Select Committee on Environmental Audit Second Report


Specific environmental tax areas

Energy

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.[9]

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 over time.







Table 1: Pre-Budget 2001—the Government's ten consultation measures


  GOVERNMENT CONSULTATION

  OUR COMMENT

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 buses—consultation document by Inland Revenue.

The consultation was launched before the Pre-Budget Report.

Abandoned vehicles—consultation document by DTLR and Home Office.

The consultation was launched in October 2001, well before the Pre-Budget Report.

Future low-carbon vehicles—Powering 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 charges—consultation 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 year—hence the consultation.

Landfill tax credit scheme—consultation, 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 Challenge—informal discussion/consultation planned with industry and other groups to define technologies to benefit from enhanced capital allowances (covering three areas—each 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 VED—informal 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 Challenge—continued 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 Information



13. Similar complexities are also featured in other areas—for 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 areas—energy 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.[10] 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.

Transport

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.[11] 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 public transport.

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.[12] 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.[13] 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.[14] 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.[15] 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.".[16] 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.[17]

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.[18] 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; and
  • the cost of delivering those improvements.[19]

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.[20] 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 and fertilisers.

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.

Waste

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 balance—thus showing that rises in the tax rate have been insufficient even to preserve its revenue neutrality.[21]

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.[22] 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.[23] Significant rises are also supported by the waste industry itself,[24] and by environmental organisations—though some think this needs to be linked to the introduction of an incineration tax to maintain differentials.[25] 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.[26]

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.[27] 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 tonne—a 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 Levy—the 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.[28] 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 limitations—particularly 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.[29] 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".[30] 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 Report—such 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.[31] 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".[32] The Treasury effectively confirmed in a subsequent memorandum that it had not carried out any research in this area.[33] 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 taxation—carrots 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.[34] 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".[35] The Environmental Industries Commission provided some interesting comments on ECAs—not least the point that they are only of any use to those companies who are making a profit![36] 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 technologies.

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.[37] The Treasury subsequently denied this, and instead suggested that increased R&D will result in environmental benefits—a view which we consider patently absurd.[38] 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.


9   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

10   Q. 143. Back

11   Second Report from the EAC, Session 2000-01, on The Pre-Budget Report 2000: Fuelling the Debate, HC 71. Back

12   Economic instruments for water pollution, DETR 1997. Back

13   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

14   Ibid., paras 11-12. Back

15   Ibid., pp. 233-234. Back

16   Q. 172. Back

17   IbidBack

18   HC 333-i, 2000-01, p. 20. Back

19   Ev. 14. Back

20   Q. 175. Back

21   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

22   Fifth Report from the Environment, Transport and Regional Affairs Committee, Session 2000-01, on Delivering Sustainable Waste Management, HC 36-I, para 136. Back

23   ACBE, Resource Productivity, Waste Minimisation and the Landfill Tax, August 2001, p. 5. Back

24   Environmental Services Association, Manifests for Achieving Environmental Sustainability, June 2001. Back

25   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 124. Back

26   QQ. 191-192. Back

27   QQ. 196-197. See HC 333-i, 2000-01, Q. 68 for the comments of the previous Financial Secretary. Back

28   QQ. 198-199. Back

29   HC 333-i, 2000-01, QQ. 70-76. Back

30   HC 333-i, 2000-01, Q. 75. Back

31   The Report of the Urban Task Force, DETR, June 1999. Back

32   HC333-i, 2000-01, Q. 81. Back

33   Ev. 14. Back

34   Sixth Report from the EAC, Session 1999-2000, on Budget 2000 and the Environment, HC 404, para 38. Back

35   Op. citBack

36   Ev. 40. Back

37   QQ. 151-152. Back

38   Ev. 14. Back


 
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