Memorandum from Friends of the Earth
1. Friends of the Earth (England, Wales
and Northern Ireland) is an environmental pressure group with
a membership of more than 113,000 and a network of 250 local groups.
We are part of Friends of the Earth International which has member
organisations in 61 countries.
2. We are strong advocates of environmental
tax reform as a crucial step in delivering a cleaner and better-protected
environment, a more dynamic and sustainable economy and improvements
in social inclusion and environmental justice. Our briefing series
"Blueprint for a Green Budget", published ahead of each
Budget and Pre-Budget Report, has been produced since 19961.
3. Since July 1997 the environment has been
placed "at the core of the Goverment's objectives for the
tax system"2. The Government's intention is to reform the
tax system to shift the burden of tax from economic activities
that should be encouraged, such as employing people, to those
that should be discouraged, such as environmental pollution.
4. The Government has committed to such
a tax-shift because it is convinced that as well as environmental
benefits it will "deliver a more dynamic economy . . . to
the benefit of everyone"3. For example, it can provide a
driver for delivering the objectives recently set out by the Department
of Trade and Industry concerning improved productivity in respect
to inputs of energy and materials4.
5. But the Government is at a crucial early
stage in this process of environmental tax reform. Two new environmental
taxes (the Climate Change Levy and Aggregates Levy) have been
introduced with associated cuts in employers' National Insurance
Contributions. At present these new taxes operate at a low rate
and the introduction of an escalator for the rate of a third green
tax (the Landfill Tax) has not been as part of a tax-shift package.
Consequently the tax burden has been shifted only marginally.
6. Following this welcome beginning the
Government has to take a long-term view of how a substantial shift
in the tax base can be achieved. It has to recognise which environmental
taxes will bring in a predictable income while changing behaviour
at the margin. It also needs to recognise that most green taxes
in the medium term will require that a proportion of the revenues
are reinvested to ensure the environmental goals of the tax achieved.
The recent public debate over fuel duty and the lack of investment
in public transport and provision for cycling and walking highlights
7. The Government, as a matter of urgency,
needs to set out a clear vision and coherent strategy for the
environmental modernisation of the tax system. The Statement of
Intent on Environmental Taxation, made three years ago, is no
longer sufficient as it only concerns the broad principles. The
Code for Fiscal Stability also requires redrafting to explicitly
include the need to remain within environmental limits. Without
such a vision and strategy the Government will be open to the
charge of being opportunistic rather than strategic in its use
of environmental taxation.
8. Most urgently the Government needs to
set out a strategy for developing and installing a comprehensive
system of carbon-based energy taxation. This is needed both to
deliver the substantial cuts in carbon dioxide emissions that
are required and to help the UK economy adapt and flourish as
improvements in energy efficiency and the expansion of renewable
energy generation drive economic change.
9. The Pre-Budget Report offered the Chancellor
an ideal opportunity to set out such a vision and strategy for
delivering a more dynamic economy and a cleaner environment. It
would have built on the Prime Minister's recent warning about
the environmental crisis and promise to push environmental issues
high up his political agenda. It would also have made the Government's
position clear ahead of the crucial Climate Change Summit in The
Hague. The opportunity was not taken. We hope this will be corrected
in Budget 2001.
10. The cuts in road fuel duty paid on low
sulphur diesel and low sulphur petrol will further jeopardise
the Government's manifesto commitment to cut carbon dioxide emissions
by 20 per cent by 2010 compared to 1990 levels. At Budget 2000
the `escalator' policy of increasing the rate above inflation
by a regular amount was abandoned. The Government's own calculations5
show that it is now likely to fail to achieve this key target
for tackling climate change.
11. This cut in road fuel duty for effectively
all diesel and a growing proportion of petrol will increase traffic
growth. This is on top of the increase in traffic growth from
28 per cent to 35 per cent between 1996 and 20106 caused by removing
the road fuel price escalator assuming no new measures are taken.
Investment in more efficient vehicles is also likely to be delayed
as a result. Figures from the car industry show that high fuel
taxes are starting to encourage the sales of more fuel efficient
12. Varying fuel duty rates to install price
differentials between fuels is a proven way of encouraging the
use of cleaner fuels. When the fuel duty escalator was in place
a price differential between low sulphur diesel and ordinary diesel
was installed while increasing the duty rates of both. Consequently,
the incentive to reduce mileage continued alongside the incentive
to use a cleaner fuel. In the Pre-Budget Report 2000 the Chancellor
has introduced an incentive for a cleaner fuel, in terms of sulphur
emissions, by reducing the rate rather than by increasing it by
less than ordinary petrol. Consequently, the incentive to drive
less has been reduced.
13. This runs counter to the Government's
commitment to cut carbon dioxide emissions. Earlier this year
the Dutch and British governments submissions to a European Commission
consultation on low-sulphur fuel both concluded that CO2
emissions were likely to rise as a result of early introduction
of low-sulphur fuels8.
14. In the Pre-Budget Report 1998 the Chancellor
stressed that fiscal measures on transport emissions needed to
be recognised that "growth in road traffic offsets the reduction
in emissions from individual vehicles". The Pre-Budget Report
2000 does not recognise this explicitly.
15. The Chancellor's commitment to install
further differentials for "alternative environmentally-friendly
fuels" is welcome in principle but we are concerned that
consultation over which these fuels might be restricted to "industry".
Any further differentials should not reduce the incentive to drive
16. This cut cannot be justified as being
more equitable. The Institute for Fiscal Studies has shown that
the poorest households would benefit the least from fuel tax cuts.
This is because fewer of these households own cars and those that
do drive less compared to middle income households9. In the UK
59 per cent of the poorest 40 per cent of households, do not own
a car10. The rural car-owning poor are affected disproportionately
by high fuel taxes, but a simple cut in fuel tax would be a blunt
and a very inefficient method of dealing with this.
17. One relief on road fuel duty that the
Chancellor did not make but which would help cut CO2
emissions, urban air pollution and congestion would be to extend
the fuel duty rebate to include school buses and express coach
services. It would also integrate with the Government's own transport
18. We were disappointed that the Chancellor
ruled out increasing the tax take from the oil and gas industry.
The threats of global climate change demand that the high rate
at which fossil fuels are exploited is reduced both immediately
and throughout this century. In the medium term Petroleum Revenue
Tax will continue to be an efficient revenue-raising tax. Reducing
the allowances and exemptions that exist and making a `windfall'
rate increase in response to the exceptional profits being made
with the price of oil so high would raise extra revenue and increase
the taxation of fossil fuels.
19. The UK tax regime for the oil industry,
a major contributor to climate change, remains one of the most
lenient in the world. The total allowances and exemptions from
the tax are estimated to cost £1.1 billion in 1999-2000.
This does not include the exemption for all fields approved for
development after 15 March 1993. Although Budget 2000 tightened
two loopholes in these exemptions it also granted two further
tax reliefs to the oil industry by extending capital gains roll-over
relief and introducing capital allowances for using machinery
and plant under an oil production sharing contract.
20. The extra revenues from closing these
loopholes and raising the rate could be used to invest in the
undoubted strength of the UK offshore engineering industry through
a major programme to develop offshore wind technologies. This
would also offer the opportunity to reinvest a proportion of tax
revenues from an industry which faces a slow decline and is a
principle cause of climate change to an industry of the future
with considerable export potential and which is a key part of
the solution to the threat of climate change.
21. The VED reforms announced in the Pre-Budget
Report can claim little environmental justification as the Chancellor
22. Friends of the Earth lobbied hard for
a set of differential rates in VED to encourage investment in
cleaner more fuel efficient vehicles. We welcomed the initial
reforms announced in Budget 2000. In this Pre-Budget Report, however,
the lower rate was extended to bigger cars and lorries received
an across the board reduction. The Chancellor would have done
better to reduce the rate for the cleanest and most efficient
vehicles by more and increased it for the most fuel hungry and
23. The claim that reducing tax on car ownership
is an environmental measure only holds if the tax burden is shifted
to car use and the Chancellor reduced both in the Pre-Budget Report.
24. Friends of the Earth has campaigned
over several years for a cut in VAT on the renovation and refurbishment
of empty dwellings. We welcome the cut to 5 per cent on residential
renovation and 0 per cent for those homes that have been empty
for at least 10 years. We also welcome the accelerated payable
tax credits for cleaning up contaminated land; the 100 per cent
capital allowances for creating `flats over shops' for letting;
and the consultations on other specific tax reliefs.
25. The Chancellor is overly optimistic
to imply that these VAT cuts together with the exemption from
Stamp Duty for house sales in the msot deprived areas will reduce
pressure of greenfield housing development. This will not come
close to providing house-builders with a significant incentive
to shift from greenfield to brownfield sites.
26. Introducing VAT at 5 per cent on new-build
housing with an exemption for the same target areas would have
installed such an incentive. Harmonising VAT rates for new-build
housing and renovation of empty homes at 5 per cent would also
have removed the remaining perverse incentive in favour of new-build
27. We welcome the Chancellor's rejection
of the latest voluntary package from the pesticide industry. Remaining
lawful and paying less are clear, strong and universal motivations
to comply with regulations and economic instruments. The three
motivations for compliance with voluntary measures put forward
by its advocates, peer group pressure, bottom-line benefits and
credibility, are not as clear, never as strong and usually only
felt by a small proportion of those who need to comply. In this
particular case as the pesticide industry has been asked to come
proposals that should include a reduction in its market it is
hardly surprising the result was so weak.
28. We are disappointed that the Chancellor
did not as a result announce public consultation on the design
of a package of measures that would accompany a pesticides tax.
The reinvestment of the revenues in measures to help farmers respond
to the tax incentive to reduce pesticide use is a crucial part
of such a package.
29. Experience from other countries, including
Sweden, Austria and Denmark, has shown that a pesticide tax package
of measures is a highly effective method of reducing pesticide
use. In Sweden and Denmark, reductions in total pesticide use
of 65 per cent over nine years, and 30 per cent over seven years,
respectively have been achieved.
30. Measures to encourage conversion to
organic farming can play a key role in the package. The rapidly
expanding market for organic produce offers farmers the opportunity
to meet consumers' preferences without paying such a tax. A proportion
of the revenues from a pesticide tax should be used to directly
support existing organic operations, and conversion from chemical
intensive systems to organic. Recently the Government set aside
£16 million to support farmers converting to organic systems
over a two year period but within demand was such that within
six months the total amount was accounted for. The research on
a pesticide tax commissioned by the Government11 suggested that
revenues would be in the range £84 to £131 million per
year which could comfortably support a scheme meeting such high
demand from farmers.
1. These briefings together with FOE's responses
to consultations on specific environmental taxes are available
2. HM Treasury, 2 July 1997 "Tax measures
to help the environment".
3. HM Treasury, 2 July 1997 "Environmental
TaxationStatement of Intent".
4. Department of Trade and Industry, 2000.
Sustainable Development Strategy.
5. Climate Change: Draft UK Programme.
6. Commission for Integrated Transport "National
Road Traffic Targets" paragraph 2 (November 1999).
7. Data from the Society of Motor Manufacturers
8. ENDS Daily, Sulphur-free fuel seen increasing
CO2 emissions, 12 October 2000.
9. Institute for Fiscal Studies `The petrol
tax debate' (September 2000).
10. Data from National Travel Survey.
11. ECOTEC Research and Consulting, 1999.
Design of a Tax or Charge Scheme for Pesticides. London, DETR.