Budget 2011 and environmental taxes - Environmental Audit Committee Contents

Conclusions and recommendations

A strategy for Environmental Taxes

1.  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
  • an examination of why environmental taxes are set, the rationale for the rate of the tax and what environmental aims particular taxes seek to achieve
  • detailed plans for increasing the proportion of environmental taxes including any intention for a taxation 'shift' which reduces taxes on 'goods' as a result of increases in environmental taxes on 'bads'
  • a methodology for assessing the full environmental 'externality' costs, and how such costs compare with the tax revenue raised
  • 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 80)

Definition of environmental taxes

2.  We recommend that the Treasury should set out its detailed plans for increasing the proportion of environmental taxes as part of an environmental tax strategy, along with how these taxes are defined. We favour the Office for National Statistics' definition, which considers the effects of a particular tax, because the most important characteristic of an environmental tax is that it promotes more sustainable and less environmentally damaging behaviours regardless of why it was introduced. (Paragraph 10)

3.  The forecast proportion of environmental taxes increases over the life of this Parliament, under both the Treasury's and ONS's definitions. By excluding Fuel Duty and Air Passenger Duty from the Treasury's new definition of environmental taxes, however, there will be no incentive to increase them as part of the Government's commitment to increase the proportion of environmental taxes. (Paragraph 11)

4.  The Treasury should publish statistics (including in its Annual Report) on the proportion of environmental tax under both [the Treasury's and ONS's] definitions. (Paragraph 12)

Setting the tax rate—raising revenue or promoting environmental change

5.  Feeding into the choice of whether an environmental tax is preferable to affect the required behavioural change, with or without complementary regulations and incentives to support it, should be a thorough assessment of the environmental impacts of the various possible interventions so that the most effective is selected. ...In justifying tax changes in each Budget, the Treasury should explain how it has assessed the environmental impacts of the various possible interventions to arrive at their optimal mix. (Paragraph 18)

6.  We recommend that the Government consider providing tax incentives, such as a council tax rebate or stamp duty discount, in next year's Budget to support the take up of the Green Deal. (Paragraph 19)

Complexity and fairness

7.  The present complex mix of environmental taxes and price signals undermines the effectiveness of both in securing beneficial behavioural changes. Businesses cannot be expected to change their behaviours and investment decisions if they are unaware of the cumulative impact of the environmental taxes affecting them. ...The Budget amended existing environmental taxes (and introduced a new one—the Carbon Floor Price), but did not address this growing issue of complexity. (Paragraph 22)

8.  To tackle the growing complexity of environmental taxes and to build greater trust in their purpose, a coherent and clearly articulated approach is needed towards environmental taxes and broader environmental policy. A clear environmental tax strategy, should be a key component of this. (Paragraph 24)

9.  Hypothecating revenues for environmental ends can restrict spending flexibility. It can also help, however, to build trust and acceptance of environmental taxes. The Treasury should therefore consider greater use of at least partial hypothecation of revenues from environmental taxes, as applied for example to the Aggregates Levy. (Paragraph 26)


10.  The Government's workshops on particular tax areas are welcome, but detailed research is needed on the impact of environmental taxes on behaviours to establish what works, and that analysis should be made public to help engender public trust in the purpose and application of environmental taxes. (Paragraph 27)

11.  We are disappointed that the Treasury did not provide the information we require for this inquiry. The material we sought is important for demonstrating the full impact that environmental taxes are having, and for building greater trust and acceptance of environmental taxes. In its response to this Report, we wish to see the Treasury's assessment of the environmental costs of motoring, beyond a simple quantification of the emissions involved. (Paragraph 28)

12.  To tackle the uncertainty over whether environmental tax rates adequately reflect externalities (or indeed over-tax them), the Treasury should seek to build consensus on a methodology for calculating environmental externalities. That would allow evaluation criteria to be formulated for assessing whether environmental taxes are having the desired effect on changing behaviours. Such a methodology and evaluation criteria should then be included in a published environmental tax strategy. (Paragraph 29)

13.  The Treasury should also publish an 'environmental impact assessment' alongside future Budgets, in a similar manner to the 'Household assessment' in Annex A of the Budget Report. This should cover the fullest possible assessment of the environmental impacts of proposed tax changes, including a monetised assessment of the environmental cost compared with the change in tax revenue. (Paragraph 30)

Natural capital

14.  The Treasury should take greater ownership of the Government's efforts on valuing and managing the country's natural capital, to ensure that policy-making in all departments reflects such valuations. (Paragraph 32)

15.  We welcome the Government's plans to incorporate natural capital into the Environmental Accounts. In the light of that work, the Treasury should keep under review the possible scope for broadening the tax base in due course to include natural assets, to help protect or increase our stocks of natural capital. While taxes based on natural capital valuation might be open to challenge at this stage, the Government might explore using the scope for financial incentives outside the tax system to reward positive environmental behaviours, calibrated according to the value of the natural capital involved. (Paragraph 34)

Motoring taxes

16.  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. (Paragraph 41)

17.  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 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. (Paragraph 44)

18.  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. (Paragraph 46)

19.  The removal of fiscal incentives to use biodiesel was a strategically retrograde act. (Paragraph 47)

20.  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, 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. (Paragraph 48)

Aviation taxes

21.  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. (Paragraph 52)

22.  The Treasury must clear up the confusion as to whether Air Passenger Duty is an environmental tax. (Paragraph 53)

23.  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. (Paragraph 54)

24.  The Government's up-coming 'sustainable aviation framework' 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. (Paragraph 55)

The Carbon Floor Price

25.  The Treasury is missing an opportunity to support low-carbon investment by not ring-fencing receipts from the EU Emissions Trading System or the Carbon Floor Price. The Treasury should consider investing a proportion of these proceeds, perhaps through the Green Investment Bank, to support energy-intensive industries to take steps to reduce their carbon footprint, enabling them to remain in the UK, to be greener, and to be competitive. (Paragraph 60)

26.  In its response to this Report the Government should provide its comprehensive assessment of the possible financial consequences of the Carbon Floor Price for existing and new nuclear power. (Paragraph 62)

27.  The Government's definition of a 'subsidy' in relation to nuclear is not robust and does not hold up to scrutiny. The Carbon Floor Price will subsidise nuclear 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. As the Energy and Climate Change Committee recommends, the Government should recognise the issues related to new nuclear head-on and honestly. (Paragraph 65)

28.  In its response to this Report, the Government should explain clearly whether, and on what legal basis, it would be possible to levy a clawback tax on existing nuclear generators so that they pay the same tax as oil and gas powered generation. If in fact legally permissible, the Government should require nuclear power generators to pay such a clawback tax to fulfil its promise to provide no nuclear subsidy. (Paragraph 66)

The Green economy and Green Investment Bank

29.  We are disappointed that there was very little in the Budget and Plan for Growth to help drive the low-carbon economy. The Government must focus on delivering growth that is genuinely sustainable, and that does not degrade the environment or entail increased consumption of resources. The forthcoming Roadmap to a Green Economy must demonstrate a greater commitment to the green economy, and in doing so dispel any suggestion that, with its separate publication, it is an 'add-on' rather than an integral part of the Government's sustainable development plans. We recommend that in the Government's forthcoming review of the Plan for Growth it is consolidated with the Roadmap. This is vital for ensuring that a green economy is at the heart of Government's plans, and to provide a stronger and more coherent strategy for sustainable development. (Paragraph 72)

30.  As we said in our report on the Green Investment Bank, the Government expects green growth to be a major future driver of the economy, able to create new jobs and help transform the UK to a low-carbon economy. The 'step change' that this requires means that this is an urgent agenda. The Government should reconsider its decision on when and under what fiscal circumstances the bar on the Bank's lending powers might be eased. (Paragraph 76)

31.  We are disappointed that unnecessary delays in securing State aid approval seem likely to result in the status of the Green Investment Bank being fudged. We are disappointed that the Government did not heed our earlier advice to make preliminary contact with the European Commission to start the process for securing State Aid approval. (Paragraph 73)

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Prepared 7 July 2011