Select Committee on Environmental Audit Second Report




(a)  In terms of environmental taxation, we fully recognise the positive aspects of what the Government has achieved and the commitments it has made.

The Government welcomes the Committee's sixth report, which recognises the positive aspects of what the Government's environmental tax reform programme has achieved and the commitments that the Government has made. Contributions from the Environmental Audit Committee have played an invaluable role in taking forward the Government's environmental tax agenda, and will continue to do so.

Sustainable development remains a priority for the Government. We will continue to advance it though both our own long term goals ­ such as our targets for reducing greenhouse gas emissions and increasing waste recycling ­ and publishing regular updates on progress towards Sustainable Development, including on the Government's headline indicators

(b)  However, we still believe that the Government must set out a plan for developing, implementing and evaluating its programme of environmental tax reform. Work in progress does not appear yet to reflect all the areas of environmental concern set out in the Government's Sustainable Development Strategy. Nor does it amount to a strategic reform of the tax system to increase incentives to reduce environmental damage.

The Government's sustainable development strategy sets out our intention to explore the scope for using economic instruments, such as taxes and charges, to deliver more sustainable development. Such measures can promote change, innovation and efficiency and higher environmental standards.

Within the Sustainable Development Strategy, the Government believes that the tax system can be used to send clear signals about the economic activities the Government believes should be encouraged or discouraged. The Government's position was set out in the Statement of Intent 1997 on environmental taxation. The Government expanded on the principles contained in the Statement of Intent in the Pre Budget Report 1999.

The Statement of Intent committed the Government to explore the scope for using the tax system, alongside other policy instruments, to deliver environmental objectives,. As a result, the Government has developed and implemented a number of environmental tax reforms which are intended to tackle climate change, improve air quality, regenerate the UK's cities and protect the countryside. The Government continues to monitor progress towards meeting these goals, and is continuing to push environmental reforms forward. The Pre Budget Report will set out an assessment of progress in developing the environmental tax reform agenda.

The Government is also committed to a full evaluation and appraisal of the environmental effects of the policies it introduces. These effects are summarised in the appraisals tables contained in the Pre­Budget and Budget Reports. The Government welcomes the interest that the Committee has shown in these tables in recent years and has adapted the tables in the light of these and other suggestions. The Government looks forward to receiving further suggestions for improvement.

(c)   The Government must accept that increases in the proportion of revenue coming from environmental taxes is the only indicator of progress in relation to its own stated aim of "shifting the burden of tax from 'goods' to 'bads' ". If the Financial Secretary is suggesting that shifting the burden from 'goods' to 'bads' is not now an aim of the Government, or a meaningful goal at all, then we require a thorough explanation and a new Statement of Intent on Environmental Taxation.

The Government stands by the principles behind the Statement of Intent on environmental taxation ­ that over time, it wishes to shift the burden of taxation away from "goods" such as employment, savings and investment, and towards "bads" such as environmental pollution and the wasteful use of natural resources. The Government's commitment to this principle has been clearly demonstrated in practice with revenues from both the climate change levy and the aggregates levy being used to reduce the burden of employers' national insurance by a total of 0.4 percentage points by April 2002.

However, there concerns about using the proportion of revenue coming from environmental taxes as the only indicator of progress. The revenues from an environmental tax that successfully reduces environmentally damaging behaviour may fall over time. The Government would regard this as a successful outcome, even though the share of tax revenues from environmental taxes might fall.

Furthermore, the Government's strategy on environmental tax reform is far broader than simply introducing new environmental taxes.. Fuel duty differentials, for example, have been a highly effective means of encouraging the take up of less polluting fuels such as Ultra Low Sulphur Diesel yet would not be shown up by this measure. And reforms to the major sources of Government revenue such as corporation tax, income tax and VAT would not be classed as environmental taxes. But the introduction of accelerated capital allowances for energy efficient technologies, reform of the income tax treatment of company cars available for private use and the extension of the reduced rate of VAT for the installation of energy saving materials in the home, clearly shift the burden of tax from goods to bads and are all expected to have a significant positive environmental impact. They do not, however, show up in a measure of environmental tax revenues.


(d)  The Government needs to do more to set out a strategic approach to budgetary and fiscal environmental policies and the interaction of these with other initiatives.

The Government is committed to putting economic, social and environmental concerns alongside each other at the heart of decision making. The environment chapters in the Pre Budget Report 1999 and in Budget 2000 clearly set out how the Government's environmental objectives can be achieved and the range of policy instruments that can be used. These includes regulation, public spending, information campaigns, voluntary agreements, and economic instruments such as taxes and charging. The use of these measures is assessed on a case­by­case basis, taking into account the wider economic and social consequences. In many cases, a mixed package of policies will be needed, as in the case of the Government's strategy to the combat climate change, which includes the energy efficiency fund, the climate change levy, and the Pollution Prevention Control regulations.

Economic instruments such as taxes, charges and trading can offer the scope for tackling environmental costs in the most efficient way. By making use of the price mechanism, economic instruments allow those involved in environmentally­damaging activities to respond according to their own circumstances. Those facing the lowest costs of pollution abatement are given an incentive to make larger pollution reductions. In this way, economic instruments integrate effective protection of the environment and prudent use of natural resources into the heart of economic decision making.

Although Budget documentation will necessarily focus on fiscal measures, further details of how environmental tax reforms fit within the Government's wider strategy for achieving its environmental objectives are set out in dedicated publications. Since Budget 2000, the Government has published the Waste Strategy, and the ten year plan for transport. Forthcoming publications, such as the Urban White Paper, the Rural White Paper and the UK's Climate Change Programme will set out the Government's strategic approach in these key areas.

We will continue to develop our environmental tax agenda which is already delivering real environmental benefits in ways which protect the competitiveness of UK firms and are socially

equitable. The Government will take the Committee's views into account as we prepare for the Pre Budget Report.

(e)  It is essential that the Government sets out clearly how it intends to pursue its programme of environmental tax reform. Major areas where such reform must play a more effective role, for example, include:

­ new development, where there are significant perverse fiscal incentives in favour of greenfield rather than brownfield sites;

The forthcoming Urban White Paper will set out the Government's strategy for generating an urban renaissance. This will demonstrate how a mix of policy instruments ­ including fiscal reforms ­ can contribute towards regenerating our urban areas and recycling previously developed land. The Urban White Paper will include the Government's formal response to the recommendations made by Lord Rogers' Urban Task Force in their report, "Towards an Urban Renaissance".

The Government announced new planning policy guidance for housing (PPG3) in March, which addressed several of the Urban Task Force's recommendations. The new PPG3 promotes greater efficiency in the use of land, gives preference to development of recycled land and building before development of greenfield sites, and encourages higher quality housing development. The recent Housing Green Paper "Quality and Choice: A decent home for all" sets out our proposals for meeting the further challenges of delivering greater quality and choice across the housing market.

In Budget 2000, the Government announced it was attracted to the idea of offering stamp duty relief to encourage developments on brownfield land. Since then, the Inland Revenue has consulted with a range of interested parties on how this measure might be targeted to help meet the Government's objectives and how it might work in practice. Progress will be reported in the Pre Budget Report.

­ waste, where huge changes in attitudes and behaviour are needed to meet targets in EU directives;

The Government's Waste Strategy 2000, published earlier this year, recognises that a huge step change is needed in how we manage waste. This is needed to ensure that we manage waste sustainably, and ensure a better quality of life for future generations as well as to meet the targets in EU waste directives.

To achieve this goal, we need to reduce how much waste we produce, increase the recycling and recovery of waste, and curb landfill rates. The Strategy sets out a package of measures designed to deliver these changes. Economic instruments are a part of this package, and have a useful role to play alongside other measures such as the new Waste and Resources Action Programme, best practice programmes and regulatory action. For instance, the Strategy includes the use of economic instruments such as tradable permits for local authorities to limit the amount of biodegradable municipal waste being landfilled. It also includes the use of the Aggregates Levy, Packaging Recovery Notes and other producer responsibility initiatives to promote the minimisation and recycling of particular waste streams. The Waste Strategy also committed the Government to using the considerable resources flowing through the Landfill Tax Credit Scheme to deliver an increase in recycling rates, particularly of household waste.

­ energy, where notwithstanding the Financial Secretary's comments the evidence suggests that current and planned levels of UK investment in renewable energy technologies are much smaller than our competitors;

The UK's Climate Change Programme will be published this year. It will set out how the UK intends to deliver our target from Kyoto to reduce greenhouse gas emissions and move towards our domestic goal to cut emissions of carbon dioxide. The programme will outline action from all sectors of the economy and will provide more information about the changes the UK will need to make to meet longer reduction targets beyond 2010. A draft programme was published earlier this year, which estimate that the policies and measures it set out could cut greenhouse gas emissions by 21.5% below 1990 levels in 2010 ­ 17.5% in carbon dioxide alone

The Climate Change levy's exemption for electricity produced from new renewables will provide a significant boost to renewables generation. As part of the Energy Efficiency Fund, set up with revenues from the climate change levy, ú39m over 3 years has been provided for DTI to promote new renewable technologies, such as off­shore wind power. ú12m over 3 years has been allocated to MAFF to support the development of energy crops.

On October 24 the Prime Minister announced that a further £50m is expected to be made available to offshore wind and biomass from the New Opportunities Fund. This funding is additional to substantial boost that the sector will receive from the "Renewables Obligation". This requires licensed electricity suppliers to supply a specified proportion of their supplies from eligible renewable sources. The Government's aim is to see 10% of generation coming from renewable sources by 2010, subject to the cost to consumers being acceptable. This would represent a very large increase on the current level, which was 2.8% in 1999.

­ water, where a failure to implement the polluter pays principle through a pesticides tax is resulting in substantial hidden subsidies for intensive farming as against organic farming for example, and extra costs borne by householders and business through water prices;

The Government's consultation paper "Economic Instruments for Water Pollution", published November 1997 sought views on taxes on fertilisers and pesticides. Responses highlighted the difficulties involved and the Government decided not to proceed with a water pollution tax.

The Government remains committed to tackling water pollution from agricultural and other diffuse sources. For fertilisers, additional Nitrate Vulnerable Zones (within which farmers must take specified measures to reduce nitrate leaching) are expected to be designated under the Nitrates Directive next year.

The Government's response to the Committee's 4th Report (PBR 1999 ­ Pesticides, Aggregates and the Climate Change Levy)[232] explained that ­ given the high levels of improvements already planned for point source discharges ­ a national tax or charge on point source water pollution would not be the best way of proceeding. However, the Government agrees that, in order to safeguard water quality, it is necessary to look at diffuse sources of pollution as well. The Department of the Environment, Transport and the Regions intends to encourage the Environment Agency to focus more regulatory effort to this area, particularly where bathing water or river water quality is threatened.

The Government has made very clear that a pesticides tax could be a useful tool in addressing the environmental impact of pesticides use. Following discussions with the Crop Protection Association over a possible voluntary package of measures to reduce the environmental impact of pesticides use, the Chancellor decided not to introduce a tax on the use of pesticides in Budget 2000.

As the Government's response to the Committee's 4th report indicated[233], there has been an opportunity for all interested parties to express their views on the Crop Protection Association's proposals which were published in April. DETR sent out copies of the document to about 300 organisations and individuals likely to have an interest. Over 280 replies have been received and the Pesticides Forum and Advisory Committee on Pesticides have considered the proposals and recorded their views.

­ transport, where steady increases in the overall cost of car usage and steady improvements in the availability of real alternatives (better public transport, more efficient vehicles and alternative fuels)­must go hand in hand.

The transport sector has a key role to play in helping to achieve the Government's environmental targets. The Ten Year Plan, which DETR published in July, outlined the Government's plans for investing in transport over the next ten years, and set out a series of targets, including improvements to public transport. We are also working hard to improve the environmental performance of vehicles. The EC Voluntary Agreements with the motor manufacturers will result in a 25% reduction in the CO2 emissions from the average new car, and the introduction of new 'Euro' standards in 2005 will introduce even more stringent standards for emissions of local pollutants than those introduced this year.

Within the Government's overall transport strategy, it has pursued a number of different policies to increase the environmental effectiveness of taxes on road transport. For example, the Government has undertaken reforms to the car VED system in order to relate the cost of VED to the level of CO2 emissions for new cars from March 2001, and has taken steps to encourage the manufacture and take­up of cleaner fuels. The Government has also announced a major revenue neutral reform of company car taxation to help protect the environment. Amongst other things, these reforms are expected to reduce substantially CO2 emissions and to improve local air quality.

The Government is also encouraging the development and use of alternative fuels and technologies. The Government has substantially increased the funding for the Powershift Programme, and intends to increase support to encourage the early introduction of emerging technologies such as hybrid and fuel cell vehicles that offer potentially significant reductions in emissions of local air pollutants and greenhouse gases. The action which has been taken through the taxation regime to encourage low emission vehicles supports these programmes.

(f)  The Government should revise the Code for Fiscal Stability, which contains the principles of fiscal management, to incorporate its commitment to sustainable development.

As required by the Finance Act 1998, the Code for Fiscal Stability sets out how the Government will apply the key principles of transparency, stability, responsibility, fairness and efficiency in its formulation and implementation of fiscal policy and its policy for the management of the National Debt.

Under the principle of stability, the Code indicates that, so far as reasonably practicable, the Government will operate fiscal policy consistent with high and stable levels of growth and employment. The principle of fairness means that the Government will take into account the financial effects on future generations, as well as its distributional impact on the current population. The Government sees no reason to change the Code.

Looking across the sustainable development agenda

(g)  We expect much more discussion of environmental impacts alongside social and financial issues in the earlier "mainstream" parts of Budget Reports, and of the implications of Budget measures for­at the very least­the 'headline' set of indicators.

All Budget measures are screened for environmental impact and Table 6.2 in Budget 2000, and similar tables in earlier documents, provide estimates of all significant effects on the environment from Budget measures. This includes details of associated headline indicators of sustainable development. The Government believes bringing together these impacts in a separate table within a dedicated environmental chapter is a better way of illustrating the overall environmental impact of the Budget measures than a more piecemeal discussion of environmental impacts scattered throughout the document.

(h)  Given the scale of the environmental challenges facing the UK, the Government must set longer term goals and annual targets by which we can measure our progress year by year.

The Government has a strong vision of sustainable development, to ensure a better quality of life for current generations as well as for those in the future. We welcome the EAC's recognition of the scale of environmental challenges which the UK is facing, and agree with the need for long term goals.

The Government has a number of such long term goals, including targets for reducing greenhouse gas emissions and increasing waste recycling both by 2010. And on both of these issues a clear signal been given that further progress beyond these targets will be essential. The Government's waste strategy and the requirements of the EU Landfill Directive set out targets on waste that must be met by 2015 and 2002. However, longer term targets for reducing greenhouse gas emissions must be agreed internationally, reflecting the global challenge of climate change, and the Government believes the UK could place itself at a disadvantage in future negotiations by setting a target unilaterally.

To help monitor the progress of sustainable development objectives ­ including the prudent use of natural resources and the effective protection of the environment ­ the Government has developed a set of "headline" indicators. These give a broad overview of trends and are backed up by a larger set of almost 150 indicators. In December 1999, the Department of the Environment, Transport and the Regions published a "baseline assessment" of all the indicators ­ Quality of life counts ­ aiming to provide a benchmark against which future progress can be measured. Annual reporting will include updates on the smaller and more manageable set of headline indicators.

Moving down the green tax agenda

(i)  The Government must be consistent when comparing environmental costs for proposed green taxes. It should establish direct and indirect financial costs in all cases, and should clarify its approach to identifying and estimating non­financial impacts.

The Government agrees that identifying, quantifying and valuing the environmental impacts at which green taxes and other measures are targeted needs to be done consistently and as comprehensively as resources and the current state of knowledge allow.

In the case of pesticides, the Government has reviewed the evidence and is aware of the broad magnitude of the costs imposed on water companies to remove pesticides as a result of targets laid down in the EC Drinking Water Directive. More information is given in the 1999 report by consultants ECOTEC, Design of a Tax or Charge Scheme for Pesticides (see Section A3.1 of this report states that "Estimates as to the costs of this treatment are as high as £1 billion, with annual operating costs estimated between £50 and £120 million."

A consistent approach was applied in the case of aggregates, but as the principal impact, and thus the principal concern, was the amenity effect, indirect financial costs were not significant.

The Government shares the Committee's view of the importance of a clear approach to identifying and estimating non­financial environmental impacts, and DETR will be publishing a guidance manual on how to use stated preference valuation techniques for expressing costs and benefits in money terms.

(j)  We reiterate our support for a Green Tax Commission as our preferred option for the promotion of environmental tax reform, especially in view of the support for this idea expressed by the UK Round Table on Sustainable Development. In the interim we recommend that the remit of the new Sustainable Development Commission should include a responsibility to advise HM Treasury on sustainable development economic instruments.

The Government is committed to pursuing the environmental tax agenda in an open and consultative manner. This has been demonstrated on many occasions. Since Budget 2000, for example, the Government has consulted on :

­ the criteria which should be used to define energy efficient technologies qualifying for enhanced capital allowances under the climate change levy package;

­ the recent proposals from the Crop Protection Association for a voluntary package of measures to reduce the environmental impact of pesticides use; and

­ what the objectives of the new aggregates sustainability fund should be and how these can best be delivered.

The case for introducing a Green Tax Commission will be kept under review but it is not obvious what such a Commission would add to existing arrangements, There are already numerous bodies which provide advice to the Government on environmental issues, including the Trades Unions Advisory Committee on Sustainable Development and the Commission for Integrated Transport, and these naturally refer to economic instruments such as tax as well as other policy areas.

The Government has read the recent report of the UK Round Table for Sustainable Development with interest and will respond in due course. The Government expects the new Sustainable Development Commission to continue the excellent work of the UK Round Table.


(k)   We were disappointed that the Government's response failed to address our recommendation that Partnerships UK (the new body responsible for assisting the development of PPP and PFI projects) should have sustainable development included in its aims and objectives. We expect the Government to remedy this situation in line with our recommendation.

Partnerships UK will be a public private partnership: a joint venture with the public sector owning a minority interest and the private sector owning a majority. PUK will operate on commercial basis, as a risk­taking private sector body. Its primary aim is to address the skill deficit on the public sector side of the PFI/PPP procurement process. PUK will have a majority of private sector investors and, while sustainable development is an important concern for all companies, it would be inappropriate for the Government to include provisions on sustainable development in the memorandum and articles of this kind of commercial entity.

Nevertheless, PUK is involved in a number of environmentally friendly projects in the fields of public transport, waste management and urban regeneration. These are producing positive environmental benefits which would not otherwise have been delivered so quickly. Furthermore, PUK's governance structure has been designed to balance private sector disciplines with PUK's public sector mission. PUK's Advisory Council ­ consisting of representatives from Government departments, the devolved administrations, local authorities and other public bodies ­ will be responsible for safeguarding its public sector mission.

The Committee may also be aware that DETR is currently preparing guidance for Departments on how to promote sustainable development objectives through PPP/PFI projects. We anticipate that this will be available early in the New Year

(l)  The Government should work much more systematically, within the framework of EC regulations, to promote "green" procurement.

The Government welcomes this recommendation from the EAC but regrets that the guidance is found to be confusing. Procurement policy is based on securing value for money, taking account of propriety and regularity. But it should not obstruct the delivery of policy and there is scope to take account of environmental factors, as is made clear in the joint Treasury/DETR note. Department's are free ­ subject to afford ability ­ to specify requirements in green terms, in line with their green strategies, and to award contracts on the basis of whole life costs and quality.

There is also scope—subject to EC and international procurement requirements—to take account of process standards and management systems, providing they are non­discriminatory and that other ways to meet underlying requirements are considered. These issues are currently being discussed in the Community and we would not want to review current guidance until these discussions are concluded.

Climate Change Levy

(m)  We are concerned at the slow progress of negotiations on the Climate Change Levy whose target date for introduction is April 2001. This is causing considerable uncertainty.

Progress towards the conclusion of the climate change levy negotiated agreements is being made to the expected timetable and the climate change levy will be implemented as planned from April 2001.

Negotiations are proceeding with 46 trade associations or similar bodies. Generic agreement documents ­ which will be elaborated for use with specific sectors ­ are now nearing completion. Each agreement will contain energy / CO2 savings targets over a 10 year period. In addition, a first draft of a package of information for prospective participants has been circulated to industry sectors. Both Government and the eligible sectors are working hard towards successful conclusion of the agreements. Negotiations of this type and scale are unprecedented and both issues of principle and very detailed points have had to be addressed. Furthermore, the negotiations have had to run in parallel with the development of the climate change levy itself, and alongside the development of carbon trading in order to give participants scope to meet their targets by trading.

Industry sectors have made considerable efforts to respond swiftly to proposals made by the Government, bearing in mind the need for trade associations to consult their membership at key stages. Similarly, the Government's negotiating team has worked hard to accommodate the particular circumstances of the sectors and to progress the discussions as quickly as possible.

Although the need for the UK to gain EU State Aids clearance for the negotiated agreements process and associated measures has been known from the outset, this has also contributed somewhat to uncertainty. Discussions linked with the revision of the Commission's State Aid guidelines for environmental protection have delayed the Commission's final decision. Understandably, sectors have been wary of this uncertainty. Indications from the Commission seem favourable and, although discussions are ongoing, the Government is optimistic of success for the applications.

These factors, in conjunction with the need to ensure that there is appropriate linkage with systems such as the new Pollution Prevention and Control regime and the proposed emissions trading scheme, have caused the negotiations to be protracted.. However, it is vital that the agreements take into account the legitimate concerns of the industry sectors, are both realistic and challenging, and do achieve real energy or carbon savings. Negotiation to achieve these objectives is, necessarily, a lengthy and time­consuming process. There are no short cuts.

VAT on energy­saving materials

(g)  The Treasury, in consultation with the DETR, should extend the reduced rate of VAT to cover products with significant energy­saving features such as low­emission glass and energy­efficient boilers.

In Budget 2000 the Government took the major step of reducing the rate of VAT on the installation of energy saving materials in all homes to 5 per cent, the lowest rate allowed under EU law. On 1 April 2000, the reduced rate was extended to cover the installation of: insulation; draught stripping; hot water and central heating system controls and solar panels. This will help combat fuel poverty and reduce wasteful carbon emissions, bringing economic and social benefits to householders and reducing the threat of climate change.

The Government has chosen to apply the reduced rate to certain items of particular concern to this Government, but it recognises that it is prudent to be selective when targeting tax reliefs. The Government has therefore chosen to target the reduced rate on installing materials whose primary purpose is energy saving. Any energy saving from "low­emission" glass and "energy efficient" boilers is incidental to the main purpose of the goods, and so the reduced rate does not apply to their installation.

30 October 2000

232  Fourth Report from the Committee, 1999-2000, The Pre-Budget Report 1999: pesticides, aggregates and the Climate Change Levy, HC76. The Government's response was appended to the Sixth Report, 1999-2000, HC404. Back

233  Ibid. Back

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