Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 13 DECEMBER 2000

MR STEPHEN TIMMS MP AND MR CLIVE MAXWELL

  20. Does the Climate Change Levy in any way substitute for or help the effect of the fuel tax escalator?
  (Mr Timms) It certainly helps meet the Kyoto objectives, which the fuel duty escalator also has helped to meet. I do not see any element of substitution but rather it is addressing another element of the problem and we have taken a series of steps to ensure that emissions are addressed wherever they are generated across the economy.

  21. With the introduction of the Climate Change Levy, and the abandoning of the fuel tax escalator and the other tax incentives which have increasingly been given to the transport sector, there is a relative shift of taxation away from transport to the rest of the business sector. How is that justified when we know that the area of the economy which is growing and increasing its pressure on carbon dioxide emissions is not the rest of the business sector, it is the transport sector, yet the Government is shifting its taxation burden away from transport to the rest of the business sector at this time.
  (Mr Timms) The first point to make is that you talk about abandoning the fuel duty escalator and it certainly is the case that it has been cancelled, but the impact of those increases over a period of six or seven years is largely still in place and will be next year as well. This is not a reverse: it is simply that the automatic annual increases will not be applied in the future.

  22. There is a shift in relative levels of taxation. The relative level of taxation of those whose business is to transport things by road is going down, whereas the level of taxation for a business which makes steel will go up.
  (Mr Timms) The level of taxation on transport usage will not have been very much reduced. The big decreases in transport taxation next year are about ownership. I do not think I entirely accept the thesis you are making. It is the case that CO2 emissions are generated in other bits of the economy as well. The climate change levy addresses that issue. I certainly do not see a shift going on deliberately seeking to change the balance of taxation between transport and the rest of the economy.

  23. In the Climate Change Programme the fuel duty escalator is described as supporting the European Union's carbon dioxide from cars strategy. Now that you have abandoned, shelved, the escalator, why do you believe this supporting measure is no longer needed?
  (Mr Timms) The influence of the duty increases in fuel on vehicle manufacturers remains in place. The great bulk of the increase which has been made to fuel duty since 1993 remains in place and its influence remains in place. We are taking other steps to address this. For example, the encouragement of ultra low sulphur petrol will itself accelerate the introduction of gasoline direct injection technology which will also reduce CO2 emissions. I do not see this as in any sense a U-turn. It is simply the case that the escalator, in the light of what happened to crude prices, is no longer a useful instrument, but the effect of its applications since 1993 remain a helpful and important contribution towards meeting our Kyoto objectives.

  24. You will agree that the majority of the population does not like paying the levels of tax they do on petrol; they do not like paying tax on lots of things but of late they have voiced their opinion loudly and the Government has apparently listened. If the price of petrol were to drop because the oil price drops, does the Government have the intention to relook at this and does it have a price in mind, however that price is arrived at, whether it be the price of crude oil combined with the price of taxation? Do you have a price level in mind at which it triggers increased taxation?
  (Mr Timms) No; no, there is not. You are right about people's feeling about fuel duty and I described to Mr Chaytor what our position is, that the freeze will apply for the coming year and if crude prices stay at their recent levels then we would expect it to apply for another year. No, we do not have a target in mind or a threshold or a figure or any of those mechanisms.

  25. If the price of oil at the pumps went down from near $30 back down to $10 in the next two years, and the taxation policy did not change, then presumably the environmentally beneficial effect on the reduction of carbon dioxide which we have seen since the fuel tax escalator was introduced will go into reverse as people will respond to the incentive to drive more. Surely the Government would be ready to react to that?
  (Mr Timms) Yes, we certainly should. There would be an entirely new set of economic and environmental considerations in effect if that were to happen and those would certainly be reflected in a decision at the time of the budget, whenever this arose, about the level of fuel duty. Yes, it would be taken into account.

Mr Loughton

  26. Implicit in what you say is that there is a desirability in keeping fuel prices relatively high for private motorists at least either by the mechanism of the fuel duty escalator as before, or now by the mechanism of naturally high oil prices which it can be construed have taken over that role. Going back to basics then, what is the objective the Government is seeking to achieve from that policy?
  (Mr Timms) Our objective in environmental terms has been to achieve our Kyoto targets. The application of the escalator has certainly contributed to that. We are pretty confident now that we will meet those targets and indeed go way beyond them. Our latest estimate is that we should achieve a reduction of 19 per cent in CO2 emissions by 2010 which is well beyond the 12.5 per cent which Kyoto set for us. In environmental terms that has been the key objective of our policies.

  27. The high price of petrol has been part of that key objective achievement.
  (Mr Timms) Certainly the fuel duty escalator has and no doubt it is the case that the high price of oil will have contributed as well, yes.

  28. What always puzzles me on that basis—and I do not disagree with you—is when you look at the DETR's transport statistics and the last set published in 1998, when the fuel duty escalator was ripping away at that stage, the Government's own forecasts of road traffic numbers on a 30-year basis show a gradual and unhindered increase. Against a base point of 100 in 1997, by 2031 vehicle kilometres travelled by cars will have increased from 100 to 150 and car ownership will have increased from 100 to 139 and the number of cars on the roads by 100 to 143. Over 30 years something like a 40 to 50 per cent increase either in car ownership, congestion, the number of cars on the road, or the number of miles travelled, which should be, on the basis of your argument, exceedingly sensitive to the price of petrol. Your own forecasts, on the basis of the fuel duty escalator actually carrying on, or now being replaced, as I think you would say, by the high level of petrol, is not achieving those things whatsoever. What is the objective?
  (Mr Timms) It is achieving them. There is no doubt at all that the increase in fuel duty arising from the escalator has had an impact on the distances driven. The AA published information some months ago making that point. I forget the figure for the elasticity which the AA quoted.
  (Mr Maxwell) It varies whether you look in the short term or the long term but the short-term figure is about 0.3 or 0.4, the longer term much higher than that.
  (Mr Timms) It is an established fact that the price does have an impact. You are right though that usage continues to rise and that is because there are all sorts of economic factors at work here. Without a doubt, the numbers you are referring to in terms of usage in particular would have been greater had there not been the price impact.

  29. It is not actually reducing. I just cannot see that argument. My argument would be: surely what has made a greater contribution towards that 19 per cent achievement is technological advancement in cleaner engines, firstly, and, secondly, the figure you have quoted to us that you are looking to save something between one million and two and a half million tonnes of carbon per year pales into insignificance aside the figure of 7.5 million tonnes of carbon saved per year simply by switching over to 1200 megawatt coal fired power stations, to similar sized gas fired power stations, a vastly greater figure. So the saving you are claiming on cars is a drop in the ocean compared to savings coming from technology and from coal fired power stations conversion.
  (Mr Timms) Yes, technology certainly has been important and will continue to be very important. We are looking for further technological improvements and the tax system is improving the incentives for further improvements and I certainly do not discount the importance of that. You say it is a drop in the ocean. In the end the reason we shall hopefully achieve our 20 per cent domestic CO2 emissions reduction target is because of quite a lot of drops in the ocean which added together will get us to the position we want to be in. The up to 2.5 million tones from the fuel duty escalator could easily make the difference between us hitting 20 per cent and not doing.

  30. But it is, at the most optimistic, one third of what is achieved simply by switching over to power stations. When are you going to revise these figures? If you are now saying that there is not going to be the remorseless rise in car usage both in terms of mileage and car ownership and you are quoting car organisations, although my understanding was that either the AA or the RAC had said that the price of petrol would need to rise to something in the order of £4 per litre before it would have a substantial impact on the actual usage of those vehicles, why have the DETR, on your advice, not altered their figures to forecast a slowdown at least, if not a reduction, in car usage over the next 10, 20 or 30 years?
  (Mr Timms) I am not forecasting a reduction in car usage; I hope I have not given that impression. What I am saying is that the impact of the escalator has been to reduce emissions from what they otherwise would have been and that, together with the other steps we have taken, will allow us to achieve Kyoto and domestic CO2 emission reductions. I do not think there is anything inconsistent between that point and the point that other government departments have made.

Mr Thomas

  31. You are obviously confident that the current change of fiscal measures will hit the Kyoto targets indeed you have just said that they are likely to overshoot them, which I am sure is welcome. However, the Environment Minister has said that the real long-term target for any government now which takes this seriously is the Royal Commission report on emissions which is looking for up to 60 per cent cuts in greenhouse gases by 2050. How can we reach that as a society if decisions are made on fuel tax or any other with environmental benefit on a budget by budget basis? Was it not at least one of the virtues of the fuel duty escalator that it was continued through two governments, in other words a political change did not change that element of environmental benefit and improvement? If we are in a position now where decisions are made on a budget by budget basis, how can we be sure that we as a society are moving towards those long-range targets which are really essential for the long-term future of the planet?
  (Mr Timms) It has always been clear that the targets set at Kyoto were the beginning of the process and certainly not the end of the story and clear that we would need to go a good deal beyond them in due course, looking at 50 years ahead and undoubtedly as the Royal Commission said we shall need to go a good deal further. That will require some very fundamental changes in the way that we work. My guess is that it is likely that it will be technological change which gives us the potential to go for those much bigger reductions that you have referred to. What we are doing is building into the tax system currently, in the climate change levy, in the fuel duty vehicle taxation arrangements, incentives for cleaner technologies. I would hope that in due course major breakthroughs will emerge which allow us to move in that direction in the longer term. As you know, in the Pre-Budget Report the Chancellor announced an alternative fuels challenge, calling on industry to come forward with proposals for cleaner fuels. We shall be issuing a consultation document about that shortly and I shall be looking with great interest, as will the Environment Minister, at the proposals which come forward. There are several ideas around at the moment and one could see that some of them could make a very substantial contribution towards reducing the emissions which we are generating. It is possible, by making fairly incremental changes in the tax system, to create an incentive for technological change which one could see over a period of 50 years or so could lead us into the sort of destination which you have referred to.

  32. Is it therefore the case that you are looking much more now at an incentive-based regime and have turned your back on disincentive-based regimes, which the fuel tax escalator was, for whatever political or social or whatever reasons that shift is to be seen? Would you accept that is happening and is the Government actively involved in that with the public and explaining the way that these processes have to move over the next ten or 15 years?
  (Mr Timms) It will always be a mixture of approaches but certainly in the last couple of years quite a number of significant incentives have been introduced to encourage people to use cleaner cars: the new vehicle excise duty system with a lower rate of duty for cars which creates lower levels of emissions; the incentive to use smaller second-hand cars because of the 1500cc lower rate of VED; incentives in the company car tax system. We have introduced a range of new incentives but the beneficial effects of the overall rate of fuel duty will continue to be a significant element. I would not want to give the impression that we abandoned what was happening before but we have evolved it.

Chairman

  33. Does that not mean that we shall get clean gridlock?
  (Mr Timms) That will be better than dirty gridlock.

  34. It is gridlock all the same.
  (Mr Timms) The ten-year transport plan will have a significant impact on reducing congestion.

Mr Grieve

  35. May I go back to the matter raised by Mr Loughton for one moment? Clearly there was a major crisis in public perception of the fuel escalator and its impact, based in part on the rise in fuel prices and the added effect of the tax on it. Can you let us have sight of the documentary information on which the Government bases its conclusions that the fuel escalator as it was before you stopped it—and you have talked about the possibility of reverting to it—does have this impact on road use growth which you claim it does? It is quite apparent to me that the public are not persuaded by this argument. If we are going to persuade the public that it is necessary for that purpose, it would be very useful to have the objective evidence which the Government has put together to justify it, which you seem to hint you had, although I must say I have never seen it. Otherwise it leaves one with the situation where the impression which was conveyed as the fuel crisis grew was that in fact the justification for the fuel escalator was to provide for public services, which is a completely different matter altogether, as I am sure you would agree. Can you help us on that and is that information available? I appreciate you may not have it to hand today but you seem to hint that it is in existence and there to underpin the Government's fuel escalator policy. Can we see it?
  (Mr Timms) Certainly the most recent information which I am aware of on this is the work of Professor Glaister for the AA which I have referred to but of course it is important to make the point that we are not simply talking about reducing the distances which are driven by people in their cars, reducing their fuel consumption by other means, by switching to more fuel efficient vehicles, is also helpful in this regard. It is not only about reducing the distances which are driven, but Professor Glaister's work is recent and publicly available and highly regarded.

Mr Keetch

  36. May I ask you about ultra low sulphur fuels which you mentioned earlier? Certainly the United Kingdom has a very low percentage of alternatively fuelled vehicles compared with France, Germany, Italy, etcetera. What estimate have you made of the effect on CO2 emissions by reducing the duty on ultra low sulphur diesel and petrol? How much do you think it will actually reduce CO2 emissions? What is the target?
  (Mr Timms) Directly ultra low sulphur petrol is no more beneficial from a CO2 point of view than conventional petrol. So I do not see that directly contributing helpfully to this at all. However, indirectly it is the case that ultra low sulphur petrol allows the introduction of gasoline direct injection technology. That improves fuel efficiency by up to 20 per cent, so that will reduce CO2 emission and indirectly once that technology becomes widespread, which it is not at the moment, then I would expect it to have an impact. Overnight it will not.

  37. No, but indirectly 20 per cent.
  (Mr Timms) Certainly GDI technology improves fuel efficiency by up to 20 per cent. One would have to make an assumption about what the penetration of GDI technology would be over a period and that is not a forecast that I have. It certainly could be significant. I think it will be.

  38. By the fact of reducing the duty, there is a concern that those reductions, the penny in diesel last year and petrol this year, have been masked by the overall rise in the actual cost of oil and that also as a form of fuel they are more difficult and expensive to produce. Does the Treasury tag and monitor the fuel prices to see that those duty cuts are actually passed on and that they are not simply overshadowed and thrown away by the overall increase in the oil price?
  (Mr Timms) No, we do not. We have had conversations with the oil companies about this and it is my impression—and I think the oil companies have issued a press release to this effect—that because of the effect of the forces of competition the additional two pence per litre incentive that we are proposing, subject to fuel being available right across the country from the budget, is likely to be passed on. I suspect also that when petrol production increasingly and ultimately goes to 100 per cent low sulphur, which I hope will not take long, it may well be that some if not all of the existing one penny per litre incentive which came into effect in October might well be passed on as well. It is not something we systematically study and our position is that pricing is a matter for the oil companies and normal market forces.

  39. You cannot guarantee to the public that those cuts in duty are being passed on to them at the pumps.
  (Mr Timms) The two pence per litre change, if that comes into effect, will take effect from the Budget. I am pretty confident that it will be passed on to customers but I cannot give a guarantee about that because I am not responsible for setting petrol prices.


 
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