Written evidence submitted by the Institute
Thank you for giving the Institute of Directors (IoD)
the opportunity to comment on your enquiry, published in April
2011. Issues surrounding environmental and taxation policy are
of considerable interest to the IoD and its membership.
Founded in 1903, and granted a Royal charter in 1906,
the IoD is an independent, non-party political organisation of
40,000 individual members. Its aim is to serve, support, represent
and set standards for directors to enable them to fulfil their
leadership responsibilities in creating wealth for the benefit
of business and society as a whole. The membership is drawn from
right across the business spectrum. 92% of FTSE 100 companies
have IoD members on their boards, but the majority of members,
some 70%, comprise directors of small and medium-sized enterprises,
ranging from long-established businesses to start-up companies.
The Institute of Directors (IoD) supports the Government's
aim of addressing climate change. However, the IoD believes that
the Government should allow the market to function effectively
in order to enable market forces to achieve these goals. Thus,
the IoD has designed a set of principles that can be used as a
guide for environmental taxation and regulation.
Britain's energy market is over regulated. UK governments
have designed detailed programmes and schemes controlling the
market to an extent that disables it. On the subsidies front,
the Government fragmented the renewables market by creating a
technology based subsidy - the Renewable Obligations (RO) and
the Feed in Tarrifs (FIT) are a prime example for this. On the
regulations front, the market is also over regulated; there is
extensive domestic regulation surrounding gas and nuclear generation,
Emission Performance Standards (EPS), the Climate Change Levy,
on top of extensive European regulation in this area. All these
different schemes and programmes lead to a high level of uncertainty
and confusion within the market. This also undermines markets
and impedes investment decisions.
Instead investors and entrepreneurs wait for the Government to
make decisions on which technologies it favors. The final outcome
is that regulatory and political uncertainty not only increases
costs in the market, but also encourages market investors to "wait
and see". This undermines the innovation and investments
that are critical for developing an effective energy market. With
regards to taxation, there is a case for some environmental taxation.
It makes polluters pay for the burdens that they impose on others.
But environmental taxes, like all other taxes, impose burdens.
Any developments in environmental taxation should therefore observe
the following principles.
Any increases in revenue raised should be matched
by reductions in the revenue raised from other taxes. Environmental
taxes must not become a tool to increase the size of the overall
tax burden. The adverse economic effects of high overall levels
of taxation are well-documented in the economic literature.
It is particularly important to emphasise revenue
neutrality because environmental taxes are hard to design perfectly.
They can easily fail to achieve their goals, either because the
wrong activities are taxed or because taxes are set at the wrong
levels. The double dividend that is sometimes attributed to environmental
taxes can all too easily turn into a double loss, when a tax does
not achieve its intended goals but still imposes the burden that
any tax imposes. A constraint of revenue neutrality at least limits
the damage that can be done.
The burden of a tax will in part be suffered by persons
other than the immediate payers of the tax, including customers,
suppliers, employees and shareholders (including shareholders
on whom many people depend, such as pension funds). One of the
worst policy mistakes to make would be to think that because environmental
taxes are intended to address worthy ends, they are cost-free,
or even positively desirable in themselves (as opposed to being
desirable for the results that they may achieve). All taxes are
burdens on individuals, one way or another, even if the route
is indirect, and the costs of taxation must never be neglected.
Environmental taxes should apply equally to businesses
and to private consumers, even if they are only collected from
businesses, and the amounts due should appear prominently on bills
or tickets that are sent to private consumers.
A tax on businesses can easily go unnoticed by private
individuals, even though they are in fact paying it, one way or
another. And where a tax on private consumers is collected via
businesses (for example as part of the cost of a flight ticket),
the amount should be drawn to the attention of the consumers.
That will help the consumers to decide on their behaviour, and
it will also help them to form their political views on whether
given taxes are justified.
Where private individuals engage in activity that
is sufficiently environmentally damaging for businesses to be
taxed, private individuals should also be taxed. For example,
whatever the case for discouraging carbon dioxide emissions may
be, it applies equally to emissions by businesses and to emissions
by private individuals. If, for example, the climate change levy
makes environmental sense, the exemption of domestic energy consumption
from the levy makes no environmental sense.
Environmental taxes should be simple in design and
straightforward in their application. They must also be introduced
with ample warning and with advance publication of detailed guidance
on what needs to be done.
There is some tension between simplicity and the
precise achievement of policy objectives. But in the environmental
field, uncertainties about what needs to be done mean that precision
in policy objectives is meaningless anyway, as soon as one moves
beyond high-level objectives such as target ranges for environmental
variables. Complexity can of course also spring from a desire
to achieve some extraneous political objective, but that is hardly
a justification for complexity.
An important element in making the application of
taxes straightforward is to give ample warning of their introduction
and to publish detailed guidance in good time. There should be
no repetition of what happened with the climate change levy when
it was introduced. Draft guidance was made available in good time,
but the finalised guidance was not published until after implementation
of the levy.
Environmental taxes should be designed to do their
job properly. The level of a tax should match the cost of the
environmental damage. The onus must be on the Government to demonstrate
the amount of that cost. And there is no point in imposing a tax
if the taxed behaviour will simply relocate to another country
and continue to do the same damage.
If, for example, a tax is intended to reduce carbon
dioxide emissions, there is no point in applying it to nuclear
power. If nuclear power has other environmentally damaging effects,
they should be dealt with using other measures, which may or may
not include taxation. And if an activity has adverse environmental
effects which justify taxing the activity, it should be taxed
whether it is carried out by businesses or by private individuals.
The general uncertainties of environmental science
make it hard to design taxes to achieve precise objectives. But
that is not an excuse for giving up and introducing new taxes
without adequate evidence to support their introduction. The onus
must be on the Government to justify its proposals in detail.
All of the analyses that officials carry out in relation to any
proposal should be published in their raw form, with no selectivity
or presentational gloss, before proposals are debated in Parliament.
That level of openness will maximise the chances of making the
Environmental taxes hold a risk of undermining businesses
competitiveness by imposing additional costs on domestic businesses
. Therefore the environmental tax system should be designed as
part of an international or regional agreement, in order to maintain
a level playing field. A tax system that will undermine British
businesses competitiveness, will not effectively address global
warming, and will undermine growth and export, which are vital
for the British economy. A tax system that ignores overseas competition
will undermine growth in the UK. It is therefore essential to
design a tax system that is taking into consideration the boarder
Lately, we are witnessing high volatility in commodity
prices. Higher energy costs impose a significant burden on households
and businesses. Households are already experiencing an income
squeeze due to higher inflation, higher VAT rates and a lack of
wage growth. Businesses struggle to achieve growth due to diminishing
demand and flat or diminishing export performance. Environmental
taxation must be adjusted to this economic reality, and not impose
high additional costs on struggling businesses and households.
Moreover, environmental taxes should be designed to adjust to
volatile energy prices without inflicting additional costs on
businesses and households.
TARRIF (FIT) AND
The IoD believes that the current framework of subsidies
hinders the market from delivering the results we aspire to see.
It hinders the carbon price and reduces incentives for both the
supply and the demand side. In the long-term FIT discriminates
between technologies when its core aim is to provide investors
with certainty about the level of support. These schemes, although
well intentioned, have a combined effect that distorts the market.
The IoD believes that the different models of FIT will distort
the market and will undermine investment. It is our view that
the market is being sliced and divided into too many sections.
The IoD believes that market forces and market structure should
be used in order to generate investment and ensure a functioning
electricity market. A stable carbon price is the best, most effective
framework for achieving this goal. As well as creating distortion
within the market, FIT and other schemes undermine the development
of a stable electricity market. The IoD is in favour of the Carbon
price support, and believe that this along with a carbon tax would
be an effective policy to encourage decarbonising the economy.
Nevertheless, the IoD objects to FIT and other schemes that generate
complexity and artificially discriminate between technologies.
It might be thought that taxes could be used to ensure
that the great majority of journeys by private car were replaced
by journeys by bus, coach and rail, that the great majority of
long-distance freight transport by road was transferred to transport
by rail, and that most short-haul journeys by air were replaced
by rail journeys.
While very high taxes probably would achieve these
results, it is not at all clear that such results would be desirable.
Certain methods of transport may have negative externalities associated
with them. Even if they do, it does not follow that the use of
those methods should be reduced to a very low level. The advantages
of using a given method, such as convenience and speed, may be
worth so much that they outweigh the externalities. The right
approach is to measure the externalities, price them into people's
decisions by the imposition of matching taxes, and then let market
forces determine the extent to which they are used. The IoD contends
that a comprehensive cost-benefit analysis should be used to design
an effective tax system. Moreover, additional considerations should
be incorporated, such as international competition, macro-economic
conditions etc. The environmental aim should be viewed as part
of a greater economic and social goal.
Thank you once again for inviting the IoD to take
part in this consultation. We hope you find our comments useful.
If we can provide further detail on any of the points raised,
please do not hesitate to contact us.
20 April 2011
16 As evidence investors can for the first time, buy
carbon credit insurance to protect themselves from political uncertainty
in the European emission trading system (Financial Times, and
City AM p-2, 18 April 2011) Back
Iod Economic forecast for 2011 is available at G.Leach, Six dragging
anchors: the UK economy in 2011, Big Picture quarter 1, 2011,
no 10, Institute of Directors. Back