Memorandum from the Confederation of British
Business Environment Group (CEB)
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
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
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
8. However, many CBI members are concerned
that economic theory is often not translated well into practice,
leading to sub-optimal resultsboth 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
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,
UK environmental taxes and business in the broader
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 goallandfill
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
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 revenuea
figure due to rise in the next two years, with the introduction
of the CCL and aggregates levy.
UK environmental tax performancegeneral
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 factorssuch 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 taxsee 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
unfocusedtherefore 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
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
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 significanttherefore
creating competitive distortions between and within sectors (ie
the plastics sector, which competes in the packaging market with
the paper and glass sectorsboth of which have agreementsis
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.
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
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
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