Green tax reform turns into tinkering

The pre-Budget report produced a mostly listless package of environmental measures. There were minor adjustments of the climate change levy and aggregates levy, but decisions on waste, pesticides and household energy efficiency were put off for another day. A new alternative fuels framework has provided firmer foundations for future tax policy on biofuels and hydrogen.

The Chancellor said fewer than 200 words about his plans for the environment when he introduced his pre-Budget report, which was par for the course of late. The enthusiasm with which the Treasury unveiled its statement of intent on environmental taxation shortly after Labour came to office has been transmuted, by and large, into a dull tinkering with the tax system towards green ends.

The Government's revenues from environmental taxes help tell the story (see table). By Labour's second year, the Treasury was raking in an extra £4 billion per year in road fuel duty, bringing total revenues from environmental taxes to 9.7% of the overall tax take.

By last year, however, that figure had slumped to 8.8% - well below the level inherited by Labour, thanks largely to lower revenues from duty on fuels and vehicles in the wake of the fuel protests in autumn 2000.

The pre-Budget report was as noteworthy for what it did not do as for what it did. Environmental groups had urged the Chancellor to hike up air passenger duty, which currently brings in £0.8 billion per year, to offset at least some of the £9.0 billion subsidy which they claim the aviation industry enjoys by paying no tax on fuel and other reliefs. The air transport White Paper (see pp 42-43 ) scotched that idea.

Other fiscal measures in the pipeline - on pesticides, household energy efficiency and waste management - were booted into the future. There was little hint of action on other issues on which the Treasury has been lobbied, such as increasing the differentials in vehicle excise duty to combat rising sales of "gas guzzlers" - although the Budget may yet bring action on that front at least.

In place of the earlier promise of wholesale green tax reform, much of the focus of the Treasury's work is now on fine-tuning existing environmental taxes - sometimes involving retreats from previously entrenched positions. This is scarcely earth-shattering stuff, but pleasing to industry interests which have pressed hard for the concessions.

Relief from climate levy
The pre-Budget report announced concessions of this kind in respect of both the climate change levy and aggregates levy.

On the climate levy, the Treasury has relented over its refusal to widen the eligibility criteria for climate change agreements. There are 44 such sectoral agreements, which come with an 80% discount on the levy for firms which sign up to energy-saving targets. Until now, they have been open only to businesses regulated under the integrated pollution prevention and control regime.

There have been persistent complaints about this criterion from sectors which have a higher energy intensity than many within the sectoral agreements, as well as from businesses which are within sectors regulated under IPPC but are themselves outside the regime because their operations are too small to qualify.

The Treasury has finally promised to widen the criteria next year, using an energy intensity threshold and taking account of competitive distortions in sectors with a membership both within and outside IPPC. The new criteria will be subject to approval under the EU's state aids rules.

The Confederation of British Industry believes that prime candidates for the 80% levy discount include plastics producers and the industrial gases sector, as well as sectors outside the scope of the present criteria competing with those which qualify - one example being plastic bottle manufacturers who compete with IPPC-regulated glass, metal and carton producers.

The pre-Budget report also announced that firms within sectoral agreements will retain their 80% levy discount if they opt into the EU greenhouse gas emissions trading scheme, which kicks off in 2005. The measure is intended to encourage firms to join the scheme.

Concessions on aggregates levy
The pre-Budget report's main initiative on the aggregates levy was signalled in November, when Economic Secretary John Healey told a parliamentary inquiry that the levy's objectives would not be met in Northern Ireland. Illegal imports of untaxed aggregates from Ireland and a black market in aggregates from illegal quarries have undermined legitimate production (ENDS Report 346, pp 3-5 ).

In Northern Ireland, the levy was being phased in over five years on processed products made from aggregates, but this relief will now be fixed at its current rate and extended to virgin aggregates until 2012. This means that the levy will amount to just 32p per tonne rather than the full rate of £1.60.

The move will require EU state aids approval. In addition, it will be open only to quarrying businesses which sign agreements to improve their environmental performance. The details remain to be decided, but the Government says that agreements are likely to cover air quality, blasting, dust, energy efficiency, groundwater and waste management. Agreements will be "individually tailored to the circumstances of the quarry, taking into account, for example, current standards and scope for improvement."

In Britain, the Treasury claims to have seen "early indications" of a reduction in aggregates extraction since the levy came into force, as well as greater use of construction and demolition waste by construction businesses.

A different picture was painted by a report from the Quarry Products Association. As reported last month, this claimed that the levy had stimulated a net increase in minerals extraction, while also forcing quarrying businesses to store low-grade rock which had previously been sold off cheaply. The pre-Budget report says that the Government sees no case "at present" for exempting "waste materials" from quarrying from the levy. The QPA, for its part, claims that the levy is beset with "major problems" and wants it comprehensively reviewed.

DEFRA panned over aggregates fund
There was one further announcement about the levy. The Aggregates Levy Sustainability Fund, which distributed £29 million in its first year to more than 200 projects, will be continued for a further three years with the current level of funding.

The pre-Budget report said little about the mid-term review of the fund, but the findings were a grave embarrassment for the Environment Department - and particularly its Waste Strategy team, which is responsible for managing the fund.

DEFRA promised before the fund was set up to carry out a mid-term review in its second year. However, when its environmental economics division was asked to support the review in early 2003, it found that the Waste Strategy team had set aside no resources for the job, and had omitted to establish arrangements to monitor the fund's operation - making it impossible to judge whether it is achieving its objectives.

The review report observes that "the limited availability of internal resources to design and manage a fund of close to £60 million [over two years]...suggests a significant breakdown in internal programme management processes." The Waste Strategy team devoted the equivalent of half an official's time, spread over four individuals, to managing the fund in its first year.

The review found numerous other faults. DEFRA did very little to promote the fund and communicate with the ten distribution bodies. It also failed to anticipate difficulties in obtaining EU state aids clearance for the different funding streams, causing the Department for Transport to return £3.7 million allocated to transport projects and holding up many projects run by the Waste and Resources Action Programme. All the distribution bodies wanted a "much stronger lead" from DEFRA.

Other difficulties have arisen from the fund's design - notably its two-year span and a prohibition on carryover of funding from one year to the next. These restrictions meant that some projects requiring planning and licensing consents had to be excluded from consideration by WRAP.

The review also heard from local authorities and quarry operators that the fund was doing little to ameliorate the impacts of quarrying on neighbouring communities - in part because minerals planning officers have had very little influence on the selection of projects.

The report recommends that the fund should run for another three years pending a further review. It should be redesigned to allow more year-end flexibility in allocations, with minerals planning officers being involved in project selection.

The report also urges DEFRA to establish a steering group to give the fund strategic direction. The review team also saw a "very strong case" for DEFRA to be given dispensation by the Treasury to draw resources from the fund to manage the programme adequately. The pre-Budget report was silent on this and most of the report's other recommendations.

Deadline for pesticides levy
The report continued the four-year stalemate over a possible pesticides tax. The Government threatened from the outset to impose the tax unless voluntary measures to reduce the environmental impacts of pesticide use were successful - and repeated the formula every year. It did so again in December, saying it "will continue to press for more rapid progress", but accepting that the farming and pesticide industries' Voluntary Initiative would be the most effective means of reducing pesticide impacts if fully implemented.

The VI is nearing a critical deadline. It has three key targets to be met by March 2004 - and scored an important success this summer when the arable farming assurance schemes decided to adopt them.

One target, to have 200,000 hectares under crop protection management plans, has been surpassed, with 290,000 hectares covered by plans. The second is to have 15,000 spray operators trained under a national registration scheme. Only 5,000 have signed up so far, with uptake remaining poor among mixed farms. The third target is to have 5,000 pesticide sprayers tested under a national scheme, but only 2,000 have passed through this to date.

The Crop Protection Association claims that the VI is "making excellent progress on a broad front". A late rush may still bring the two outstanding targets within reach - but it may be an anxious wait for the initiative's members.

Delays on waste
The pre-Budget report brought disappointment for waste management interests. This year's Budget announced a major study into the health and environmental impacts of different waste management practices to inform future tax policy - notably a possible tax on municipal waste incineration - and a statement had also been expected on variable charging for household waste.

The statement on variable charging did not materialise. As for the study on health and environmental impacts, a parliamentary answer as late as 17 November promised that it would be published "around the time of the pre-Budget report" - but in the event the Treasury said that it would be published in the spring. This is likely to put it beyond the Budget, deferring decisions for a further year.

The report's only noteworthy announcement concerned the conclusions of a review of how future increases in the landfill tax should be recycled to business. It proposed a package of measures, including grants and other financial supports, along with an extension of the "promotional and capacity building services" - presumably WRAP and Envirowise - "to support a broader range of commercial and industrial sectors".

However, firm decisions in the Budget seem unlikely. The Treasury intends to hold further consultations on the best delivery mechanisms in the run-up to the Budget and next year's spending review.

The delay was criticised by environmental groups and some industry bodies. However, the CBI applauded the Treasury for acceding to its request for a further consultation, as well as accepting its proposals for a mixed package of support measures.

The CBI is keen to see targeted grants, as long as they are flexible and not dedicated to a particular step in the waste hierarchy. It also wants funding to assist sectors which feel that the UK lacks the treatment infrastructure to help divert their wastes from landfill.

The waste industry's Environmental Services Association was a lone voice in objecting to the Treasury's revenue recycling ideas. Chief executive Dirk Hazell commented that the industry would be "much more effective than public spending programmes at competitively providing relevant and state of the art infrastructure." The ESA wants increases in the landfill tax to be offset by cuts in other business taxes.

Inertia on energy efficiency
The pre-Budget report also offered little hope of an early introduction of economic instruments to promote household energy efficiency. The Treasury has already held two consultations on the issue, and will now give it "further detailed consideration" before making "a further announcement" in the Budget.

One of the measures under consideration is a cut in VAT on energy-saving materials and energy-efficient products. The Treasury maintains that its hands are tied by EU rules on VAT, and says that current negotiations to reform these are unlikely to bear fruit quickly. A proposed capital allowance for leasing of energy-efficient equipment to households is to be considered as part of a review of corporation tax. Another option on the table is a domestic business tax allowance for energy saving.

The report drew a scathing response from two all-parliamentary groups for intelligent energy and sustainable development. They said that the Treasury had "continued to perpetuate its reputation for vacillation and delay", and was using the EU negotiations on VAT "as a smokescreen for inaction". Some VAT reductions are permitted within EU law, the groups said, and should be introduced immediately along with the domestic business tax allowance.

Framework for alternative fuels
Possibly the most significant initiatives in the pre-Budget report concerned vehicle fuels. The losers were interests supporting liquefied petroleum gas, who had argued for an extension of the reduced rate of duty which the fuel has enjoyed since 2001 (ENDS Report 346, pp 11-12 ).

Without explaining its reasoning, the Treasury says that the environmental benefits of LPG "no longer justify the level of duty differential it currently receives." The duty rate is to be "gradually increased" over the next three years, setting it "on a path towards a level commensurate with the fuel's environmental benefits".

The decision may well be seen as evidence that taxation policy is too prone to fluctuate to justify investments in alternative fuels. That, and the continuing debate about the best ways of stimulating production of biofuels and beginning a possible transition to a hydrogen economy, led the Treasury to set out an "alternative fuels framework" in the pre-Budget report.

The framework commits the Government to a "rolling three-year period of certainty" on duty differentials for alternative fuels. Environmental gains will be the central priority, with an emphasis on fuels' life-cycle carbon performance. Account will also be taken of other environmental benefits, such as improving air quality and reducing waste, as well as benefits to the economy.

The framework also acknowledges that duty incentives can be a blunt instrument. The Government will therefore consider other support measures, such as capital incentives, grants or regulatory solutions, where incentives need to be more focused.

Drawing on the new framework, the Treasury says that it will consider ways of focusing duty on biofuels on inputs as well as products. This, it says, "would allow the duty regime to better incentivise more environmentally and economically efficient fuel manufacturing processes." It might also be more effective in stimulating indigenous production than the present duty differential, which is sucking in imports of biodiesel made from rapeseed oil.

The announcements did not please everyone. The Energy Saving Trust had argued for certainty on duty differentials for ten years ahead, while the British Association for Biofuels and Oils had wanted a seven-year period.

The Government will face more strategic decisions next year, when an assessment of the energy implications of a hydrogen economy and large-scale biomass-based fuels is due for completion. The work will give important pointers to possible support mechanisms for beginning the transition to these fuels.

On other transport issues, the report promises a Budget announcement on the tax treatment of company vans. The Government is also exploring how to "improve the effectiveness" of vehicle excise duty differentials - a possible hint of a widening of the differentials, currently a maximum of £55 per year.

Finally, the report promises a "modest" duty differential to favour red diesel with a sulphur content of less than 0.005% and fuel oil with a sulphur content of less than 0.5%. The move follows a consultation this summer (ENDS Report 342, pp 53-54 ).

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