Treasury promises jam tomorrow on green tax reform

Copious official hints of a wide-ranging green tax reform came to little in the Government's first Budget on 2 July. The benefits of the Chancellor's main environmental measure, an increase in the annual road fuel duty escalator, will be outweighed in the short term by cuts in domestic energy taxes. The Treasury has attempted to fend off criticisms with its firmest promise yet that the tax burden will be shifted from environmental "goods" to "bads".

In the run-up to the Budget, official briefings had fostered the impression that a whole swathe of environmental taxes was under serious consideration. Among them were new taxes on pesticides and aggregates, an equalisation of VAT on energy-saving products and domestic energy, an increase in landfill tax, a reform of vehicle excise duty to encourage less polluting vehicles, and cuts in company car allowances. In the event, none of these materialised.

In apparent recognition that the Budget was a serious disappointment on the environmental front, the Treasury issued a statement of intent on its future approach to environmental taxes. Asserting that the Treasury is committed to the goal of "sustainable growth", the statement promised that "over time, the Government will aim to reform the tax system to increase incentives to reduce environmental damage."

Then came the customary qualifications. "Environmental taxation must meet the general tests of good taxation. It must be well designed, to meet objectives without undesirable side-effects; it must keep deadweight compliance costs to a minimum; distributional impact must be acceptable; and care must be had to implications for international competitiveness. Where environmental taxes meet these tests, the Government will use them."

Two new green taxes are potentially on the cards next year, although Chancellor Gordon Brown was careful to say that, after a period of consultation, he would return with "any proposals" in his next Budget in spring 1998.

  • Quarrying: The Chancellor appeared to have two issues confused when he said that extraction of aggregates causes "significant environmental costs and damage to the landscape which may go beyond that recognised in the scope and level of the landfill tax."

    The Government's intentions were clarified in the Red Book and a Treasury statement. Research is to be commissioned to quantify the environmental costs associated with quarrying, including landscape impacts and the effects of noise and dust. The results will be considered alongside a review of the operation of the landfill tax.

    The link between the two probably stems from complaints by landfill operators about taxation of soil and construction wastes which they have traditionally obtained free or at very low cost for use in site engineering and restoration. The tax has diverted some of these wastes from landfill, forcing some operators to buy primary aggregates instead. An aggregates tax would push their costs up even further.

  • Water pollution: "Too little is being done to discourage water pollution," the Chancellor told the Commons. "The environmental case for charges on polluters needs to be examined carefully."

    Studies of a pollution charging scheme have been under way in the Department of the Environment for some four years, and a consultation paper has now been promised on "possible options to reduce water pollution" - with charges related to the amount and nature of pollutants being one of these.

    The environmental measures in the Budget were:

  • Road fuel duty: Duty on petrol and diesel is to be raised by 6% per year in real terms, compared with the previous Government's pledge to increase it by "at least" 5% per annum. The immediate 4p/litre hike in duty brought the total increase to 7p/litre within seven months, and will raise an extra £730 million in revenue in 1997/8.

    The Treasury says that a real 6% per year increase in fuel duty will, if sustained over the life of this Parliament, reduce annual emissions of carbon dioxide by 2.5 million tonnes (as carbon) by 2010. This is around 8% of current emissions from road transport, and only about 15% of the contribution which, according to a recent independent estimate, the sector will have to make towards the Government's target to cut CO2 emissions by 20% between 1990 and 2010 (see pp 6-8 ).

    Duty on road fuel gases, cut by 15% and 25% in the last two years, has not been raised, and the Government intends at least to maintain the current differential against diesel. In addition, the Treasury will review the scope for using the fuel duty rebate to bus operators to promote low-emission vehicles.

  • Vehicle excise duty: The Government will implement its predecessor's plan to reduce VED by up to £500 for lorries with low particulate emissions. But it will also extend the scheme to buses.

    The VED reduction is intended to encourage operators to fit particulate traps or convert vehicles from diesel to gas. However, the last Government's consultation paper on the details of the scheme cast doubt on its effectiveness because operators would get a payback on such investments in 4-5 years at best (ENDS Report 264, pp 34-35 ).

    VED for all vehicles will be raised broadly in line with inflation in November - bringing an end to the seven-year freeze on VED for lorries.

  • Energy taxation: The Chancellor delivered on his pre-election pledge to cut VAT on domestic energy from 8% to 5%, the minimum allowed by EC law. The move will take effect on 1 September, cutting Treasury revenues by £485 million in the first full year.

    But Mr Brown went further, announcing abolition of the levy on beachhead deliveries of natural gas next April at a cost of £170 million in 1988/9.

    Mr Brown estimated that these tax cuts, coupled with "other price cuts already announced", would reduce real gas prices by 5.5% this year and 11% in 1997/8, giving a £90 fall in next year's average fuel bill compared to last year's.

    The Treasury did not explain the environmental impacts of these changes. However, the Association for the Conservation of Energy (ACE) used official price elasticity data to estimate that the 11% cut in gas prices will increase annual CO2 emissions by 450,000 tonnes (as carbon) - offsetting the benefit of the increase in road fuel duty for well over a year.

    These effects will be compounded by the price cuts expected when the gas and electricity markets are fully liberalised next year, and by a new proposal from electricity regulator Offer to cap the average annual domestic electricity bill at £238 before VAT from next April compared with today's average of £270.

    ACE suffered a double blow when the Chancellor took no action to cut the 17.5% rate of VAT on energy-saving goods. Its hopes had been raised the day before the Budget when Environment Minister Michael Meacher told the Commons that equalising taxes on energy and energy-saving products was "desirable", reflecting long-standing Labour policy. ACE estimates that the move would cost the Treasury only £15 million per year in lost revenue.

    The palliative offered by the Chancellor was to bring forward the completion of a review of the revenue effects of a cut in VAT on energy-saving materials by six months to October. The review was required by the last Finance Act, but its scope has now been widened to compare a VAT cut with other options for alleviating fuel poverty.

    No new money has been provided for investments in energy saving, despite past Labour criticisms of cuts in funding for the Home Energy Efficiency Scheme. And Mr Brown's claim that home insulation will be expanded by the new programme to put the young unemployed to work will probably come to little because no money is being made available for materials.

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