Specific environmental tax areas
11. We have become increasingly concerned at the
interaction of different policy instruments in this area, and
the conflicting signals sent by lower energy prices as a result
of market reforms. The Climate Change Levy is particularly complex,
with its exemptions for renewables technologies, the associated
certificate trading mechanism, the large number of negotiated
agreements, and the ongoing extensive monitoring requirements.
The Government's rationale for some of this complexity was the
desire to implement it as a downstream tax so that the domestic
sector could be exempted. Yet, somewhat contradictorily, the new
Renewables Obligation will, over time, impose increased costs
on all customers, while introducing a similar but not entirely
compatible exemption and certificate trading system. The introduction
during 2002 of a UK Emissions Trading System will introduce further
complexities. We also note that the Government has no figures
on total compliance costs for Government or industry for these
energy-related policy instruments.
12. We are concerned about the extent to which
confusion and inefficiency can result from the growing complexity
of policy instruments in the energy sector. The Government might
therefore wish to explore the scope for rationalising these instruments
Table 1: Pre-Budget 2001the Government's
ten consultation measures
Options for a lorry road-user charge"Modernising the Taxation of the Haulage Industry", consultation document by HM Treasury. Launched on PBR day.
This is a formal consultation, but the proposal is not new. It was announced in Pre-Budget 2000 and again in Budget 2001.
Motorcycle VED"Reforming Motorcycle VED", consultation document by HM Treasury.
This is a formal consultation, launched on PBR day, but the proposal is not new. It stems from the Government's 1998 consultation on reforming VED to ensure a cleaner environment. VED for cars and lorries has already been reformed in previous budgets.
Tax treatment of employer-provided busesconsultation document by Inland Revenue.
The consultation was launched before the Pre-Budget Report.
Abandoned vehiclesconsultation document by DTLR and Home Office.
The consultation was launched in October 2001, well before the Pre-Budget Report.
Future low-carbon vehiclesPowering Future Vehicles, consultation document by DTLR, DEFRA, DTI and HM Treasury.
A major document, launched December 2002. It does, however, continue the debate which was launched in this area by Pre-Budget 2000.
Fuel scale chargesconsultation document by Inland Revenue.
This is a formal consultation, but on a minor issue which did not even warrant a press release by Inland Revenue. Fuel scale charges have been subject to an escalator which is due to end next yearhence the consultation.
Landfill tax credit schemeconsultation, probably in form of consultation document involving DEFRA and HM Treasury.
As at 30 January 2002, no consultation had been issued. The issue is hardly new, and the Pre-Budget Report 2000 and Budget 2001 announced the Government's intention to replace the existing scheme.
Green Technology Challengeinformal discussion/consultation planned with industry and other groups to define technologies to benefit from enhanced capital allowances (covering three areaseach likely to be a separate process), involving HM Treasury, Inland Revenue, DEFRA and DTLR, between PBR and Budget.
Not a formal consultation, or a new proposal. The Green Technology Challenge was announced in Budget 2001. A formal consultation was issued on 25 July 2001, with a closing date of 28 September 2001.
Incentives for cleaner vans, such as VEDinformal discussion planned with stakeholders such as manufacturers and users, involving DTLR, DVLA and HM Treasury, between PBR and Budget.
Not a formal consultation, or a new proposal (see comments above on lorry road-user charging).
Green Fuel Challengecontinued discussion on one remaining pilot project bid ongoing and commitment to launch new round of bids for pilot project status in spring 2002, led by Customs and Excise.
Not a formal consultation, or a new proposal. The Green Fuel Challenge was announced in Pre-Budget 2000, and again in Budget 2001.
Source: Environmental Audit Committee's analysis based on HM Treasury
13. Similar complexities are also featured in other areasfor
example, the use of Enhanced Capital Allowances (ECAs). In July
2001, the Treasury launched its Green Technology Challenge (GTC)
consultation (a commitment in Budget 2001) with the aim of offering
enhanced firstyear capital allowances for further environmental
objectives and new technologies. In the PreBudget Report
2001, the Government announced that the GTC will be focussed on
three areasenergy efficiency, tackling climate change and
improving air quality, and reducing water use and improving water
quality. It is unclear to us how the proposals for tackling climate
change and improving air quality under this scheme are going to
relate to the existing ECAs available for energy saving technologies
under the Climate Change Levy. We welcome the Treasury's acknowledgement
in oral evidence that there might be scope for rationalisation
here. We are concerned
at the potential overlap between schemes for Enhanced Capital
Allowances, and recommend that the Treasury should rationalise
them to avoid confusion and unnecessary complexity.
14. In our report last year on the Pre-Budget Report 2000, we
focussed on fiscal incentives to promote cleaner road fuels and
the need for a strategy to move towards a hydrogen economy.
We recognise the overwhelming popular pressures which led to the
abandonment of the fuel duty escalator. But the continuing growth
of car traffic and associated emissions remains one of the most
serious environmental problems facing the UK. In this context,
the Government's incremental approach to fuel duties, and even
its reform of vehicle excise duty, appear inadequate. In the absence
of the fuel duty escalator and the undesirability or impossibility
of a vast expansion in the road programme, the Government will
need to consider all options for containing the growth of road
traffic while simultaneously encouraging the provision of better
Pesticides, fertilisers, and water
15. Water abstraction and diffuse pollution from pesticides and
fertilisers were two potential areas for environmental taxes which
the Government began to explore from 1997.
We have highlighted previously the substantial costs borne by
water companies (and ultimately the public) as a result of the
need to remove pollutants from the water supply. We have also
charted the manner in which ideas for such taxes have been successively
abandoned. This culminated
in the Government's decision prior to Budget 2000 to shelve the
introduction of a pesticides tax and accept instead proposals
for self-regulation put forward by the pesticides industry itself.
16. In our Fourth Report, 1999-2000, we expressed our astonishment
at the manner in which this decision was made.
It was announced by the Prime Minister in a speech to the National
Farmers' Union only two weeks after the then Financial Secretary
had told us that he had not yet begun to consider the voluntary
proposals and that they would require very careful scrutiny. Indeed,
the incident prompted an exchange of letters between the Chairman
of this Committee and the Financial Secretary.
We note that no reasons have ever been given by the Government
for its decision to shelve the introduction of a pesticides tax
and adopt instead industry proposals for a package of self-regulatory
measures. As part of its evaluation of progress in this area for
Budget 2002, the Government should set out why it considers a
'partnership' approach with industry is a more suitable policy
instrument than a tax.
17. The voluntary package of measures to reduce the use of pesticides
was implemented on 1 April 2001 and will run initially for five
years. It is overseen by a steering group comprising the signatories
to the package and representatives of an equivalent number of
environmental organisations, under an independent chairman. The
Government will review progress on the package in the run up to
Budget 2002, to assess whether it is delivering significant environmental
benefits over and above those that would result from introducing
a pesticides tax.
18. We were pleased to hear the Financial Secretary assert so
positively that a pesticides tax was still a real option. "I
really do want to stress that we have by no means ruled out a
Pesticides Tax. It remains an option, and noone should be
under any illusion that if the partnership approach does not work
and if we are not satisfied in making that assessment that it
is working then we will take the necessary measures.".
His intention to keep under constant review the design work on
a possible tax which was carried out in 1999"so that
it will not take long to get it off the shelf: the dust will not
be allowed to accumulate on it"is also welcome.
19. The independent steering group overseeing the voluntary package
was to have provided two reports to Ministers by 1 February 2002
in order to inform the Government's decisions on the pesticides
agenda. We recommend
that the Government publish both progress reports on the voluntary
pesticides partnership approach as soon as possible in order to
inform public debate on this issue.
20. We also asked the Financial Secretary about the criteria which
would be used for evaluating the success of the voluntary approach.
The Treasury's supplementary note sets out these criteria as:
- the uptake of the measures within the package;
- the coverage they have achieved;
- their effectiveness in delivering environmental improvements;
- the cost of delivering those improvements.
21. We are disappointed that the criteria listed above did not
include any mention of the very substantial costs for cleaning
up pollution which water companies currently bear. This appeared
to conflict with the Financial Secretary's assertion that it would
be surprising if account was not taken of such costs.
We recommend that the Government carries out its own study
to quantify the cost externalities associated with the use of
pesticides and fertilisers. In addition, it should clarify where
it stands on the 'polluter pays' principle in relation to pesticides
22. We also asked the Financial Secretary whether the Treasury
had carried out any recent research on the scope for a fertiliser
tax, and were disappointed to hear that there had been no activity
in this area. In view of the onerous new requirements of the Water
Framework Directive, the Government will need to develop a strategy
for reducing the use of pesticides and fertilisers to a level
at which the water catchment quality targets can be met. As yet,
there is little sign of a joined-up approach to using fiscal measures
in this area to bring about the long-term changes in agricultural
practice that will be needed. More generally, there would be a
good opportunity in the context of the broader countryside and
food policy reviews now under way to consider how far fiscal policies
might assist a transition to more environmentally friendly agriculture.
23. The landfill tax was introduced in 1996. The initial rate
of tax was set at £7 a tonne for active wastes and £2
a tonne for inert wastes. The rate for active wastes was subsequently
increased, and in Budget 1999 the Government announced that it
would rise by £1 each year with a review in 2004. The rate
is now £12 a tonne. The current proceeds from the tax fall
well below the cost of the 0.2% cut in National Insurance contributions
which it was originally intended to balancethus showing
that rises in the tax rate have been insufficient even to preserve
its revenue neutrality.
24. A number of key commentators have suggested that the tax should
be set at a far higher level. The House of Commons Environment
Sub-Committee recommended in March 2001 that the tax be increased
to at least £25 per tonne over the next 5 years with all
funds from the increased tax rate going to the Landfill Tax Credit
Scheme. In their
August 2001 report, the Advisory Committee for Business and the
Environment (ACBE) recommended that by 2010 the cost of landfill
(tax or equivalent extra costs) should be three times the level
currently planned for 2004.
Significant rises are also supported by the waste industry itself,
and by environmental organisationsthough some think this
needs to be linked to the introduction of an incineration tax
to maintain differentials.
Such a rise would also bring the UK more into line with countries
such as Denmark and Holland, where the rate of landfill tax is
substantially higher. We impressed upon the Financial Secretary
the need to take action now, and were encouraged by his acknowledgement
of our concern.
25. Major shifts in relative price will be required if the objectives
and legally binding targets on landfill reduction and increased
recycling are to be met. At the moment, the whole waste strategy
is in danger of stalling. Local authorities and waste management
companies are all waiting for clear guidance on the appropriate
strategies to pursue, and clear economic pricing signals and resources
to enable them to implement these strategies. We note that the
Performance and Innovation Unit (PIU) is currently reviewing the
national waste strategy, including the economic and regulatory
framework required to meet European Union (EU) targets and deliver
more sustainable waste management. It is expected to complete
a preliminary examination of the strategy's economic implications
by February 2002 to feed into Budget 2002. The Treasury must
take advantage of the widespread consensus among both industry
and environmental groups that the rate of the landfill tax should
be radically increased, and the Government should not wait until
2004 to do so. To maintain appropriate differentials and prevent
incineration becoming an easy option, the Treasury should explore
the scope for introducing an incinerator tax.
26. Those subject to the tax can currently claim up to 90% tax
credit against donations which they make to approved environmental
bodies carrying out eligible projects. There has been some concern
over the effectiveness of this scheme, and we were interested
that Mr Boateng was rather more positive about it than the previous
Financial Secretary appeared to be.
In any event, the Government will be consulting imminently on
the shape of a replacement scheme which could either be in the
form of a new public spending programme, or a refocussed use of
tax credits against the landfill tax liability so as to enable
private sector investment to provide most of the facilities. We
would be in favour of a new tax credit scheme to stimulate extra
investment in recycling and disposal, provided that the weaknesses
of the existing scheme are adequately addressed. The Government
might wish to recycle some of the extra proceeds from raising
the landfill tax into such a scheme.
27. Inert waste is still charged at £2 a tonnea rate
unchanged since the introduction of the tax. Moreover, Budget
1999 introduced a total exemption from tax for inert waste used
to restore landfill sites in order to ensure a sufficient supply
of suitable waste materials. The low or zero rate of tax acts
as a perverse incentive to landfill secondary waste rather than
recycle it, and it therefore conflicts directly with the Aggregates
Levythe primary objective of which is to reduce primary
extraction and encourage reuse of secondary material. The Financial
Secretary noted our concern about the fiscal treatment of inert
waste, and committed himself to looking into this area and informing
us of the outcome.
When setting a much higher rate for the landfill tax, the Treasury
must also review the fiscal treatment of inert waste, and the
extent to which it acts as a perverse incentive to landfill rather
than reuse secondary material.
Urban regeneration and greenfield development
28. PreBudget 2001 implements the Government's proposals
for a reduced rate of Stamp Duty to encourage regeneration in
deprived areas. We endorse this measure, despite its limitationsparticularly
in respect of residential properties. In many of the most deprived
wards in the country most houses would not even be eligible for
Stamp Duty at all, as their value would be far less than the £60,000
minimum threshold. Its effectiveness will therefore mainly depend
on its impact on businesses.
29. We welcome the fact that the Government has taken on board
the concerns we expressed to the previous Financial Secretary,
and is now proposing to introduce a cap whereby residential properties
sold for more than £150,000 will not be eligible.
We are, however, somewhat surprised at the Government's volte
face on this issue as, only in March last year, Mr Timms told
us "I would not favour...attempting to draw a distinction
between residential and business properties in terms of this exemption.
I think that is an unnecessary complexity".
It will be interesting to see, in due course, how appropriately
the list of deprived areas will operate in practice.
30. We note the other related measures included in the PreBudget
Reportsuch as the new Community Investment Tax Credit,
the proposal to establish a £40 million Community Development
Venture Capital Fund, and the possible creation of 'Business Improvement
Districts'. In developing these measures, we expect the Government's
commitment to sustainable development to be reflected fully in
the way environmental objectives are incorporated alongside social
and economic ones. They form, of course, only part of a wider
web of policy instruments aimed at stimulating development and
addressing deprivation (including the role of Regional Development
Agencies, Urban Regeneration Companies, and local authorities).
We are interested in how these policies will operate, and may
return to this subject as part of a wider examination of the measures
to encourage regeneration in relation to sustainable development.
31. We remain concerned that the Government has still not addressed
the fundamental perverse VAT incentives between greenfield and
brownfield development which still exist. The Government has admittedly
introduced some concessions in VAT rates for development on polluted
brownfield sites, and for the conversion of buildings for residential
occupancy. However, it is still the case that new build on greenfield
sites is zero VAT rated.
32. We asked the previous Financial Secretary in March 2001 why
he had not done more to address this point, which many saw as
the fundamental recommendation of the Rogers report.
He stated that "it is the case that we do not plan currently
to make big changes to the VAT base. That would require a lot
of detailed research on the likely social, economic and environmental
impacts of such a move".
The Treasury effectively confirmed in a subsequent memorandum
that it had not carried out any research in this area.
Yet, in our view this is just the kind of research which it should
be undertaking if it is seriously committed to an environmental
tax strategy. We recommend that the Treasury, as a matter of
some urgency, carry out research on the impact of removing the
perverse fiscal incentive to build on greenfield sites.
Business taxationcarrots and sticks
33. In discussing ECAs above, we have already referred to the
potential overlap between the GTC and the Climate Change Levy.
With regard to the role of ECAs, in past reports we have pointed
out that they offer a timing benefit for companies, but do not
actually reduce the amount of tax paid.
They allow companies to set their eligible investment against
their tax liability for the first year and defer that amount of
the tax due to subsequent years. The Government, in turn, only
loses a small amount of interest due to the deferral. The real
cost to the Government of a £100 million ECA scheme, for
example, is therefore only in the order of £5 million in
the first year, and thereafter the cost actually falls away to
nothing, as tax receipts in subsequent years will be greater than
they otherwise would. In its consultation response on the GTC
which it submitted to the Government, the Confederation of British
Industry commented: "Underinvestment in R&D and
innovation and progression of technologies to the market is deeprooted
in the UK and will require more than just enhanced capital allowances
(ECA) to solve, but it is a step in the right direction".
The Environmental Industries Commission provided some interesting
comments on ECAsnot least the point that they are only
of any use to those companies who are making a profit!
The Government will need to offer greater financial incentives
to businesses than those provided by Enhanced Capital Allowances,
if it is to promote effectively greater investment in environmentfriendly
34. It was therefore with some interest that we noted the proposals
in the Pre-Budget Report 2001 for an R&D tax credit for larger
companies, and we questioned the Financial Secretary as to whether
the scheme would incorporate environmental criteria. In his evidence
to us, he asserted that it would do so.
The Treasury subsequently denied this, and instead suggested that
increased R&D will result in environmental benefitsa
view which we consider patently absurd.
We urge the Government to reconsider the focus of the R&D
tax credit scheme for larger companies and orientate it more specifically
on environmental objectives.
The regulatory impact assessment for the Renewables Obligation,
for example, fails to include any figures for either start-up
or recurrent costs to business. See The Renewables Obligation
Statutory Consultation, DTI, August 2001, Annex A, paras 28-32. Back
Q. 143. Back
Second Report from the EAC, Session 2000-01, on The Pre-Budget
Report 2000: Fuelling the Debate, HC 71. Back
Economic instruments for water pollution, DETR 1997. Back
Eighth Report from the EAC, Session 1999-99, on The Budget
1999: Environmental Implications, HC 326, pp. viii-ix; see
also Fourth Report from the EAC, Session 1999-2000, on The
Pre-Budget Report 1999: Pesticides, Aggregates and the Climate
Change Levy, HC 76, 1999-2000, pp. x-xvii. Back
Ibid., paras 11-12. Back
Ibid., pp. 233-234. Back
Q. 172. Back
HC 333-i, 2000-01, p. 20. Back
Ev. 14. Back
Q. 175. Back
The Government's 2001 Budget Report sets out the estimated revenues
for landfill tax in 2000-01 and 2001-02 as £0.5 billion (table
C7, p. 192). The current cost of a 0.2% cut in employer NI contributions
is £0.7 billion (see EAC, HC 333-i, pp. 19-20). Proceeds
from the landfill tax are therefore about £200 million lower
than they would have been had revenue neutrality been maintained. Back
Fifth Report from the Environment, Transport and Regional Affairs
Committee, Session 2000-01, on Delivering Sustainable Waste
Management, HC 36-I, para 136. Back
ACBE, Resource Productivity, Waste Minimisation and the Landfill
Tax, August 2001, p. 5. Back
Environmental Services Association, Manifests for Achieving
Environmental Sustainability, June 2001. Back
For example, see PIU, Resource Productivity: Making More With
Less, November 2001, p. 95 and Fifth Report from the Environment,
Transport and Regional Affairs Committee, Session 2000-01, on
Delivering Sustainable Waste Management, HC 36-I, para
QQ. 191-192. Back
QQ. 196-197. See HC 333-i, 2000-01, Q. 68 for the comments of
the previous Financial Secretary. Back
QQ. 198-199. Back
HC 333-i, 2000-01, QQ. 70-76. Back
HC 333-i, 2000-01, Q. 75. Back
The Report of the Urban Task Force, DETR, June 1999. Back
HC333-i, 2000-01, Q. 81. Back
Ev. 14. Back
Sixth Report from the EAC, Session 1999-2000, on Budget 2000
and the Environment, HC 404, para 38. Back
Op. cit. Back
Ev. 40. Back
QQ. 151-152. Back
Ev. 14. Back