Budget 2011 and environmental taxes - Environmental Audit Committee Contents

3 Transport taxes

37.  In this chapter we explore further some of the issues in Chapter 2 which relate to transport, including Budget announcements on Fuel Duty and a per-plane aviation duty.

Motoring taxes

38.  Motoring is a significant source of carbon dioxide emissions. The most recent data show that emissions from domestic transport account for 21% of all UK emissions (up from 16% in 1990), with around half of these relating to domestic motor vehicles.[87] Motoring also causes a number of well-known environmental externalities including congestion, air pollution, noise and accidents.[88] The RSPB highlighted some that are often overlooked such as wildlife habitat loss and barriers across wildlife corridors.[89]

39.  There are two main environmental taxes on motoring :

  • Vehicle Excise Duty paid on car ownership.
  • Fuel Duty paid on sales of all hydrocarbon fuels, including petrol, diesel, LPG, biodiesel, and bio-ethanol. Rates vary by fuel type, and fuels used in certain vehicles are exempt or pay a reduced rate. The average price of unleaded petrol during March 2011 was 133p a litre, with around 61% taken as tax.[90]

Fuel Duty accounts for around 65% of all (ONS defined) environmental tax revenues.[91] Although not introduced with environmental objectives in mind (rather to raise revenue for road and infrastructure projects), they have increasingly become an instrument of Government environmental policy.[92] The previous Government announced a fuel duty escalator[93] in Budget 2009[94] and since 2001 rates of vehicle excise duty have been based on the level of carbon dioxide emitted by the vehicle.

40.  The Economic Secretary told us that the Treasury does not count Fuel Duty as an environmental tax because it was not introduced or structured to change behaviours. However, for Vehicle Excise Duty there was more of a debate to be had.[95] Whilst not counting motoring taxes as environmental ones, the Treasury does consider them to have a role in promoting more sustainable behaviours by 'incentivising the development and purchase of electric and ultra low-carbon vehicles and supporting sustainable biofuels'.[96] There is indeed evidence that petrol prices, bolstered by tax, have an important beneficial impact on behaviours, with train operating companies reporting a 5% shift to rail in the first few months of 2011 due to rising oil prices.[97] And drivers have reduced their average speed to conserve fuel, due to concerns over rising fuel costs.[98]

41.  The Campaign for Better Transport pointed out that rail and bus travel generally resulted in substantially fewer emissions per passenger-mile than either car or air travel. [99] With 56% of car journeys being less than five miles,[100] a transport policy to support a modal shift towards public transport, cycling and walking, underpinned by Fuel Duty, could help to deliver significant reductions in emissions. Fuel Duty is an environmental tax by any other name. We are concerned that by not classifying it as an environmental tax the Treasury is loosening the link between the rate of the tax and the cost of environmental externalities associated with motoring, and thereby reducing further the likelihood of using the Duty as a lever of behavioural change.

42.  There is a clear upward trend in the underlying price of crude oil, with a fourfold increase over the past ten years. The Policy Studies Institute found that this trend had remained stable over time and that there was no reason to expect that it will not continue in the medium term.[101] A continuing dependence on oil could however undermine the public finances in the longer term because of the effect on the economy.[102] Ben Shaw from the Policy Studies Institute told us that there is an opportunity to be much clearer with the public about this long-term trend and the need to take action to reduce the cost of motoring through other alternatives rather than, "King Canute-like", trying to drive the price of fuel down.[103]

43.  The Budget announced a Fuel Duty cut of 1 pence and the replacement of the fuel duty escalator by a 'fair fuel stabiliser'. When oil prices are high, Fuel Duty will be increased by inflation only, offset by increased tax on North Sea oil production. The previously-planned April 2011 inflation-only increase was delayed to January 2012, and the April 2012 increase delayed to August 2012.[104] Increasing the tax on North Sea oil profits is forecast to raise £10 billion[105] and, as Friends of the Earth pointed out, that will be all spent on "cutting Fuel Duty and none of it on measures to cut our dependence on oil".[106] The Aldersgate Group commented that the fair fuel stabiliser was a missed opportunity to fund additional support for fuel efficient vehicles or public transport.[107] Similarly, Chris Hewett of Green Alliance questioned the justification for its being used only in assisting road users.[108]

44.  PwC pointed out that dropping Fuel Duty by 1p was unlikely to have any impact on its environmental efficacy, given the "extremely high rate of environmental tax implicit in the existing Fuel Duty rate, the inelastic demand for fuel and the far greater impact of increasing oil prices".[109] In a similar vein, the Economic Secretary told us that "the oil price has fed through far more to changing behaviour than Fuel Duty was able to do".[110] In the short-term, dropping Fuel Duty by one penny might be justifiable in terms of reducing the impact on economic growth of high fuel prices, but as the Economic Secretary acknowledged the Budget change was insignificant compared with the large petrol market price changes. And in the medium to long-term, the Government should not use taxpayers' money to keep fuel prices artificially low, but instead focus its efforts on helping motorists move away from oil.

45.  As we discussed in Chapter 2, environmental taxes need to be carefully structured if they are to carry taxpayers with them. Unfortunately, in terms of following the environmental tax principles we discussed there, the Budget changes for motoring taxes have sent the wrong signal.[111] They have not, for example, assisted the required 'tax shift' advocated by the Green Fiscal Commission (paragraph 5). The Treasury raised North Sea oil and gas production taxes but used the revenue to cut Fuel Duty, and even with that regrettable linkage there are now concerns about the likely North Sea revenues anticipated.[112] The Energy and Climate Change Committee recently examined this issue.[113]

46.  It is also unclear what the wider objectives of the Government's motoring taxes are. The Budget provided very little in the way of tax incentives to help motorists switch to lower carbon transport or alternatives. The Campaign for Better Transport claimed that over the last two decades, public transport fares have increased significantly while the overall costs of motoring have been falling, and that this trend is set to continue.[114] Sustrans thought that the effectiveness of Fuel Duty in promoting a modal shift would be enhanced if there were complementary policies such as reducing public transport fares, perhaps hypothecating Fuel Duty revenues,[115] and a political and financial commitment towards increasing levels of walking and cycling.[116] As Stephen Joseph from Campaign for Better Transport pointed out, alternatives still need to be provided to single-occupancy car use for a lot of the journeys people have to make.[117] The Campaign for Better Transport suggested that a cut in the price of public transport of 20% would increase bus travel by 13% and rail travel by 17% within eight years.[118] Axeon suggested additional tax measures could be taken to persuade consumers to purchase electric vehicles such as a 'feebate' scheme, where a new purchase tax on relatively high CO2-emitting vehicles would subsidise lower-emitting vehicles within that same class.[119] This could be fiscally neutral. The Treasury should consider providing greater incentives to encourage motorists to switch from polluting cars to lower carbon alternatives, including a 'feebate' scheme on the purchase of new cars.

47.  The sense of a lack of strategic vision for what motoring taxation is intended to achieve is also illustrated by the Budget implementing the previous Government's plans to remove the 20p Fuel Duty price differential for biodiesel made from used cooking oil.[120] The UK Sustainable Biodiesel Alliance stated that biodiesel manufactured from used cooking oil can reduce lifecycle carbon emissions by up to 90%.[121] Agri Energy told us that this tax incentive had:

…been largely successful in promoting the use of waste derived bioliquids in transport fuel and ensuring that waste oil is not illegally poured down the drain... [serving] as a case study of how well targeted fiscal measures can drive behavioural change, private sector innovation and job creation.[122]

They told us that vehicles can easily switch back to using ordinary diesel.[123] The removal of fiscal incentives to use biodiesel was a strategically retrograde act.

48.  We are disappointed that the Budget provided few tax incentives to help motorists switch to lower carbon transport alternatives. The Government should consider partially hypothecating revenues from Fuel Duty to invest in low-carbon alternatives. But perhaps most importantly, the Treasury needs to set out a clear vision and strategy for motoring taxation, reflecting the principles in Chapter 2, to demonstrate what transport policy objectives it is seeking to support. Until it does so, it will be open to accusations of sending mixed messages to motorists and undermining taxpayers' support for such environmental taxation.

Aviation taxes

49.  Carbon dioxide emissions from aviation have grown rapidly over the last forty years, and account for around 6% of the UK's total greenhouse gas emissions.[124] The Government forecasts emissions from air travel to continue to rise, with emissions from domestic and international flights set to account for 21% of total UK carbon emissions in 2050.[125] Air Passenger Duty was introduced in 1994 as a way of raising revenue. Environmental objectives were not part of the rationale for the tax's introduction.[126] However, in 2009 rates were re-structured around four distance bands 'as an effective way of reducing emissions from aviation', aiming for those that travel further 'and have a larger environmental impact [to] meet the cost'.[127] There has been much criticism of the bandings for not reflecting the actual flight distance, and even taxing some shorter journeys more than longer ones.[128]

50.  Under the Coalition Agreement the Government undertook to 'reform the taxation of air travel by switching from a per-passenger to a per-plane duty, and [to] ensure that a proportion of any increased revenues over time will be used to help fund increases in the personal allowance'.[129] Research by the Greener by Design Group,[130] sponsored by the Government, had found that there was little evidence that Air Passenger Duty had had a material environmental impact.[131] However, the 2011 Budget announced that the Government would not introduce a per-plane duty at the present time, given 'concerns over the legality and feasibility of this approach'. Instead, the Government committed to work with international partners to build consensus for a per-plane duty in the future.[132]

51.  In terms of feasibility, the Policy Studies Institute examined proposals for different bases for a per-plane duty—compatible with the Chicago Convention—including NOx emissions, take-off weight and number of engines.[133] Alongside the Budget, the Government launched a consultation on proposed changes to Air Passenger Duty 'to simplify APD in a way that improves the efficiency and fairness of the tax'.[134] It discusses how the tax should relate to distance travelled[135] (although long-haul flights have lower emissions per passenger-mile, short-haul journeys typically emit less given the difference in distances travelled).[136] We received evidence on the different tax treatment of short-haul and long-haul flights, and concerns about UK aviation competitiveness.[137] Gatwick airport pointed out that the proposed reforms, overall, do nothing to make Air Passenger Duty a more effective environmental tax:

APD is only calculated according to one element of a given flight—the distance travelled. The 2011 Budget does not propose to change this. There are a whole range of other factors relevant to a given flights' impact on the environment, including the type and age of the aircraft, the time that the aircraft is physically in the air as well as how heavy it is. The Government choose not to take these factors into account. In its current form, the effectiveness of APD as an environmental tax is severely limited.[138]

We questioned the Economic Secretary as to whether she had thoroughly investigated the options for a per-plane duty. She told us:

I can assure you we looked at a number of different ways in which we could structure this taxation to try and encourage better environmental behaviour...I think our sense was—particularly on things like NOx, for example—that there were better ways of making improvements on that than through tax.[139]

52.  As regards the legality issue, the Economic Secretary told us:

To be clear, the Coalition Agreement talked about us looking at the options to reform APD, including looking at this per plane duty. I think, realistically, looking at the legalities of how we would pursue it, it simply wasn't going to be sensible to do it. Because what became clear was that the international legal framework that we operate in, including the Chicago Convention, certainly right now meant that we couldn't go down a per plane tax route.[140]

Our predecessor Committee had previously raised the Chicago Convention being a block to developments in aviation taxation[141] and the then Government responded that 'the UK continues to argue for change at international level, and is engaging constructively with our international allies'.[142] We are disappointed that little progress has been made on revising the Chicago Convention since we last examined this area, and we are left wondering whether, given earlier Government examination of the scope for reform within the terms of the Convention, there was ever any realistic prospect for bringing forward the work envisaged in the Coalition Agreement. In responding to this Report, the Treasury should detail what work it has undertaken on investigating per-plane tax options, and explain what the basis was for holding out the prospect for a per-plane tax in the Coalition Agreement.

53.  The Government's efforts to explore a per-plane tax has to some degree been undermined because the Treasury now no longer considers Air Passenger Duty to be an environmental tax (paragraph 11), but one instead to 'raise revenues for the Exchequer in a simple, fair and efficient way'.[143] This seems to be a change from the 2011 Budget Report, where Air Passenger Duty was included under an 'Environmental tax' heading.[144] The Treasury must clear up the confusion as to whether Air Passenger Duty is an environmental tax.

54.  The EU Emissions Trading System (EU ETS), by extending its coverage into aviation in 2012, will at least clearly represent an 'environmental tax' (paragraph 9). The Treasury told us that this 'represents an internationally co-ordinated and least-cost approach to limiting the carbon impact of aviation across Europe in the future'.[145] At present Air Passenger Duty on flights to EU destinations is £12 in economy and £24 in premium class.[146] Gatwick Airport pointed out that as a result of aviation coming within the EU ETS, by 2020 airline tickets for a return journey could increase by between €4 and €39 per passenger depending on the length of the journey across the EU.[147] The Policy Studies Institute believed that the terms on which the sector will join the EU ETS are generous, and that the price of carbon in the scheme was expected to be much too low to have much effect on the growth of emissions from aviation.[148] Tim Johnson from the Aviation Environment Federation told us that the impact would be "very, very small", with demand by 2020 expected to rise by 135-137% rather than 142%.[149] Relying on the EU Emissions Trading System to reduce emissions from aviation is a high risk and low impact strategy. Its success in reducing aviation emissions turns on the effectiveness of the EU Emissions Trading System in curbing emissions more generally. We are examining in a separate inquiry the role of the UK carbon budgets system in delivering our Climate Change Act emissions reduction commitments, which, for the 'traded sector' at least, depends crucially on the effectiveness of the EU ETS.

55.  In the absence of further restraints on demand, air passenger numbers are forecast to grow by up to 200% by 2050.[150] The Office for Budget Responsibility expects the number of air passengers to grow from 2011, even with current Air Passenger Duty rates increasing by inflation each year.[151] The Government has stated that aviation has an important role to play in delivering growth and that the Government wants to see aviation prosper.[152] However, it has also said that unconstrained aviation growth is not an option.[153] There is a tension between growth and environmental protection running through the Government's policy on aviation taxation. The Government's up-coming 'sustainable aviation framework'[154] must set out clearly how the Government expects to balance its competing objectives for aviation, along with how Air Passenger Duty and EU Emissions Trading System revenues will contribute to environmental objectives, to give a foundation for planning aviation tax strategy.

87   Department for Transport, Transport Statistics Great Britain: 2010, November 2010. Back

88   Mirrlees Review, op cit, Chapter 5. Back

89   Ev w73 Back

90   The AA, Fuel price report March 2011, April 2011. Back

91   Office for National Statistics, UK Environmental Accounts 2010, June 2010. Back

92   Chartered Institute of Taxation, Green tax report, May 2009. Back

93   An increase in fuel duty of 2 pence per litre on 1 September 2009, and of 1 penny per litre in real terms each year from 2010 to 2013. Back

94   HM Treasury, Budget 2009, HC 407, April 2009, paragraph 7.51. Back

95   Q 68 Back

96   Ev 41 Back

97   Association of Train Operating Companies (see http://www.atoc.org/media-centre/latest-press-releases/tens-of-thousands-switch-from-cars-to-trains-as-petrol-prices-rise-100489) Back

98   Research commissioned by Green Flag (http://www.greenflag.com/news/press/One-in-five-motorists-driven-off-the-road-by-soaring-fuel-prices.html) Back

99   Ev 27 Back

100   Ev w51 Back

101   Policy Studies institute, Road transport fuel prices, demand and tax revenues: impact of fuel duty escalator and price stabiliser, February 2011. Back

102   Office for Budget Responsibility, Assessment of the Effect of Oil Price Fluctuations on the Public Finances, September 2010. Back

103   Q 20 [Ben Shaw] Back

104   Budget 2011, HC 836, March 2011, page 4. Back

105   Budget 2011, op cit, table 2.1. Back

106   Ev w3 Back

107   Ev 32 Back

108   Q 20 [Chris Hewett] Back

109   Ev w95 Back

110   Q 90 Back

111   Ev w73 Back

112   http://www.oilandgasuk.co.uk/news/news.cfm/newsid/617  Back

113   Energy and Climate Change Committee, Oral evidence session held on 4 May 2011, transcript published as HC 1018-i.  Back

114   Ev 27 Back

115   Ev w51 Back

116   IbidBack

117   Q 42 [Stephen Joseph] Back

118   Ev 27 Back

119   Ev w32 Back

120   Q 95  Back

121   Ev w16 Back

122   Ev w11 Back

123   IbidBack

124   HM Treasury, Reform of Air Passenger Duty: a consultation, March 2011.  Back

125   Department for Transport, UK air passenger demand and CO2 forecasts, January 2009. Back

126   Chartered Institute of Taxation, Green tax report, May 2009. Back

127   HC Deb, 24 November 2008, col 499. Back

128   Ev w59 Back

129   HM Government, The Coalition: our programme for government, May 2010, page 30. Back

130   Greener by Design group is a Department for Business, Innovation and Skills sponsored body with the remit of assessing options for addressing aviation's environmental impacts. It is based within the Royal Aeronautical Society but is not aligned with any sectoral interest. Back

131   Ev w1 Back

132   HM Treasury, Budget 2011, op cit, paragraph 1.152. Back

133   Policy Studies Institute, A new basis for aviation taxation, June 2010.  Back

134   Reform of Air Passenger Duty: a consultation, March 2011, page 2. Back

135   Reform of Air Passenger Duty: a consultation, paragraphs 2.6, 3.4. Back

136   Reform of Air Passenger Duty: a consultation, paragraph 3.4.  Back

137   Ev w101; Ev w87 Back

138   Ev w55 Back

139   Q 99 Back

140   Q 98 Back

141   Environmental Audit Committee, Third Report of Session 2008-09, Pre-Budget Report 2008: Green fiscal policy in a recession, HC 202, paragraph 52. Back

142   Environmental Audit Committee, Fourth Special Report of Session 2008-09, Pre-Budget Report 2008: Green fiscal policy in a recession: Government Response to the Committee's Third Report of Session 2008-09, HC 563, page 9. Back

143   Ev 41 Back

144   Budget 2011, op cit, page 43. Back

145   Ev 41 Back

146   Reform of Air Passenger Duty: a consultation, op citBack

147   Ev w55 Back

148   Policy Studies Institute, A new basis for aviation taxation, June 2010.  Back

149   Q 52 [Tim Johnson] Back

150   Reform of Air Passenger Duty: a consultation, op citBack

151   HL Deb, 11 January 2011, col 1288; Office for Budget Responsibility, Economic and Fiscal Outlook, November 2010. Back

152   Reform of Air Passenger Duty: a consultation, op citBack

153   Department for Transport, Developing a sustainable framework for UK aviation: Scoping document, March 2011. Back

154   ibidBack

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