Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Taxation has an important role to play in helping to protect the environment. Whether ensuring at least some of the environmental cost is borne by those responsible, or making an environmentally damaging activity economically unattractive, environmental taxes create an incentive to move towards more sustainable behaviours. For environmental taxes to be effective they need to be straightforward so that taxpayers understand the behavioural change signal being sent, and seen as fair so that political momentum can be gained for higher environmental taxation. In practice, however, many perceive them as just another means of raising revenue, and their growing complexity means that many businesses are unaware of the cumulative impact of the environmental taxes affecting them.

There is a pressing need for Government to take a more coherent approach to environmental taxation. A clear strategy should be adopted, setting out their objectives and rationale, the basis on which rates are set, and how their impact will be evaluated. Even partially hypothecating revenues from environmental taxes for environmental ends can also help to build greater acceptance, whilst also providing much needed funding for the low-carbon transition.

Announcements on transport taxes in the Budget were disappointing. By dropping a penny on Fuel Duty rates and providing few tax incentives to switch to lower carbon transport alternatives, the Government missed an opportunity to be much clearer with the public about the long-term need to switch to lower carbon alternatives. The proposed changes to Air Passenger Duty will do nothing to make it a more effective environmental tax. Abandoning plans for a per-plane duty, albeit on legal advice, and relying on the EU Emissions Trading System (EU ETS) is a risky approach, because its success in reducing aviation emissions turns on the wider effectiveness of the EU ETS in curbing emissions more generally.

It cannot be all stick and no carrots. A shift to environmental taxes must be accompanied by a corresponding reduction of taxes on the things that are valued by society, such as jobs, incomes and profits. There is also a role for other policy instruments alongside taxes to help achieve the desired change.

The Government's definition of a 'subsidy' in relation to nuclear is not robust and does not hold up to scrutiny. Nuclear will be subsidised in the same way as renewable energy sources, which have no adverse environmental impacts, and nuclear will benefit the most from the Carbon Floor Price mechanism.

The Plan for Growth did not provide the much needed step change to aid the transition to a low-carbon economy, and in some areas—e.g. the zero carbon homes standard—the Government has taken a backwards step. The forthcoming Roadmap to a Green Economy must demonstrate a greater Government commitment to the green economy, and in doing so dispel any suggestion that a green economy is an 'add-on' rather than an integral part of the Government's sustainable development plans.

The Green Investment Bank could be a driver for the green economy but preventing the Bank from borrowing will limit its impact on renewables and the support it can provide for the Green Deal. Fresh consideration should be given to when, and under what fiscal circumstances, the bar on the Bank's lending powers might be eased.

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Prepared 7 July 2011