Conclusions and recommendations
1.HM Treasury has yet to set out how the tax system can help government achieve the UK’s net zero target. HM Treasury has been slow to review how the tax system supports the government’s environmental goals. In 2011, the Mirrlees review published by the Institute for Fiscal Studies said it was a pity there had not been a comprehensive assessment of how the tax system can help protect the environment. HM Treasury has still not made such as assessment. In 2019 it initiated a review into how the transition to net zero could be funded but this review has been delayed. HM Treasury published an interim report in December 2020 and the final report is expected soon. The interim report highlighted the importance of using tax alongside regulation, legislation and spending. HM Treasury has told us that the final report will provide an analytical framework to consider the economic and fiscal costs of moving to net zero. We are concerned HM Treasury’s progress is too slow. With the UK hosting the UN Climate Change Conference (COP26) in Glasgow in November 2021, we urge HM Treasury to provide a clear vision on the role of tax in reducing carbon emissions and help the UK to provide global leadership.
Recommendation: HM Treasury should aim to become an exemplar finance department in supporting government’s environmental goals like net zero; and, by COP26 in November 2021, set out a clear vision of how it will work to help the UK achieve net zero.
2.HM Treasury cannot explain how it will manage declining revenues from consumption of fossil fuels, worth £37 billion in 2019–20. HM Treasury has identified risks to £37 billion of revenue from taxes that are wholly dependent on the consumption of fossil fuels or the emission of greenhouse gases. In particular, the government’s decision to end the sale of new petrol and diesel vehicles by 2030 will accelerate the transition to electric vehicles and reduce revenue from fuel duty. Fuel duty raised around £28 billion in 2019–20, equal to an increase of around 6p on the basic rate of Income Tax. The government said in November 2020 that revenue from motoring taxes would need to keep pace with the move to electric vehicles so that it can continue to fund public services and infrastructure. In its evidence to us, HM Treasury suggested that it had nine years to prepare for declining levels of fuel duty. But we disagree. The government, with the Department for Transport in the lead, is seeking to encourage people and businesses to move to cleaner vehicles now. Government typically needs several years to consult on major tax changes and HM Treasury will need to act soon to identify and consult on options for motoring taxes, and the impact on different parts of society and the levelling-up agenda.
Recommendation: By the next budget, HM Treasury should set out a timetable for how it will consult on options for replacing declining revenues from fossil fuels including fuel duty; and ensure it plans for sufficiently early and broad consultation with different parts of society, particularly with the government’s levelling-up agenda in mind.
3.We are concerned that immediate priorities have often outweighed action needed to support long-term environmental objectives. Budgets in 2020 and 2021 froze the rate of fuel duty to help with the cost of living, while recognising that future rates would need to be considered in the context of the UK’s commitment to reach net zero emissions by 2050. HM Treasury told us that as net zero is a 30-year programme it needs to consider interventions over a long timeframe and not simply year by year. It also recognises that households and businesses need to understand the overall policy direction and where costs are likely to fall so they can plan accordingly. But HM Treasury has yet to provide a long-term view for taxpayers on the difficult action that will need to be taken to get the UK on the path to net zero. The Institute for Government has called for a tax road map to net zero to provide that long-term view, and the Treasury Select Committee has recommended a wider tax strategy including principles for meeting climate change and other environmental objectives.
Recommendation: HM Treasury should consider the pros and cons of publishing a roadmap that signals a clear trajectory to taxpayers for how tax measures will be deployed to contribute net zero. It should write to the Committee to set out its thinking before the next Budget.
4.Tax impact assessments do not sufficiently recognise the potential for every tax measure to affect progress towards environmental objectives. The exchequer departments’ current definition of environmental taxes covers just four taxes with specific environmental objectives. Other established tax measures can have significant environmental impacts, such as fuel duty and Air Passenger Duty which both increase the cost of polluting forms of travel. Tax changes announced in Budget 2021 may also impact on the environment significantly. The new temporary 130% super deduction on Corporation Tax, worth £25 billion, could encourage investment which harms the environment as there are no environmental restrictions on eligible companies. The exchequer departments rarely quantify in tax information and impact notes the environmental impact they expect from tax changes intended to alter behaviour. This prevents effective scrutiny of the environmental impact when Parliament considers tax changes.
Recommendation: From the next budget, HM Treasury should:
- assess the environmental impact of every tax change considered; and
- publish the expected environmental impact for each tax measure in the budget, including the extent of behavioural change, alongside forecasts for tax receipts.
5.HMRC has not done enough to evaluate how tax measures with environmental objectives have changed behaviour. HMRC’s monitoring of environmental taxes focuses on tax revenue, but this is not sufficient on its own. For example, falling tax receipts may mean that a tax is effective because businesses are changing behaviour, but it does not tell HMRC what businesses are doing instead and whether that is more or less environmentally harmful. HMRC has not monitored adverse outcomes sufficiently to understand the impact of environmental taxes. It does not monitor the effect of Landfill Tax on the export of waste, and it currently holds no information on levels of fly-tipping, although it had undertaken some analysis which found no correlation with Landfill Tax rates. The range of responses to a tax can be complex. In the absence of good monitoring data, evaluation is needed to understand the range of environmental impacts. HMRC has evaluated only one of the four environmental taxes since 2010, in part because its research budget has been limited. HMRC is now planning to allocate an additional £2 million for evaluating tax measures in 2021–22.
Recommendation: HMRC should ensure that it has sufficient information to assess whether environmental taxes are achieving their objectives and whether they are having wider impacts, including unwanted behaviour change.
6.We were concerned that HM Treasury and HMRC seemed to view the consequences of environmental taxes as the responsibility of other government departments. The Department for Environment, Food & Rural Affairs (Defra) has lead responsibility for all environmental policy areas apart from climate change mitigation, including net zero, on which the Department for Business, Energy & Industrial Strategy (BEIS) leads. HM Treasury, HMRC and other departments contribute to Defra and BEIS’s environmental objectives. Taxes are blunt financial instruments which HMRC accepts can have adverse consequences as well as disincentivising behaviour that is damaging to the environment, but it seems to us it leaves managing these consequences to other departments. The risk of adverse consequences, combined with the lack of transparency around the environmental impact of tax measures and limited evaluation, should require a high level of engagement across government which the exchequer departments have not persuaded us is the case. Recommendation: The exchequer departments need to:
- consider and describe the expected impact of taxes on other departments’ responsibilities for environmental objectives, for example within tax impact and information notes; and
- by autumn 2021, agree with other departments robust approaches for assessing and monitoring the effect of tax measures on government’s environmental goals.
Published: 28 April 2021 Site information Accessibility statement