Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

WEDNESDAY 13 DECEMBER 2000

MR STEPHEN TIMMS MP AND MR CLIVE MAXWELL


Chairman

  1. Welcome to the Thatcher room. Delighted to have you here. Thank you for coming along. We want to concentrate on the major elements of the Pre-Budget Report (PBR) and one particular thing is the ending of the automatic fuel duty escalator which is a significant announcement. We shall lead off on that before discussing a number of other aspects of your responsibilities as a Green Minister in the Treasury. Is there anything you want to say briefly before we begin asking questions?
  (Mr Timms) I shall make a few brief remarks, if I may. Thank you for your welcome and for the opportunity to speak to the Committee again. May I first of all introduce Clive Maxwell who is the Head of the Environmental and Transport Tax Team at the Treasury. Recent events have probably raised the profile of environmental concerns up and down the country, if anything increasing the impetus to protect the environment and using natural resources in line with the concerns of this Committee. That priority was reflected in the Pre-Budget Report. You mentioned the issue of fuel duties. Recent oil prices have hit people hard and I think it was right that we responded to that, but we did so in an environmentally responsible way and the changes to fuel duties, to vehicle excise duties, to car taxation rules are all focused on encouraging cleaner fuels, more efficient vehicles and greener transport. The publication of the Government's climate change strategy has set out the measures which will move us towards a more sustainable low carbon economy. Progress on one of the main elements of that strategy, the climate change levy which I have talked about to the Committee before, continues as planned. The levy will come into effect on 1 April and in the PBR and in the Urban White Paper we have also embraced Lord Rogers' vision of an urban renaissance to improve cities to reduce pressure for development on the countryside. There is a number of measures in the Pre-Budget Report on that. The Rural White Paper, also published recently, has set out the steps we are taking towards a countryside which is sustainable economically, environmentally and socially as well. I hope the Committee can welcome this continuing progress on the environmental tax agenda and I shall be very happy to answer the questions you have hinted at and others as well.

  Chairman: Thank you. It is nice to hear a Minister tackle so many different aspects of Government policy.

Mr Chaytor

  2. You referred to the Climate Change Strategy and the reduction of traffic growth is a key component within the Climate Change Strategy. Now the fuel duty escalator has been abandoned, where does that leave fuel duty as a policy aimed to deliver the reduction in traffic growth?
  (Mr Timms) The abolition of the escalator was announced in the November 1999 Pre-Budget Report when the Chancellor said that he considered the appropriate rate of fuel duties on a budget by budget basis, taking into account all of the relevant economic, social and environmental factors; so fuel duty only increased by the rate of inflation at the time of the last budget. Taking into account the strength of the world oil prices, the other measures we have introduced to tackle climate change, the Chancellor made a further announcement in the PBR this year that the duty on all road fuels would be frozen in the coming budget and that will have the effect of reducing the rate of duty by about one penny and a half per litre in real terms. Between 1997 and 1999 the rate of duty on ultra low sulphur diesel was steadily cut relative to conventional diesel with the effect that within a couple of years pretty much the entire diesel market was converted to cleaner fuel, cutting emissions of the most damaging local air pollutants and enabling the interaction of new pollution-reducing technology. We have learned from that experience and in October we have already reduced the rate of duty on ultra low sulphur petrol by one penny per litre. Last month the Chancellor announced that we want to go further with that and introduce a further two pence per litre cut in order to promote the takeup of ultra low sulphur petrol. The package that the Chancellor announced on fuel duty in November did reflect widespread concern about the high price of crude oil and the effect on petrol and diesel prices, as expressed by members of the public and by hauliers and their concerns about UK competitiveness. Those were reflected in the Chancellor's announcement but we were able to make some changes there in an environmentally very effective way. The announcement was of course a balance, but I hope the Committee will feel that the balance the Chancellor struck was about right.

  3. You mentioned the impact of high oil prices in leading to the decision to freeze the annual fuel duty rise. Does it follow therefore that if oil prices start to fall you will again consider the need for an escalator?
  (Mr Timms) We have set out the position for the coming year. The freeze will apply and we will be going further on ultra low sulphur petrol and ultra low sulphur diesel, subject to the conditions which are set out in the PBR about ultra low sulphur petrol being widely available. That will be the position for the coming year. We have also said that if the recent high prices of crude oil continue then we would expect the freeze to apply for a further year. If on the other hand the price of crude drops sharply, then that cannot be taken for granted any more. In a sense the answer to your question is yes.

  4. May I compare the impact of the escalator between 1996 and 1999 and the projected impact of the ten-year transport plan? We are told that the reduction of carbon between 1996 and 1999 was somewhere between one to 2.5 million tonnes of carbon (MtC) as a result of the escalator. By contrast the estimate for the reduction of emissions as a result of the ten-year transport plan is going to be about 1.6 MtC of carbon. By contrast the escalator seems to have been a very, very effective means of reducing emissions. Does it not follow then that at some stage in the future, if we are serious about meeting the Kyoto targets, we have to return to the fuel duty escalator?
  (Mr Timms) It is true that quite a large share of the reduction in emissions which would be achieved to meet the Kyoto targets, and go further in the case of the UK, has been borne by the transport sector. However, the climate change strategy which we published sets out quite a wide range of measures alongside the one you have mentioned which will also reduce emissions: the climate change levy in particular is a substantial contribution, the emissions trading scheme which we are developing, some changes to company car tax also which we reckon will save up to one million tonnes of carbon as well. The point I want to make is that we have a wide range of policy strands to address the reduction in CO2 emissions, not only the transport ones but others as well and between them those will take us to the Kyoto target and indeed beyond that. In the longer term of course calls are already being made for much much deeper reductions in CO2 emissions and I have no doubt at all that the targets set at Kyoto are not going to be the end of the story and we need to revisit all of these issues in due course. The strategy which we have published, the measures we have taken, will achieve the Kyoto objectives and go beyond them in fact and then we shall need to do some completely fresh thinking about where we go in the longer term.

  5. May I turn to the principles underlying the green taxation programme, the polluter pays principle? There is now general agreement that the polluter should face the true costs of the environmental damage they cause. In terms of the transport sector, what work has been done and what evidence is there for the true environmental cost caused by domestic transport in private cars and the haulage industry? Do we have some indicators as to what the true cost is by which we could measure the cost which needs to be recouped through environmental taxation?
  (Mr Timms) One of the pieces of work which I am aware of has been the environmental costs of lorries and that is informing the review of lorry vehicle excise duty which is under way at the moment and we are anxious that the new scheme will reflect more fully the environmental costs associated with each kind of lorry than the present arrangements do. That is a particular piece of work I am aware of.
  (Mr Maxwell) The only other thing to mention is the transport modal studies that the DETR have said they will be carrying out over the next year or two as part of their longer term work on inter-urban road charging issues.

  6. You see my point. If there is not at the moment a published body of evidence as to the true environmental costs then it is very difficult to assess the extent to which the taxation regime is making the polluter pay. We need both sides of the equation to come to some assessment of the effectiveness of the overall policy.
  (Mr Timms) In a lot of these areas there is still quite a lot of exploration on the regional thinking going on and being required and gradually a fuller picture is emerging. Certainly there are still some gaps and I accept that.

  7. May I continue this theme of environmental damage? Where do you think the environmental damage is greatest within the transport sector and how is the fuel duty policy responding to that?
  (Mr Timms) I suppose it depends how you measure the scale. There are different ways one could measure it. Clearly there are serious CO2 emission problems; very large amounts of CO2 emissions. Significant local air pollution problems are also being caused in the transport sector and the policies we have put in place are seeking to address both of those and to do so in an increasingly sophisticated way. The effect of the fuel duty escalator is referred to and the new arrangements we have for vehicle excise duty and also company car tax reflect the amount of CO2 emissions being generated by the vehicles and the amount of duty which is payable depends on the amount of emissions, the amount of tax in the case of company car tax depends on emissions. In both of those schemes there is also a supplement for diesel engines reflecting the fact that there are relatively more problems with local air pollution on diesel engines than on petrol engines which have the same CO2 emissions. We now have quite a sophisticated array of measures in place to address both those problems.

  8. Just finally to focus on the question of the diesel engine and the haulage industry, I think it would be agreed that it is the older lorries used in the haulage industry which contribute disproportionately to total emissions, but at the same time in the Pre-Budget statement we have a package of measures which actually reduces the volume of taxation on the haulage industry. How do you reconcile this apparent contradiction with the haulage industry contributing most to environmental damage but at the same time having received the greatest benefits in terms of tax reductions in the Pre-Budget statement?
  (Mr Timms) A process is going on of switching the burden of taxation from ownership to usage and it is true we shall be reducing the amount of vehicle excise duty which is payable but we have not introduced the essential users fuel duty rebate which was being proposed and that is partly for the reason you have set out. In addition to that I have said that the new vehicle excise duty scheme will encourage cleaner vehicles and in addition we have announced the £100 million ringfenced fund to be available over a three-year period for incentives to encourage the modernisation of the vehicle fleet in the haulage industry, including encouragement for cleaner lorries and new technology. We have been able to make progress on that front as well.

Chairman

  9. Just on this lorry point, the DETR sustainable distribution strategy said that the impact of lorries is the equivalent of £28,000 per vehicle; a very large sum. I do not know whether we are near that in terms of actually offsetting that pollution effect, but surely Mr Chaytor is right in saying that we are going to lessen the effect, whatever effect we are having, as a result of your changes.
  (Mr Timms) I hope that we can improve the incentives in the scheme for cleaner lorries by the changes we are making on vehicle excise duty and with the ringfenced fund, also by improved driver training. There is quite a lot which can be done to reduce the environmental costs of lorries and two or three of the elements of the package are directed towards improving the environmental signals we are providing through the tax system. I am not familiar with that total figure or how that matches up to the total amount.

  10. Perhaps Mr Maxwell has a view.
  (Mr Maxwell) No, not on that in particular I am afraid. It is obviously the case that the measures announced are more to do with encouraging and incentivising particular shifts in behaviour and shifts in the choice of lorry driven or the types of engines used rather than internalising every single cost. It is a bit of both going on.

Mr Thomas

  11. I wanted to follow up the point Mr Chaytor asked about regarding the impact, where the greatest environmental damage was from. In particular I have in mind private car use when asking this. Would you agree that the price of fuel is lowest in the areas of the greatest pollution? If we are looking at urban areas we find the market looking to deliver low cost fuel for private motorists where the supermarkets are congregating and in competition with each other, with different incentive schemes to buy £20 of goods in the supermarket and get £10 off your fuel bill and so forth. On the other hand the price of fuel is highest in the areas where private car use is most essential and I am thinking in particular of rural areas where there are fewer alternatives and fewer choices in terms of transport switching. Though a lot of that is about the market, there is obviously an interaction with fuel prices, fuel duty and any other incentives the Treasury might decide to bring in. I wanted to ask you whether you accepted that premise, whether that shows that competition is not working very well towards your aims within the Government and that the market is not helping you in this regard and whether you have considered any other fiscal measures which could change that market pressure. A windfall tax on oil company profits is one thing which was floated and we certainly saw their profits soar during the fuel crisis, which seems to suggest that as well as fuel duty, there is a question about the way the market works and delivers fuel to the consumer and the way that is not going hand in hand with the environmental objectives.
  (Mr Timms) I am obviously aware that there is variation in the price of petrol in different parts of the country. I think that is a matter which is determined largely by the market; certainly I have not seen any evidence of a failure of competition in the supply of petrol in different parts of the country. I know that has been looked at from time to time by the competition authorities but as far as I can see the competition is pretty effective in the supply of petrol around the country. I am not sure whether this is one of the things you were driving at but from time to time there are suggestions that we ought to have different rates of fuel duty in different parts of the country. That is not something I favour. It would be extraordinarily difficult to implement and it would create no end of problems and would almost certainly be illegal under EU rules anyway. We have not looked at tax measures which might have an impact and we are not proposing a windfall tax on the oil companies either.

Mr Gerrard

  12. If we look at the real costs of motoring over a long period the UK sustainable development indicators show that from 1974 to 1998 the real cost of motoring hardly changed, whereas public transport fares have gone up by 50 per cent, disposable income had gone up very significantly. Why do you think then that motorists have this perception that they are being unduly taxed? If we compare with other things which are taxed higher, like cigarettes or alcohol, I am sure if you went into the nearest pub and you asked everybody in there they would say yes, there is too much tax on beer, but it does not seem to provoke the same reaction that there has been on fuel. Why do you think it is that people have that perception?
  (Mr Timms) I do not know. I suspect you are probably in as good a position as I am to provide an explanation for that. What has happened is that there has been something of a switch in the overall cost of motoring and that the costs of ownership and the element of that total accounted for by the cost of owning a car have fallen, whereas the running costs have not. The two of them together have been broadly unchanged over a couple of decades or longer. Maybe what has happened on the running cost side has had a disproportionately greater impact on people's consciousness than one would have expected.

  13. Do you think perhaps there has not been sufficient effort to highlight publicly the environmental rationale for fuel duty? It was quite noticeable during the fuel crisis that we had Prime Minister, Chancellor, talking about the possible economic effects on spending on hospitals, on schools, if there were changes in the rates of duties. A great deal was not said about fuel duty. Is that part of the reason, perhaps over a number of years, that that rationale has not been delivered publicly?
  (Mr Timms) I think we have said quite a lot about the environmental benefits of the fuel duty escalator; certainly I have talked about it at some length and others have done as well. It was a very important element of the justification for the policy. We have talked about it pretty widely. The financial aspects are important as well but I do not think we have downplayed the environmental aspects of this.

  14. You said earlier that you thought if all prices were to drop dramatically then the Chancellor would reconsider. The freeze would stay if prices stay as they are or certainly if they go up. Does that mean that you have really given up on price mechanisms in a sense and think that current prices are as high as they need to go? If we want to encourage fuel efficient motoring, want to encourage unnecessary journeys, we have the prices as high as they need to be?
  (Mr Timms) I do not think we have considered it in those terms. Clearly the fact that crude prices are so high has a significant impact on prices and therefore without any more needing to be done on the duty side, the relatively high prices do their job in the way that the escalator was intended to. I do not think I would want to speculate about what might happen in the future or how we would respond to that. Those are decisions which can only be made in the light of all the circumstances at the time.

  15. Is there a view that rather than using price as a major mechanism for discouraging unnecessary journeys we should look at other mechanisms?
  (Mr Timms) We are looking at a variety of mechanisms, not only for discouraging journeys but for the ten-year plan for transport which will involve very substantial investments in public transport, so encouraging people to use public transport alternatives. There are the incentives for cleaner engines which the tax system is increasingly presenting, so the journeys which are being run will be more environmentally benign than they have been in the past. A wide range of initiatives needs to be taken and is being taken to ensure that transport is increasingly operating in a sustainable way.

  16. Is that what the Chancellor was referring to in the Pre-Budget speech in 1999 when he announced the decision to stop the escalator and make decisions budget by budget? He said then, "... having cut the deficit and introduced our new environmental policies, we are now in a position" to abandon the escalator and work budget by budget. Are those the sort of new environmental policies he was referring to?
  (Mr Timms) The point he made was that he wanted to determine the level of duty on the basis of the economic, social and environmental, all of those, considerations year by year.

  17. He seemed to be suggesting that there were alternatives now. We have new environmental policies therefore we do not need the escalator any more. I just want to be clear exactly what those new environmental polices are supposed to be.
  (Mr Timms) On the climate change side, the climate change strategy has set them out. I mentioned some of them: the climate change levy for example, the new arrangements for company car taxation. So there are several clubs at our disposal which are having the effect of reducing emissions across the economy. Because of the effect of all of those we shall achieve the Kyoto objectives and indeed do better than that. The fuel duty escalator for the period it was in operation made a very significant contribution, but there are other measures now in place as well.

Mr Jones

  18. Forgive me, Minister, you may not like my first question but it is prompted by that answer. You were asked about what the Chancellor had in mind in the 1999 budget when he removed the fuel tax escalator. You said there are environmental, there are economic and there are social reasons. Surely with more candour could you not also say that there are political reasons and that there may be very strong environmental reasons why we should continue a particular tax, but politically you find it too difficult to do at the moment? What is the problem? Why does the Government not just say that? Is that not the honest truth?
  (Mr Timms) There is not a chasm between economic, environmental and social considerations on the one hand and political considerations on the other. The position we were in in 1999 was that the fuel duty escalator had been operating since 1993, had contributed to a significant increase in the price of petrol and diesel and had had very significant environmental benefits. I do not think it was ever envisaged that the escalator would go on and on for ever; apart from economic considerations one has to bear in mind what other countries are doing. It is not the case that we can set our fuel duties entirely disregarding what is happening elsewhere. We have to take account of that. That is one of the economic considerations the Chancellor takes into account. I stand by the point I made, recognising that economic, social and environmental considerations always have political implications as well.

  19. I want to ask some more about the point you made about relative fuel prices but before I do, is it your view now that the price of oil produced by a number of external factors to the Government is such that it really replaces the need for the fuel tax escalator? It serves the same purpose.
  (Mr Timms) It certainly has a bearing on the decision made each year about what the level of fuel duty should be. Yes, that is undoubtedly the case. Whatever the level of oil prices was to be, I do not think it was ever intended that the escalator would go on indefinitely.


 
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