Green taxes urged for Labour's first Budget

A leading left-wing think tank has urged the new Chancellor to introduce an initial package of green taxes in his first Budget on 2 July. Changes in existing taxation of vehicles, road fuels and landfilling could raise £1.5 billion per year, according to the Institute for Public Policy Research (IPPR). The Government is already believed to be considering a new tax on primary aggregates.

The IPPR has been a leading advocate of a greening of the tax system. Last year, it published a report proposing new or additional taxes on energy, waste, road fuels and aggregates which, it suggested, could pay for substantial cuts in labour taxes and stimulate the creation of at least 575,000 new jobs by 2005 (ENDS Report 257, pp 18-21 ).

The Treasury is understood already to have worked up proposals for a tax on primary aggregates and presented them to the new Government. The IPPR calculates that, set at an initial rate of £1 per tonne, the tax would raise £200 million. The net impact on Treasury revenues would be smaller since up to 40% of aggregates are used in public sector contracts, although this will diminish as road construction declines.

Proposals for a modest set of additional green taxes for the July Budget were aired at a closed IPPR seminar attended by civil servants, academics and industry representatives on 28 May. The main options considered were:

  • Increasing the rate of landfill tax, presently set at £2 per tonne for inert wastes and £7 per tonne for "active" wastes. Dominic Hogg of consultants Ecotec told the seminar that doubling these rates would yield a corresponding initial doubling in revenues to around £920 million in 1998, but with a decline to £835 million by 2005 as the tax spurred waste minimisation and recycling efforts in line with existing Government targets. A tax on incineration, advocated by some environmental groups keen to promote recycling, would currently raise around £10 million per year if set at £7 per tonne.

    However, there appears to have been limited enthusiasm at the seminar for an immediate increase in the rate of landfill tax, which was only introduced last October.

  • Cutting the rate of VAT on energy-saving materials from 17.5% to 5%, equalising it with the rate to be charged on domestic energy after the Budget. According to Dr Joanne Wade of the Association for the Conservation of Energy, the Treasury would lose at most £14 million per year in revenue - a tiny fraction of the £450 million it will lose as a result of the impending cut in VAT on domestic energy from 8% to 5%.

    Dr Wade also told the seminar that Customs & Excise has now conceded that there should be few difficulties in defining the energy-saving materials to which the reduced VAT rate could apply. Treasury Ministers have claimed in the past that this is a serious obstacle. However, it remains unclear whether there are also obstacles in EC law.

  • Reforming vehicle excise duty and fuel duties to reflect environmental criteria. Dr David Taylor of the Institute for European Environmental Policy told delegates that an 8% increase in duty on standard diesel to achieve parity with petrol on the basis of their carbon content would raise at least a net £500 million even if accompanied by a widening of the differential in favour of low-sulphur diesel from 1p to 4p per litre.

  • Short-term reforms of company car taxes could raise around £400 million per year. A tax on private non-residential parking to discourage commuting by car was also discussed at the seminar, but, if this was tied to the next revaluation of the business rating system, it could not be introduced until 2000.

    For the longer term, IPPR Director Gerald Holtham urged the Government to tax industrial and commercial energy use to help it meet its target of cutting carbon dioxide emissions by 20% by 2010 from the 1990 level.

    Options for such a tax put forward at the seminar were a starting rate of $1 per barrel of oil equivalent, rising by $0.5 per year to $3.00 in 2002/3, or $2 per barrel rising to $5 by 2002/3. The first would raise £2.65 billion and the second £4.15 billion by the end of the period. In either case UK energy prices would remain in the mid-range of prices among competitor countries.

    According to the IPPR, the tax would dampen GDP growth and increase inflation by 0.4-0.8% over base. However, it would help to cut CO2 emissions by 12-14% below 1990 levels by 2010. Opposition can be expected from "powerful industrial lobbies" which will claim that the tax will damage UK competitiveness, and while the IPPR believes that their arguments can be answered, "experience in other countries suggests that the measure will require considerable political will."

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