Budget 2011 and Environmental Taxes

Written evidence submitted by PricewaterhouseCoopers PwC


· In the budget the Government’s main green tax policy measure was the introduction of the carbon price support mechanism (CPSM) which gives a level of certainty to the EU Emissions Trading Scheme (EU ETS) carbon price for electricity generators.

· Our view is that introducing a carbon floor price is broadly a sensible policy approach that should help to underpin investment in low carbon infrastructure. However, it is likely to lead to at least some increase in energy costs experienced by trade-exposed UK energy consumers that their overseas competitors will not experience. This impact should be assessed through further consultation with the affected industries.

· We also have concerns about the proposed methodology for implementing the CPSM. Setting the price 2 to 3 years in advance without flexibility to respond to carbon price movements could lead to greater variability in the actual carbon price experienced, thereby undermining the intent of the floor.

· By introducing a floor price unilaterally, the UK has shown strong leadership on green tax policy compared to other countries. However, the floor would have greater effect and less adverse side effects if it was implemented across the EU and more widely. The Government should engage its EU counterparts on this issue, whilst commending its approach actively at COP17 in Durban to other participants.

· Additional funding, an earlier start date, and the potential for links to the government’s wider enterprise and manufacturing support packages announced in the budget are good news for the proposed Green Investment Bank. Whilst the reduction in fuel duty could be described negatively in green terms, it is unlikely to have any real impact on behaviour given the high levels of fuel prices in the UK. The longer policy objective of Air Passenger Duty (APD) needs to be considered in terms of the actual impact of its current design.

· The changes proposed in the budget have furthered the green tax agenda, but have not addressed the issue of the growing complexity of carbon taxes and price signals and other green taxes and incentives. To succeed in mobilising the substantial private sector activity required for the transition to a low carbon economy a more coherent and clearly articulated approach is needed to green taxes and broader environmental policy. This has the potential to deliver ‘win-win’ environmental and economic outcomes for the public and private sector.

· We believe that there is a case for a more thorough review of green tax policy, founded on six principles, namely :

o Clarity of policy objective

o Coherence

o International integration

o Policies that address real policies on the ground

o Cross party consensus

o Balance

· Energy security / independence is an important feature of the UK’s energy policy. Both the CPSM and the North Sea tax increases should be considered in this context.

A clear, coherent green tax strategy

1. Alongside the changes announced to the Green Investment Bank noted in the summary, there were two main ‘green tax’ measures announced in the budget: The carbon floor price and the cut in fuel duty funded by North Sea oil and gas tax increases.

The carbon floor price

1a. Broadly, the CPSM is a sensible policy and the Government should be commended for showing leadership on this issue for Europe. Below we consider four questions in relation to the new CPSM:

1b. Is a carbon price support mechanism conceptually the right approach for the UK in 2011? Broadly we consider this to be a positive policy development which underpins the market price for carbon. Variability of market prices was too high to enable proper inclusion of carbon prices in long term energy investment models and the expected trajectory for carbon prices too low to sufficiently incentivise the low carbon investment decisions required by the UK to meet emissions reduction targets. The longer term stability of the carbon price at a level above the market’s expectation should help address these problems. Although the UK is the only country in the EU ETS to adopt this approach at the moment we believe this unilateral approach is justified. Significant investment is required over the next 5-10 years in the UK in particular to renew ageing electricity generation capacity. Whilst the Electricity Market Reform and other measures will be crucial to ensuring this investment, action was required now to ensure that those investment decisions are able to include a predictable carbon price and a level which will help encourage low carbon choices for these investments to me made.

1c. Have the prices been set at the right level? The levels set are £16 moving to £30 per tonne in 2020 in real prices, expected to be £19 to £40 in nominal prices. IDEAcarbon research shows that the floor prices will lead to UK emitters paying a significant premium over EUA prices. Consistency is also an issue as it is not clear how the UK CPSM price will relate to lower carbon prices under the Carbon Reduction Commitment scheme (initially set at £12 per tonne, with auctioning planned post 2014).

1d. Given that the UK is taking a lead in this area, there are concerns about the impact on competitiveness of the higher prices for differing sectors of the UK economy operating in a global environment. We would recommend further research and consultation with the affected industries in this area. It is also important that the Government engages its EU counterparts on this issue, whilst commending its approach actively at COP17 in Durban to other participants. See also paragraph 1f below. While managing the impact on competitiveness should be a priority, the reality is that higher carbon prices are likely to be needed to achieve the government’s ambitious greenhouse gas reduction targets as set out in the Climate Change Act. Whether overall the price is right could be better understood through economic forecasting of the impact of the price on UK carbon emissions. Key factors in this will be the elasticity of carbon consumption in electricity generation to changes in the price which in turn will be impacted by the availability of substitutes.

1e. What is the impact of the mechanism chosen to implement the policy? The carbon floor price is effected through a pre-set tax on fossil fuel supplies. The Government appear to be proposing that the tax rate is set based on carbon futures markets 2-3 years in advance. This is an impure application of the floor price concept as there does not appear to be flexibility to adjust the tax rate to accommodate changes in the carbon price after it has been initially set.

1f. For example in the first three months of 2011 there was a 20% increase in carbon prices, attributable at least in part to unexpected events: the earthquake and nuclear disaster in Japan and the North African and Middle East political disturbances. The effect of this could be that when the pre-set floor price is applied to the actual price of carbon the actual total carbon price (EU ETS price plus the top-up tax) exceeds the floor set by the Government. To avoid this price risk, those affected would need to set their carbon prices by buying futures at the same time (2-3 years in advance) that the Government sets the CPSM rates. This may not be commercially desirable for participants and may create a degree of complexity for those businesses not geared up to actively manage their participation. This places greater emphasis on the importance of carbon price hedging strategies and could constrain participant’s carbon management practices.

1g. Has the impact on UK competitiveness been adequately assessed and addressed? The Government has taken the view that the increase in energy prices in the short to medium term will be offset by a longer term reduction: The UK will develop a more sustainable electricity generation infrastructure and be less reliant on increasingly expensive imported fossil fuels. This is a reasonable rationale, but the short term impact of increasing energy prices, albeit small in 2013, should not be underestimated or ignored because of the positive long term impact. This is particularly important in a global economy where businesses recovering from recession are deciding where to focus capital investments and expansion plans. At least some of the CPSM revenues should be spent on policies to help UK commercial energy users facing higher energy prices than their overseas competitors as a result of this policy.

1h. The Government should now encourage primarily other European, but also non-European nations, to follow suit to help address the competitiveness issues that have arisen from this approach in the UK. There are two strands to the impact on competitiveness. First, there is the impact for trade-exposed energy consumers that now have an additional cost that their competitors overseas will not have. Second, there is a threat to UK electricity generators – their overseas counterparts can produce power without the CPSM applying and sell to the UK market at an advantage. We would encourage the EAC to test the Government’s assertion that this risk is immaterial because it is limited by current UK to Europe inter-connector capacity (2% of overall generation capacity). The inconsistency could encourage future inter-connector capacity expansion. We suggest that the Government monitors developments in this area and opens appropriate channels of communication with the energy industry to understand the impact.

1i. Energy security / independence should be a core part of the green tax policy. Current political tensions over fossil fuel supplies are likely to increase as these resources become scarcer. As well as the threat posed by the CPSM, the additional North Sea oil and gas taxes are also a threat to energy security. This is discussed in the following section.

Fuel duty cut funded by increased North Sea oil and gas taxes

1j. The government has announced an intention to fund the 1p cut to fuel duty by additional North Sea oil and gas taxes. In principle the 1p reduction is counter to the policy objective to increase the use of green taxes. However, given the extremely high rate of environmental tax implicit in the existing fuel duty rate (see paragraph 5b), the inelastic demand for fuel and the far greater impact of increasing oil prices, the effect of this policy change on the environmental efficacy of fuel duty is negligible. North Sea taxes (Petroleum Revenue Tax and 62% Corporation Tax including the Supplementary Charge) are not typically considered environmental taxes, but by increasing them it is possible that a positive environmental effect will arise – encouraging a shift to cleaner energy sources. However, in reality the lack of suitable substitutes to fossil fuels with quickly scalable volume increases will minimise this effect.

1k. Gas extraction in the North Sea has been disproportionately affected by this policy as the tax rate makes no distinction between oil profits (inflated by rising oil prices) and gas profits (suppressed by low global gas market prices). Gas is a less carbon intensive electricity generation source than coal and cannot be transported as easily. By applying a disincentive to exploit UK gas reserves, this policy could have an environmentally detrimental impact by shifting the balance for fossil fuel based electricity generation to coal.

1l. This additional tax could have a long term effect on North Sea productivity and investment, even if it is eventually reversed. There is a limited window for the North Sea while the infrastructure and skills are in place to produce efficiently and any loss of production now may never be recovered. As a result, this policy is likely to result in greater reliance on imported oil and gas. The first few months of 2011 alone have highlighted the volatility and sensitivity of global energy markets:

· For energy generally the short and long term impact of the Japanese nuclear disaster is still becoming clear, but will inevitably lead to an increase in demand for fossil fuels.

· In the oil markets, the current unrest in North Africa and the Middle East has led to a significant price spike.

· For gas, global markets are suppressed by the material unconventional source (such as shale gas) discoveries, particularly in North America. However, the political sensitivity in Russia and other former Soviet states, key suppliers of gas to Western Europe, remains a strong lever to domestic gas prices that is very difficult to control or predict.

1m. These developments acutely highlight the importance of keeping the proportion of energy that the UK produces domestically as high as possible. We would suggest that the North Sea tax increases are counter to this objective. On the assumption that energy independence remains a policy objective for the Government, we recommend that progress towards this objective is reviewed, in consultation with the industry, and appropriate policy responses are formulated.

2. The budget continued a regularly recurring trend in recent years by focussing on adding to or amending slightly the existing green tax policy mix. We believe there is a justification for a separate process to review green taxes. This paper sets out the justification for this process and what we believe the guiding principles should be.

3. The UK now has a more complex mix of green taxes and incentives than ever before. This is understandable given the ever increasing prominence of green issues, but there is a danger that the cumulative effect is less than the sum of the parts because the policy mix is too disparate. For example there are now four carbon ‘tax’ points in the electricity supply chain. The point of a carbon tax is to encourage a change in behaviours and shift in investment to lower carbon substitute products and services. However, particularly with regard to investment, the effect will be dampened if the investors are unable to distil a single and reliable carbon price that has a reasonably predictable future trajectory. As explained below in section 5e, the private sector is currently frustrated in their attempts to understand the carbon prices currently applying.

4. The CPSM achieves this aim in isolation, but when considered alongside the other three overlapping carbon pricing policies (Climate Change Levy, CRC Energy Efficiency Scheme and the EU Emissions Trading Scheme) inconsistencies, confusion, overlaps and uncertainty undermine the signal to low carbon investment.

5. To ensure that green tax policy properly resonates with individuals and businesses and has the behavioural impact desired by the Government, we believe some broader changes and consolidation are needed. Some key guiding principles must be embedded, with cross-party consensus as a worthwhile ambition to cement these principles over the long term investment horizons that are implicit in this sector.

Clarity of policy objective

5a. Environmental policies, particularly green taxes, should be targeted at changing behaviours. This is in essence the purpose of a green tax – to deliver the core environmental objective. At the moment there is a tendency towards using loosely defined environmental objectives to justify what is ostensibly a revenue raising tax.

5b. Fuel duty is a good example of this. If this is considered a full environmental tax, as defined in Appendix 2, then the implicit carbon price is £247 per tonne of carbon. To put this into context the existing EU ETS carbon price is around €17 and the UK Government have set price levels at £12 (CRC Energy Efficiency Scheme) and £16 (EU ETS carbon floor price) recently. There are clearly two elements to fuel duty – an environmental element and a revenue raising element. Environmental taxes should be used to change behaviour in line with clearly set environmental targets. In line with this principle, the element of fuel duty that is an environmental tax should be measured against the reduction in driving that it achieves. This should be benchmarked against the element of the carbon reduction target set out in the Climate Change Act that has been allocated to road transport.

5c. The same can be said for Air Passenger Duty. This is currently included in the definitions of an environmental tax (see Appendix 2). We understand that the Government more recently has taken the view that this is a ‘revenue raising’ rather than an environmental tax, consistent with the statements made by Kenneth Clark when he introduced the tax in 1994. If this is the case then decreasing the number of passengers flying to, from and within the UK is not the overall policy objective. This viewpoint may be justified on the basis that the overall benefits to the economy of passenger travel outweigh the environmental cost. If the Government wishes to impose an environmental tax on aviation and remain consistent with the policy objective not to constrain the number of flights, then environmental goals can only be achieved by a policy that encourages greater fuel efficiency. Air Passenger Duty is not fit for this purpose as it is not linked to the fuel consumption of the aircraft. We recognise the Government’s effort to address this problem and introduce a ‘per plane’ or fuel based tax. The 1944 Chicago Convention has been cited as a roadblock to this, deeming taxation in this area as illegal. If this roadblock can be overcome, aviation tax policy should be developed through close consultation with the aviation industry. Unilateral aviation tax by the UK carries a material threat of simply shifting the takeoff or landing points from the UK to nearby neighbours. This could in some case increase overall emissions rather than reduce them. The consultation will need to consider this ‘emissions displacement’ threat thoroughly together with the broader competitive impacts of any changes on the UK’s aviation industry.

5d. The Treasury Committee Report on the budget identified ‘trailing’ or ‘presenting policies in the best possible light’ as a weakness in existing policymaking. There was an element of trailing with the carbon floor price – the Government was keen to avoid the description of a ‘pre-set’ tax in describing the policy, which led to some surprises when the details became available. Trailing should be resisted. The clear, coherent framework can only be properly delivered if the policy objectives are set out clearly from the outset.


5e. Green taxes are only one arm of policy. There are three pillars of green policy - subsidies / financing support, regulation and market based mechanisms, of which tax is a subset. The Government’s green policy ambitions should be clearly set out within these three categories. Coherence also means coherency across Government departments. There are some signs that joined up thinking is not as strong as it could be, for example between DECC and HMT, on the Electricity Market Reform policy package. The Government has stated that it is committed to using market-based approaches to simplify this policy landscape, minimising the costs of transition and reducing burdens on business. There needs to be a step change in approach if this can be achieved. This is a strongly held and consistent view throughout the private sector and within the public sector. The House of Commons Treasury Committee Budget 2011 review, published on 9 April 2011, makes several references to the lack of coherence in green policy. The report concludes:

"The Budget contained a number of measures that have an impact on energy prices, from the cancellation of the fuel duty escalator to the introduction of the Price Floor for carbon. Whilst we do not comment here on the likely impact of individual measures, we note that, as a package, they lack overall coherence."

Reference is made to a quote which, in our experience, provides a fair representation of the view held by many in the private sector (source not specified):

"if you read the stuff on low carbon here, on the various grants, subsidies, price floors, levies, caps and so on, it is impossible to work out what the overall impact is, what the strategy is. Frankly, if you were an investor trying to decide whether to invest in low carbon technology or in electric vehicles, I think you would look at this and not know what to think."

It is also important to note that there are non-fiscal instruments available to achieve policy, including the provision of alternatives, clear communication and education.

International integration

5f. One of the greatest barriers to environmental policymaking is the threat to international competitiveness. The policy will inevitably price the consumption of an environmental resource that others will continue to use for free. Global integration and consistency of policy is unfortunately not a realistic near term prospect, illustrated by the often frustrated negotiations that are a recurring feature of the UNFCCC climate negotiations. We urge the Government to continue efforts to engage on international policymaking by all mechanisms available.

5g. One such mechanism is the OECD’s green growth project which PwC have been linked into via the BIAC industry representative group. The objective of the project is to provide a framework and set of tools to enable countries to measure and compare their environmental policies against a consistent set of environmental metrics. The executive summary of the green growth strategy report is to be presented to ministers in May. There are at least two strong benefits of this approach. First, it enables countries to compare progress and identify areas of policy that need improvement. Second, it enables international sharing of policy ideas and success stories [1] .

Policies that address the real problems on the ground

5h. A current example of the problem on the ground that is not currently addressed by policy is access to finance. Green projects investors and banks are often uncomfortable with the level of perceived risk in markets which are usually less mature and tested than high-carbon or resource intensive alternatives. In the current global financial market where capital is scarce and expensive, this threatens to be a material barrier to the level of green growth desired and required to meet the Climate Change Act and other environmental targets. The Green Investment bank can help to address this but the extent to which it is successful will depend how well aligned it is to the specific financing challenges that arise. To maximise the chances of success it will be important to ensure that private sector consultation is fundamental to defining how the Green Investment Bank will operate. Further targeted policies may also be required. The tax system can be part of this. One such policy could be extending the ISA scheme with ‘Green ISA’s’ exclusively for low carbon investments.

5i. The Government should have a process in place to ensure that they are quick to identify and respond to current and future real issues as they arise.

Cross party consensus

5j. Whilst it is recognised that achieving political consensus has a number of challenges, it is important that to the extent possible, areas of common ground are established and publicised so that all stakeholders can have confidence in policy regardless of a change in government, particularly where long term investment decisions are involved.


5k. Put simply, the policies could temper penalties for polluting with incentives for cleaner behaviour. It cannot be all stick and no carrot. The private sector recognises that in the current fiscal climate it is extremely difficult to justify new incentive schemes. However, efforts could be made to take green tax revenues and invest them in providing tax or other green incentives to accelerate the shift to a low carbon economy. As the fiscal position improves, these efforts must be increased as a priority. There is strong competition internationally to attract green growth, for example South Korea recently committed 80% of fiscal stimulus measures to environmental incentives.

5l. In addition any use of the taxation system to achieve green policy needs to ensure that there is no disproportionate or unfair impact on the more vulnerable sections of society. The system should ensure, for example, that any significant increase in energy costs is counterbalanced by relevant incentives for investment in fuel efficient capital equipment.

6. If these six principles can be achieved the rewards for the UK can be great, but the damage to green growth from failing to achieve this can also be significant.

6a. Rewards for getting it right. It is a well established, empirically proven, fact that green taxes can be ‘win-win’ for the public and private sector. They deliver a ‘double dividend’ economically. This effect arises from the economic impact of pricing externalities – damages to natural capital that arise through pollution. Carbon pollution externalities (societal ‘bads’) are not currently sufficiently priced, so good green tax policy allows these prices to be captured (the first dividend) while allowing other taxes on the ‘goods’ in society – labour and profits – can be cut (the second dividend). In the current fiscal climate a ‘cut’ in a good tax may not be possible. Instead it may be possible to consider the ‘cut’ as reducing the amount that this tax would otherwise have to rise. The economic effect of the reduction is the same, but this does make the task of communicating this as a tax ‘cut’ more challenging. A policy framework that meets the criteria above can unleash the private sector to deliver the green investment and growth. The effect is likely to be positively self-reinforcing and accelerate as long as these six principles are adhered to.

6b. Penalties for getting it wrong. Without this approach there is a danger that the effect on green investment will be too weak. This could be negatively self-reinforcing. More and more ‘emergency’ additional measures are needed to keep up with the legally binding carbon targets. These would further add to the complexity of the green policy framework and therefore further weaken the overall potential for green growth.

7. It is worth observing that the UK Government has the benefit of an electorate that appear more amenable and a political environment that is more conducive to green policymaking than elsewhere. The challenges for environmental policy advocates in the USA are well documented and show no signs of diminishing. If anything the anti-environmental movement is gaining momentum through current efforts to challenge the EPA’s authority to regulate greenhouse gases. In Australia Julia Gillard’s carbon tax is attracting intense criticism and is threatening to become a key electoral issue. The UK electorate are resistant to fuel duty increases, particularly in the context of rapidly increasing oil prices, but introduction of the CPSM tax has attracted, relative to the Australian carbon tax, low levels of resistance from energy consumers. It is likely that a significant factor in this is that the impact of the CPSM is not visible to the majority of the electorate. If it had been described as a carbon tax policy the perceived understanding of the impact would probably have been greater, and the resistance to the policy enhanced may have been enhanced accordingly. However, research by the Green Fiscal Commission reveals that environmental taxes designed properly with clear ‘green spending’ of the proceeds are relatively well accepted by the public. The challenge with the low likelihood of international action is the potential competitiveness disadvantage created by unilateral action.

8. The Government could benefit from ensuring a robust assessment of the ‘instability impact’ of policy announcements such as the recent proposed changes to the feed-in-tariffs. Investors have limited capital, particularly in the current climate of restricted access to bank lending to supplement equity. The UK needs to persuade them to invest here. It is possible that the long term damage to confidence in the UK clean technology market in general (not just the part that qualifies for feed-in-tariffs) will be more expensive to repair than the relatively small savings (for example, £40m in 2013-2104) achieved from the proposed cut to feed-in-tariffs. Although ‘investor confidence’ is difficult to assess and quantify, it is still an important factor to consider when carrying out impact assessments. The key theme of the Plan for Growth (objectives A to C) is to create a more attractive tax environment. This should be broadened to policy environment. It is no use offering a solar company a simpler corporation tax regime and few percentage points lower headline corporation tax rate if the promised subsidy (the feed-in-tariff) that was fundamental to their business model is unexpectedly halved.

Appendix 1 – Reference to specific questions asked in the request for submission

This appendix addresses the six questions that the EAC have asked in their request. We believe the answers are contained within the document and have included references accordingly.

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

See paragraph 1.

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

It is a well established, empirically proven, fact that green taxes are ‘win-win’. They deliver a ‘double dividend’ economically. It can be challenging to communicate complex economic theory to the vast majority of the electorate who have not studied economics. This is why clarity of policy objectives is paramount. See paragraphs 5a-5d.

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

A pure green tax has one objective, to encourage behavioural change. Where there is a lack of suitable substitutes, such as for driving or flying at the moment, the behavioural change impact is extremely difficult to achieve. The impact of a policy seeking to engender a behavioural change in travel where practical alternatives do not yet exist is to suggest that people should travel less. We do not believe this is the objective of the Government. This highlights the needs for carrots as well as sticks – to encourage the rapid development of alternatives like electrically powered cars that perform and look as good as their fossil fuel counterparts, and to encourage fuel efficient planes.

The scope for the taxation system to protect and increase stocks of natural capital and the possible role of proposed 'natural accounts'

Properly executed tax policies are proven to change behaviour, where alternatives to the item being taxed exist. One good example of this is the Irish Plastic Bag tax which has seen a significant reduction in the use of plastic bags in Ireland. Provided alternatives or substitutes exist, there is no reason why the tax system cannot be asked to protect natural capital or support the principle of capital ‘banks’.

The impact of the taxation system in general on sustainable development

The UK has some valuable environmental tax levers. As this submission notes, improvements could be made but tax should always remain as a key behavioural change tool in any environmental policy mix.

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)

We do not comment on this in detail. It is fair to say that ‘green’ and ‘growth’ can go hand in hand and can be mutually reinforcing. There is a danger with some environmental policies that they will generate some green but not enough growth, if the impact on competitiveness is not addressed and incentives do not accompany additional costs / taxes on business.

The announcement in Budget 2011 on the Green Investment Bank.

The tripling of initial funding for the Green Investment Bank from £1bn to £3bn is a major step forward for the low carbon economy and the Government should be commended for this given the current fiscal constraints. They should also be commended for the decision to bring forward the establishment of the Green Investment Bank to 2012. The next stage is to consider the Green Investment Bank’s remit. Estimates of the amount of capital needed in the next 10 years to address green infrastructure challenges range from £200bn to over £500bn. Defining this challenge and working through the detail of where the money is expected to come from will help test whether the Green Investment Bank is fit for purpose. Lifting the ban on the borrowing is likely to be a crucial step to enabling the Bank to be able to help deliver the amount of investment required. See paragraphs 5h and 5i for further comments relating to making sure that policies address the real problems faced.

Appendix 2 – Definition of green taxes from the EAC submission request

There is no single definition of what a green or environmental tax is, but they are generally considered to be taxes which have been designed specifically to meet environmental aims; taxes that have been restructured to reflect environmental objectives; or taxes not specifically introduced for environmental reasons, but which have an environmental impact.

Environmental taxes, as classified in the UK Environmental Accounts: Fuel duty, VAT on Fuel duty, Renewable energy obligations, Climate change levy, Vehicle excise duty, Air passenger duty, Landfill tax, and Aggregates levy. 7.4% of all taxation revenues collected in 2007 were from environmental taxes (mostly from Fuel duty and VAT on fuel). Environmental taxation as a proportion of GDP has fallen from 3.5% in 1998 to 2.7% in 2007.

The Coalition agreement set out the Government's overall approach to taxation for this Parliament: "the Government believes that the tax system needs to be reformed to make it more competitive, simpler, greener and fairer. We need to take action to ensure that the tax framework better reflects the values of this Government." HM Government, The Coalition: our programme for Government, May 2010. It has adopted the previous Government's policy aim of shifting the burden of taxation from 'goods' (such as employment) to 'bads' (such as pollution).

On 30 March 2011 the Department for Transport published "Developing a sustainable framework for UK aviation: scoping document" which can be found here: http://www.dft.gov.uk/consultations/open/2011-09/

5 May 2011

[1] A graphic showing an example of an OECD co-ordinated framework is set out in the PwC submission, but is not reproduced here.