planning system, essential services will get stretched, Britain’s roads will get ever more choked, and our climate change problems will get worse." [16]

26 April 2011