Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Written evidence submitted by EEF

ABOUT EEF

1.  EEF is the representative voice of manufacturing, engineering and technology-based businesses with a membership of 6,000 companies employing around 800,000 people. A large part of its representational work focuses on the issues that make a difference to the productivity and competitiveness of UK manufacturing, including investment, innovation and tax issues.

SUMMARY

2.  Over the past two decades, UK governments of all stripes have increasingly used the tax system to achieve their environmental objectives. However, as the UK pushes ahead of other countries in its use of green taxes, the Committee's inquiry into Budget 2011 and green taxes provides an opportunity to assess the impact of the Government's approach to green taxes on growth and carbon emissions.

3.  Better balanced growth and an economically sustainable transition to a low carbon economy are two of EEF's top priorities. Consequently we do not believe the two are necessarily mutually exclusive. But the nature of the transition to lower carbon emissions matters. Our concern is that the mix of environmental taxation currently proposed by government is unlikely to achieve either growth or a reduction in carbon emissions.

—  OECD suggests taxes that raise relative costs on mobile activity will be harmful to growth. The behavioural and growth consequences of the shift away from taxing "goods" and towards taxing "bads" will depend on whether the "bads" are derived from mobile economic activity. According to the OECD study, a carbon tax that raised the relative cost of production in the UK would likely lead to lower growth as mobile activity shifted abroad.

—  Tax on its own will not change behaviour. For environmental taxation to be effective—ie bring about the desired change in behaviour—it needs to be sensitive to the range of barriers facing businesses and complemented by other policies to help overcome them. The Landfill Levy is an example of an environmental tax that has been relatively successful because of a strategic package of complementary regulations, investments and incentives for waste reduction and recycling. The proposed Carbon Price Floor stands in contrast, where the new carbon tax will inefficiently duplicate existing carbon taxes.

—  UK needs political leadership. Rather than reaching for ambitious, but unachievable targets, the UK should adopt a policy mix that shows that growth and an economically sustainable transition to a low carbon economy are not mutually exclusive.

THE ENVIRONMENT, TAXATION AND GROWTH

Question:  What are the various approaches to shifting the burden of taxation from "goods" (eg labour) to "bads" (eg emissions) and what factors need to be considered when designing and introducing green taxes?

4.  Over the past two decades, UK governments of all stripes have increasingly used the tax system to achieve their environmental objectives. However, as the UK pushes ahead of other countries in its use of green taxes, the Committee's inquiry into Budget 2011 and green taxation provides an opportunity to assess the impact of the UK's approach on growth and carbon emissions.

5.  In order to generate growth and a reduction in carbon emissions, the choice of shifting from taxing "goods" in favour of taxing "bads" needs to be viewed in the context of how taxation affects growth.

6.  A recent OECD study, Tax Policy Reform and Economic Growth,[93] shows that taxes that have a smaller negative impact on economic decisions of firms will have a less negative impact on growth. According to the report, taxes on mobile economic activities will be the most harmful to growth, while taxes on immobile activity have the least damaging effects on growth.

7.  As globalisation increases economic openness and mobility, the OECD report stresses that different factors should drive tax policy choices than in the past, when there was less mobility. Although tax is only one factor among many in improving countries' competitiveness, the OECD report notes that location decisions are becoming more sensitive to relative tax rates.

8.  The analysis suggests that corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes, personal consumption taxes and finally taxes on immobile property the least harmful tax. According to the report, the relative taxes that affect mobility include taxes that affect the costs of production, and therefore the relative international competitiveness of some sectors, and corporate income taxes—including allowances for capital expenditure and innovation—which can influence the location of factories and offices.

9.  Consequently, the behavioural and growth consequences of the shift away from taxing "goods", such as corporate income, and towards taxing "bads", such as carbon emissions, will depend on whether the "bads" are derived from mobile economic activity. In theory, taxing "bads" can help make explicit the wider social and economic costs of the activity and, thereby, change behaviour. The new Carbon Price Floor is an example of a tax that will add to the higher costs (relative to their European and international competitors further afield) faced by UK manufacturers already paying the Climate Change Levy (CCL) and the Carbon Reduction Commitment (CRC).

10.  With rising carbon prices, there are three potential behavioural consequences: a reduction in carbon emissions, a reduction in the activity that led to the carbon emissions, or escaping the tax by moving the activity abroad (or not locating it in the UK in the first place). According to the OECD study, a carbon tax that raised the relative cost of production in the UK would likely lead to lower growth as mobile activity shifted abroad.

11.  Any significant shift to taxing "bads" also raises questions about the ultimate policy objective. In the case of a carbon tax, it is unclear to manufacturers whether the policy objective is reducing carbon emissions or raising revenue.

12.  As noted above, a green tax that succeeds in changing behaviour, would, by definition, reduce the potential tax base. The only way to maintain a stable revenue base is to continually raise the tax rate, as was done with the Landfill Levy escalator. A tax on "bads" that didn't change behaviour—such as the Airline Passenger Duty—may generate a stable revenue base, but would undermine the credibility of green taxation as it achieved neither the policy objective of growth or the transition to a low-carbon economy. In addition, a tax on "bads" derived from mobile activity would damage growth in the UK, without necessarily reducing global greenhouse gas emissions.

13.  Taxing "bads"—including through carbon taxation—is therefore not as simple as setting the right price in order to generate the right behaviour, which in this case is fostering both growth and the transition to a low-carbon economy. Rather experience suggests that taxation, including carbon taxes, is successful at changing behaviour without sacrificing growth when they are part of a strategic and targeted policy mix and factor in the relative international impact.

GREEN TAXES FAILING ENVIRONMENTAL GOALS AND GROWTH

Question:  How well are green taxes being used to deliver environmental goals and aid the transition to a low carbon economy?

Question:  Does Budget 2011 strikes the right balance between these aims and broader economic objectives?

Question:  What views do you have on the announcement in Budget 2011 on the Green Investment Bank?

14.  For environmental taxation to be effective—ie bring about the desired change in behaviour—it needs to be sensitive to the range of barriers facing businesses and complemented by other policies to help overcome them.

15.  For example, the energy-intensity of UK industry has fallen by two-thirds in the past 40 years but going further is likely to require more than just sharpening price signals through taxation. In many industries, further efficiency gains are being held back by technological and financial barriers. So environmental tax policy needs to be placed in the broader context of issues like innovation policy, support for investment and access to finance.

16.  The Landfill Levy is an example of an environmental tax that has succeeded because of a raft of complementary regulations, investments and incentives for waste reduction and recycling. The proposed Carbon Price Floor stands in contrast, where the new carbon tax will simply duplicate existing carbon taxes in the form of the Climate Change Levy (CCL) and the Carbon Reduction Commitment (CRC).

17.  The cost of the Carbon Price Floor (CPF) will also be acutely felt at a time when complimentary support mechanisms to overcome entrenched barriers are being stripped away, including support via The Carbon Trust for its Industrial Energy Efficiency Accelerator which aimed to work with manufacturing sectors to overcome technical barriers to carbon reductions.

Landfill Levy

18.  Landfill Levy was introduced on 1 October 1996 as a tax levied on landfill operators by weight of refuse disposed in landfill sites. The aim of the tax is to encourage less disposal of waste to landfill; to recover more value from waste through recycling and composting; and to stimulate moves to alternative waste management technologies by making their gate fees more economically viable. It was the UK's first tax with an explicit environmental purpose.

19.  There are two rates: £56 per tonne for "active" wastes, which rises by £8 per annum until it reaches £80 per tonne by 2020 and £2.50 per tonne for "inactive" wastes. The Landfill Levy escalator started with annual increases of £1, rising to £3 in 2005 and £8 a tonne in 2007. This long-term clear projection of cost has helped industry adapt and budget for change.

20.  Figures from HMRC show that landfilled waste subject to the standard rate of Landfill Levy has dropped by 45% from 49,006 thousand tonnes in 98/99 to just 26,983 thousand tonnes by 09/10. Alongside the Landfill Levy a number of supporting measures have been introduced to help stimulate the diversion of waste away from landfill, including:

—  Statutory recycling targets for local authorities (one of a suite of Best Value Performance Indicators).

—  A national, public recycling awareness campaign, Recycle Now, run by the Waste and Resource Action Programme (WRAP).

—  The New Technologies Demonstrator Programme was run by Defra's Waste Implementation Programme to demonstrate the commercial viability and to help remove investment and insurance risks of advance waste technologies that had yet to be proved in a UK-environment. It included pilots of gasification, in-vessel composting, anaerobic digestion and mechanical heat treatment. Since then further support for energy recovery from waste has been provided for through the Renewables Obligation system.

—  The Business Waste and Resource Efficiency Programme—a number of government-funded projects, paid for by Landfill Levy receipts (£43 million in 2005-06, £95 in 2006-07 and £146 million in 2007-08), which aimed to help businesses divert waste away from landfill. This included funding for the Waste and Resources Action Programme which provided targeted support for those sectors facing some of the greatest challenges in waste management.

—  The Landfill Allowance Trading Scheme which threatens local authorities with large fines (£150/tonne) if they fail to divert biodegradable waste from landfill. Target periods are 2010, 2013 and 2020. (NB: Defra is currently examining whether to scrap the scheme due to the level of fines councils may be forced to pay).

—  Additional European legislation has also led to waste being diverted from landfill through the introduction of statutory recycling/recovery targets including producer responsibility legislation dealing with packaging, waste electrical and electronic equipment and batteries.

Carbon Price Floor

21.  The recently announced Carbon Price Floor, designed to catalyse investment in low-carbon power generation, is a striking example of a "green" tax which looks likely to damage economic growth for little or no environmental benefit.

22.  The CPF will have a negative and material impact on the competitiveness and attractiveness of manufacturing in the UK, especially in energy-intensive industries like steel, cement and aluminium.

23.  The "implicit price" of carbon in the UK (ie the combined effect of all existing climate policies) is already significantly higher than in other major industrialised economies. According to analysis carried out for Australia's Climate Institute, it's more than twice as high as in China, almost six times as high as in the USA and more than nine times as high as in Japan.[94]

24.  The CPF will widen this gap further and will, significantly, undermine the competitiveness of UK manufacturing vis-à-vis competitors elsewhere in the EU, our largest trade partner. The effect will be felt through higher industrial electricity prices as the cost of generating power increases. Initial EEF analysis suggests that this measure alone could add up 10% to industrial electricity prices and up to £6 million a year to manufacturers' electricity bills by 2020.

25.  Similarly, the investment case for the CPF—ie it is needed to drive the necessary investment in low-carbon power generation—is unconvincing. The stated objective of the tax is to deliver greater stability and certainty over returns for investors in low-carbon technologies. Yet under electricity market reform proposals, the Government is also planning to introduce long-term contracts for low-carbon generators based on "Contracts for Difference" (CfD) against the wholesale power price. The introduction of these "feed-in tariffs" would make the carbon price floor redundant by offering investors absolute certainty over returns and greater protection against political risk in the form of a binding legal contract. In addition to achieving a low carbon goal, well-designed CfD feed-in-tariffs would achieve that goal at less cost.

26.  The ultimate case for many of the UK's flagship climate policies like the 2020 renewable energy target and the CPF is often cited as setting an example to inspire the rest of the world to follow. However, it is highly questionable that rapidly industrialising emerging economies would want to follow an example that constrains and undermines growth in manufacturing. The UK would set a more compelling example by pursuing a climate policy that puts greater emphasis on cost-effectiveness, competitiveness and more efficient use of resources.

27.  Given the mobility of manufacturing activity, the economic and environmental case for the CPF is very weak. By adding to relative costs in the UK, the CPF is likely to damage growth (as the OECD report suggests) or it will simply push mobile activity out of the UK, resulting in little or no net reduction in net emissions across Europe or even globally.

28.  From an industrial perspective, a significant failure in the design of UK carbon taxation is heavily skewed focus on "sticks" rather than "carrots". UK manufacturers, therefore, are faced with rising costs, but with few complementary policy measures to help them overcome the barriers to improving their energy efficiency and cutting their emissions.

29.  Despite being subject to amongst the highest levels of carbon taxation in the UK economy (eg households are exempt from both the CRC and the CCL), industrial consumers receive significantly less support to cut their emissions than households or power generators. In addition, unlike the Landfill Levy, tax receipts from the CRC and the CPF contribute to general finances rather being used to help energy users reduce their carbon impact.

30.  The "Green Investment Bank" (GIB) currently being developed by the government is a case in point. To help drive the behavioural change across the economy that taxes like the CPF, CCL and CRC are ostensibly designed to bring about, the GIB's remit should include financing industrial energy efficiency and onsite generation projects rather than just large-scale infrastructure and major power generation schemes. Manufacturers face a similar range of technological and financial challenges as the utilities, and because most compete in global markets they are often less able to pass on the costs of adopting new technologies.

CONCLUSION

31.  As the UK pushes ahead of other countries in its use of green taxes, EEF believes that the Government should rethink its approach to demonstrating leadership on the climate change agenda. Rather than reaching for ambitious, but unachievable targets, the UK should adopt a policy mix that shows that growth and an economically sustainable transition to a low carbon economy are not mutually exclusive.

21 April 2011


93   OECD (2010), Tax Policy Reform and Economic Growth, OECD Tax Policy Studies. Back

94   Vivid Economics (2010), The Implicit Price of Carbon in the Electricity Sector of Six Major Economies Back


 
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Prepared 7 July 2011