Budget 2011 and environmental taxes - Environmental Audit Committee Contents

6 Conclusion

77.  Taxation has an important role to play in helping to protect the environment by creating incentives to move towards more sustainable behaviours. Greater environmental taxation could help the UK meet its climate change targets and fund reductions in taxes on things that are valued by society, such as income and employment.

78.  To be effective, environmental taxes need to be carefully structured and the rationale behind them well articulated so that taxpayers understand the behavioural change signal being sent. However, environmental taxes are often perceived as just another means of raising revenue, and their growing complexity means that many businesses are unaware of their cumulative impact. Weaknesses in the Government's approach are borne out by transport taxes where the Budget tinkered with motoring taxes, sending the wrong signal. There was confusion as to whether Air Passenger Duty is an environmental tax, and under the Carbon Floor Price, nuclear power will have the same financial incentives as renewables, which has no environmental impacts.

79.  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 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.

80.  There is a pressing need for Government to take a more coherent and clearly articulated approach to environmental taxes. A clear strategy is needed, setting out their objectives and rationale, the basis on which rates are set, and how their impact will be evaluated. The following elements could feature in such a future strategy:

  • a definition of environmental taxes, identifying those taxes meeting this definition (paragraph 10);
  • an examination of why environmental taxes are set, the rationale for the rate of the tax (paragraph 14), and what environmental aims particular taxes seek to achieve (paragraph 46);
  • detailed plans for increasing the proportion of environmental taxes (paragraph 8), including any intention for a taxation 'shift' which reduces taxes on 'goods' as a result of increases in environmental taxes on 'bads' (paragraph 23);
  • a methodology for assessing the full environmental 'externality' costs, and how such costs compare with the tax revenue raised (paragraph 29); and
  • a broad set of evaluation criteria for environmental taxes should be set to assess whether environmental taxes are having the desired effect on changing behaviours (paragraph 29).

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Prepared 7 July 2011