Annex 1: Coming Clean: Principles for
applying environmental taxation
The objective of environmental economic instruments
is to influence polluter behaviour in the face of externalities,
not to raise additional revenue or tax general consumption.
Economic instruments such as taxation may be
Producers or consumers do not bear
the full cost of the pollution they create
Marginal benefits of the measure
exceed or at least equal the marginal cost of compliance
tax system must be seen by all parties to be achieving a valid
environmental objective. Sound science is essential for effective
environmental policy, even if it does not imply absolute certainty.
If the scientific base is not fully proven, the nature of the
uncertainty should be taken into account in the design of the
Economic rationalethe tax
system must be seen by all parties to be more flexible and cost-effective
than other ways of achieving the environmental objective. Its
role should be to encourage innovation amongst the participants.
The tax must be designed in a way to take full account of its
impact on UK business competitiveness, and be consistent with
the international trade obligations.
Fiscal neutralitynew environmental
taxes should be revenue neutral, except when spent on related
activities in cases where the spending can be justified.
Simplicitysimplicity is essential
and deviations from simplicity should only be introduced when
demonstrably necessary. Multitudes of academic and institutional
studies, of ever increasing complexity, have been undertaken seeking
illusionary perfection. No system will be perfect and good simple,
pragmatic solutions will succeed where more complex ones will
Compatibilitya tax system
should be consistent with other policy measures. New tax measures
should take into account the structure of existing taxes and regulation,
reworking them if necessary to minimise distortion
Equitythe tax system must
not result in competitive distortions between companies and sectors.
Transparencythe system must
be transparent so that there is national confidence. An imperfect
system with good transparency is to be preferred to any system
with poor transparency.