Chancellor starts off reform of transport, energy taxes

The first step in a potentially significant shift in transport taxes was taken in the Budget on 16 March - though a Treasury claim about the impact of higher fuel duty on carbon dioxide emissions appears to be wildly optimistic. Another important move was the announcement of a high-level task force to look at taxation of industrial and commercial energy use. But decisions on taxes on quarrying and water pollution have been deferred.

The Chancellor did not deliver on the expectations he raised last year. In June, he announced a move to consider water pollution charges. But by November, when he announced that a consultation paper on the issue was being published "with a view to making proposals in the Budget", it was already clear that too much time had slipped by for a decision in March to be prudent (ENDS Report 274, pp 17-20 ). The Government's growing sensitivity to the rural lobby may also have put paid to the early introduction of taxes on fertilisers or pesticides.

The Treasury said after the Budget that early results from research on water pollution charges commissioned by the Department of the Environment, Transport and the Regions (DETR) were "promising". Consultation will be carried out on detailed proposals if the work confirms that they would be practicable and cost-effective.

The Treasury's gloss on the research, which is being carried out by consultants ERM, was contradicted by a source close to the work. Water pollution charges were proving to be an "extremely difficult area", he told ENDS, and it was still far from clear whether introducing them for point sources would be worthwhile.

A separate study on a pesticide tax has been commissioned by the DETR from another consultancy, Ecotec. The terms of reference include an assessment of its impacts on food prices and competitiveness, as well as its effectiveness in curbing pesticides use. No new work is under way on a fertiliser tax.

Faster progress has been made on a quarrying tax - the second measure announced last June. A study for the DETR on the "externalities" of quarrying is to be published shortly. According to the Treasury's "Red Book", the research "demonstrates that there are significant environmental costs not already covered by regulation." Further work is to be carried out on taxes and other means of addressing these costs, and Customs & Excise is to consult on how a tax might work.

The DETR study was carried out by London Economics, which used contingent valuation techniques to calculate the externalities caused by several quarries - including a coastal superquarry - and one or two aggregates recycling operations. Officials say it will raise difficult issues for environmentalists as well as quarrying businesses.

The quarrying industry is up in arms about the prospect of a tax, and received backing from a Confederation of British Industry discussion paper on environmental taxes in March. The CBI says that a tax would have little environmental impact and harm competitiveness, and that regulation can deal with the environmental impacts of quarrying. It has also set itself against the use of contingent valuation methods as the sole means of analysing the costs of quarrying, contending that they "are not based on science or objective valuations."

The environmental measures announced in the Budget will raise a net £945 million in 1988/99, rising to £1.71 billion in 2000/1. The main contribution will come from road fuel duty.

Set alongside this, expenditure which will contribute to environmental improvement will be limited to £500 million of extra money for public transport, spread over three years. Most of the total will go to London Underground, but £50 million has been allocated to rural public transport.

Transport was the focus of the environmental measures announced in the Budget:

  • Road fuel duty: Last June, the Chancellor announced that fuel duty will be raised by 6% per year above inflation until 2002. Some fuels took a heavier increase in March.

    Duty on leaded and normal unleaded petrol was raised by 9.2%. But the rate for super unleaded was increased by 11.8% on the grounds of its higher benzene content.

    Duty on ordinary diesel was increased by 11.7%, but the increase for ultra low-sulphur diesel was only 9.4%. This increased the differential between the two fuels from 1p to 2p per litre, and the Treasury expects the margin to be extended by a further 1p in the next Budget.

    Diesel, not long ago regarded by some as environmentally superior to petrol because diesel engines are more fuel-efficient, is now seen as less desirable on two grounds - its higher emissions of particulates and nitrogen oxides and, curiously, its higher carbon content. The Red Book shows that the Treasury expects the increased duty on diesel to cause a "very small" increase in CO2 emissions - probably because it will encourage some motorists to switch to petrol-engined cars.

    As part of the diesel package, the specification for ultra low-sulphur diesel has been tightened to exclude fuels which have only had their sulphur content reduced, giving a boost to "City" diesel, which is more fully reformulated to give bigger air quality benefits. Indeed, it is this move, combined with the wider duty differential, which is predicted to bring the largest benefits of all the Budget measures, cutting particulate emissions from urban traffic by 20% by 2005.

    More controversial is the Red Book's prediction that the overall impact of fuel duty increases from 1993 to 2002 will be to cut traffic emissions of CO2 by 10 million tonnes (as carbon, mtC) by 2010. This is equivalent to almost 30% of current emissions from road transport.

    Quite how this remarkable improvement could be achieved is a mystery. The latest official traffic projections, published last October, are that traffic will grow to some 520 billion kilometres by 2010. The projections incorporated the effect of the Government's policy on fuel duty to 2002, and the Red Book reveals that the duty increases from 1993-2002 are predicted to cut traffic by 29 billion kilometres in 2010 - contributing a reduction of just 5%.

    This suggests that the bulk of the predicted reduction in CO2 emissions would have to come from improvements in fuel efficiency - but official expectations incorporated in the traffic projections suggest that these will be nowhere big enough to give as large a reduction in CO2 emissions as the Treasury is predicting. ENDS' own projections last October were that road transport CO2 emissions might be at about today's levels in 2010 (ENDS Report 273, pp 8-9 ). The discrepancy is important for the forthcoming UK climate change strategy.

    Other Budget measures on fuel included a freeze in duty on gases, and an increase in the rebate on diesel duty for bus operators in line with the increase in duty. Perversely, this may discourage operators from converting to gases. However, the Government has promised to consult on how the rebate may be targeted to encourage operators to switch to cleaner fuels.

  • Vehicle excise duty: The Chancellor confirmed the go-ahead on January 1999 for the introduction of VED reductions of up to £500 per year for lorries and buses with low particulate emissions. The incentive has been widely criticised as too small by comparison with the cost of upgrading existing vehicles or buying cleaner new ones (ENDS Report 277, p 41 ).

    VED for cars and vans was frozen at £150. However, the Government has promised to consult later this year on a new "environmentally-graduated" VED system for cars, with a £100 rate for "less polluting" vehicles and an increase for "less environmentally friendly" cars.

    In addition, the VED system for lorries is to be reviewed to ensure that it reflects the environmental damage they cause.

  • Company cars: The Budget delivered a strong signal that the practice of offering free fuel for private mileage by company car users will be discouraged. About 800,000 motorists - half of all company car drivers - currently benefit from this perk.

    As a result of the Budget changes, a company car driver on the basic rate of income tax and with a small petrol-engined car will pay almost £1 per week extra in tax in 1998/99. Drivers with smaller diesel cars will pay £2.40. The Government has also announced that the scale charges from which these tax liabilities are calculated will increase by 20% over and above the increase in pump prices in each of the next four years.

    The Government is to consider other reforms to company car taxation. Currently, an employee pays less tax once he drives 2,500 or 18,000 business miles, providing an incentive to cross these thresholds. The review will consider changing the basis of taxation from bands of business miles to private miles.

    As another incentive for fuel gases, the cost of converting a company car or the extra cost of a new car running on these fuels will be disregarded for income tax purposes from April 1999.

    Other Budget initiatives were:

  • Energy tax: The Chancellor announced that Sir Colin Marshall, CBI President and Chairman of British Airways, will lead a task force to examine the case for using economic instruments, including an energy tax, to control industrial and commercial energy use. The move is a potentially important step for the UK, which has long resisted EC proposals for a carbon/energy tax.

    The group's membership has yet to be finalised, but the Treasury announced on Budget day that it will comprise only business people and civil servants. However, the "current expectation", it said later, was that there will be "some sort of consultation" with other interests. The group should complete its work in time to inform the pre-Budget report in November.

  • Landfill tax: The Chancellor announced an increase in the tax rate for "active" waste from £7 to £10 per tonne from April 1999. The £2 per tonne rate for "inactive" waste has been frozen on the grounds that it has resulted in the diversion of some waste to unregulated activities.

    A significant change was the decision to exempt from tax altogether inert wastes used in restoring landfills. In a major concession to the minerals industry, the exemption is likely to encompass infilling of quarries. The move may diminish the incentive provided by the tax for recycling demolition and construction wastes. It remains to be seen whether an aggregates tax could offset this.

    Details of the landfill tax changes were given in a report by Customs & Excise (see pp 33-35 ). In addition, landfill tax is to be brought into line with other taxes to allow future increases in tax rates to be applied immediately after Budget day rather than wait several months for the Finance Act.

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