Select Committee on Environmental Audit Minutes of Evidence


Memorandum from the Confederation of British Industry (CBI).

Business Environment Group (CEB)

Introduction

  1.  The CBI represents businesses operating in the UK, who collectively account for approximately 40 per cent of the UK workforce. Our membership is drawn from across a wide range of sectors (including manufacturing and services) and a wide range of company sizes, from SMEs to major multinational enterprises.

  2.  The CBI mission is to promote the conditions in which businesses in the UK can compete and prosper. A key area of our activity is to ensure that public policy contributes positively to this mission.

  3.  Government macro-economic policy (including its approach on taxation and public spending) is a particularly important dimension of our work. CBI regularly submits, for example, proposals to Government in advance of its pre-Budget report (PBR) and Budget setting out specific business priorities for each.

  4.  Public policy on the environment is also an important element of CBI work. Our activity ranges from commenting on individual policy proposals, to informing public debate (eg through surveys), to developing proactive policies (eg on emissions trading) and practical applications (eg on reporting and benchmarking corporate environmental performance).

CBI and environmental taxes

  5.  Taxation in general is an issue of particular concern for CBI members, particularly (but not exclusively) those competing in international markets. Specifically, the burden of tax on UK business is a current major concern. Despite some reduction in the overall level of tax on business in the 2001 Budget, CBI estimates that tax raised from business has increased by some £29 billion in the period from 1997/98 to 2001/02.

  6.  In recent years, one dimension of UK tax policy has been an increased degree of interest in taxes raised with the stated aim of promoting good environmental performance. The inclusion of a separate section in recent PBRs devoted to environmental taxes bears witness to the growing importance of the issue.

  7.  Business has also taken a closer interest in this field. The 1998 CBI report Coming clean examined the use of economic instruments (including taxes) to promote environmental goals. The report set out principles which businesses felt should guide policymakers in this area (see Annex 1) and said that environmental economic instruments, including tax, could be justified in certain circumstances.

  8.  However, many CBI members are concerned that economic theory is often not translated well into practice, leading to sub-optimal results—both for business competitiveness and the environment. The CBI thus decided to carry out a study (mainly through desk-based research) into the performance of the key environmental taxes in the UK, and to make recommendations as appropriate.

  9.  This remainder of this paper makes some tentative general points, drawn from our findings to date. However, our work is still in progress and is not due to be completed until at least the turn of the year, so the following points should be treated with caution and as interim, rather than definitive, conclusions.

UK environmental taxes and business in the broader context

  10.  Mapping the effect of environmental taxes has an immediate definitional challenge (particularly when trying to compare UK experience with other countries). We focus on taxes that have an explicit environmental goal—landfill tax, elements of road fuel and vehicle taxation, climate change levy (CCL) and aggregates levy. The last of these will be introduced in 2002, while the others have been in existence for varying periods.

  11.  Eurostat figures suggest that the level of environmental taxation in the UK, as a proportion of total tax revenues, is above the EU average. However, caution must be exercised the degree of comparability of the figures is not clear.

  12.  Within the UK, our early analysis suggests that revenues from environmental taxes continue to increase in absolute terms. However, these revenues have decreased as a proportion of total tax revenue over the past three years, and are set to decrease further despite the introduction of the CCL and aggregates levy.

  13.  As a proportion of the total business tax burden, environmental tax revenue raised from business appears to account for less than it did three years ago. But business still pays more than half of all UK environmental tax revenue—a figure due to rise in the next two years, with the introduction of the CCL and aggregates levy.

UK environmental tax performance—general points

There appears to be a lack of empirical analysis

  14.  While attempts are made officially in some cases to model or estimate the benefits of environmental taxes (as in the case of the CCL), there appears to be little good available data on the actual effect of taxes once implemented. Data on UK waste arising is limited and poor, for example, undermining claims about the extent to which inert waste arising has decreased since the introduction of the landfill tax.

  15.  Similarly, we are not aware of any actual evidence of the benefits of a "double dividend" arising from packages which seek to shift taxes from "bads" (eg pollution) to "goods" (eg employment)—as in the case of cuts in employers' NIC contributions alongside introduction of the landfill tax and CCL.

  16.  A key challenge in any analysis is the difficulty in isolating the effect of a tax on behaviour from other factors—such as the effect of the fuel duty escalator, as opposed to technical improvements, in stimulating greater fuel efficiency. But the risk is that without sufficient analysis generally, there may be a temptation not only to continue, but also to increase, the level of taxes which may in fact be poorly-designed.

Taxes can be a blunt and relatively ineffective way to achieve environmental goals

  17.  General taxation can also have significant limitations as an instrument of environmental policy. Increasing fuel duty, for example, will undoubtedly have some effect on behaviour, and increasingly so over time, but the demand for petrol and diesel is price inelastic (particularly for goods vehicles). Road use emissions are also sensitive to traffic conditions which vary by time and place, yet fuel duty is not effective as a way of encouraging efficient driver responses to such conditions.

  18.  The CCL is another example of how taxes can be blunt in effect, despite the package of discounts and exemptions from the levy (which adds to the complexity, and frequently perverse consequences, of the tax—see below). Many businesses, where energy costs are small in proportion to total costs or in cases where the incentive to act is low (ie commercial tenants) may not end up doing anything about energy use. Yet these are the ones where there is significant gain to be had.

Inadequate preparatory thought is given to mitigating measures and impact on competitiveness

  19.  In many cases, there appears to be little appreciation of the competitive issues that may arise as a result of an environmental tax measure. As such, the package of support measures, often seen as an afterthought, have been delayed or unfocused—therefore inadequately addressing some of the potential concerns for companies and sectors.

  20.  In the case of the CCL, different approaches elsewhere in Europe to industrial energy tax discounts already leave significant elements of British business at a competitive disadvantage. In Germany, for example, all manufacturing is eligible for generous discounts (an 80 per cent discount on energy tax with a further discount based on how much social security cuts a firm receives).

  21.  The revelation in June's official statistics that (provisionally) CCL might be responsible for a 1 per cent increase in manufacturing input prices (in addition to the actual increase of 2.6 per cent in the 12 months to June) underlines the seriousness of this issue.

  22.  At the same time, the programme of support measures (aimed at helping companies to reduce energy use), for example, those overseen by the Carbon Trust, has still not been finalised despite the introduction of the levy in April 2001 (over six months ago).

  23.  Similarly, action to develop a package of supporting measures for road hauliers (through the Road Haulage Forum) was not taken until after the combination of rising tax and high oil prices had reached critical levels. The result was not only damage to the competitive position of UK hauliers but a lack of confidence in Government tax policy.

Arrangements to deliver revenue neutrality are not transparent

  24.  With regards to the CCL and the landfill tax, the Government has stipulated that the revenues raised will be recycled back to the payers through a mixture of measures including reductions in National Insurance Contributions and specific environmental programmes (ie enhanced capital allowances).

  25.  Despite this, the arrangements to deliver revenue neutrality over time are not transparent and remain a particular concern for those businesses whose costs under the CCL and landfill tax are already significant.

The design of environmental taxes can lead to unintended consequences

  26.  In many cases, the introduction of an environmental tax is not providing the right incentive to reduce environmental impact. The climate change levy agreements (CCLAs), whilst targeting many major energy users, still excludes a number of sectors and companies whose energy use is significant—therefore creating competitive distortions between and within sectors (ie the plastics sector, which competes in the packaging market with the paper and glass sectors—both of which have agreements—is excluded from the CCLAs).

  27.  There are some cases where the introduction of a tax has lead to environmentally perverse outcomes.

  28.  Although evidence is anecdotal, there are major concerns that the landfill tax has resulted in an increase in fly-tipping. A survey of farmers and growers (undertaken by the NFU for the Select Committee on Environment, transport and Regional Affairs) found that "almost two-thirds of respondents considered that fly-tipping had increased and less than 2 per cent had considered that it had decreased".

  29.  With regards to the CCL, firms (in the steel industry) which apply pickling, a process which uses acid to remove oxide scales, are able to negotiate CCLAs as this process is IPPC regulated. However, mechanical de-scaling, an environmentally friendly alternative to pickling is not covered under IPPC. Therefore, firms which have sought to improve the environmental performance of their processes are not eligible for CCLAs.

Conclusion

  30.  Generally, while the use of taxes to promote environmental goals can make sense in theory, CBI members are worried about the lack of empirical analysis on the impact of such taxes in the UK and about shortcomings in various aspects of design.

  31.  That concern should be seen within the context of a general CBI concern about the burden of tax on business in the UK. In our submission on the forthcoming 2001 PBR, we have argued that while the Government should remain committed to its spending plans (which cover some priority areas for business, such as transport and education), there should be no further rise of any kind in Government-imposed costs on business.

  32.  Our 2001 PBR submission also states that business regards stability in the tax regime as important. Before embarking on any future tax overhauls, we believe it essential that existing schemes should be analysed to assess their impact in practice.

  33.  Our ongoing assessment of environmental taxation suggests that a review of the Government's approach in this area as a whole (and not just on individual measures) would be a desirable first step to introducing greater transparency into this area.

12 November 2001


 
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