EAC SECOND REPORT
THE PREBUDGET REPORT 2000: FUELLING
Responses to recommendations and conclusions
(a) The Committee has found no evidence that the
Government has carried out a comprehensive environmental appraisal
of its PreBudget measures which would even satisfy its own
guidance in this area. For example, the PreBudget Report
does not refer to any assessment of:
the expected effect
of the duty cuts on car use;
the local air quality benefits of Ultra
Low Sulphur Petrol (ULSP) against the additional carbon dioxide
emissions generated in its production and how far these will be
counteracted by more fuel efficient engines in the longer term;
how far the new VED rates for lorries reflect
their environmental costs.
The Budget sets out an environmental appraisal of
the Government's Budget measures. In response to the specific
points you raise:
Effect of duty cuts on car use:
The Government expects the duty cuts to have only
a minimal effect on car use: modelling work by the DETR suggests
that the reduction in fuel duty will increase traffic by around
0.2% by 2010 relative to 2000 levels. This is an estimate for
England only which represents 85% of traffic in Great Britain.
This is against a background increase of 17% between 2000 and
2010 (17% figure includes impact of 10 Year Plan).
Benefits of ULSP:
Any small increase in CO2 emissions from
increased desulphurisation at the refinery should be offset over
time by more efficient refining processes. Furthermore, as low
sulphur fuel is required for the effective use of GDI technology,
the CO2 benefits from the adoption of this technology
should over time outweigh any minor CO2 increase at
Lorry VED reforms:
The new lorry VED scheme will improve the environmental
signals that lorry VED sends out. Vehicles that cause higher levels
of track and environmental damage will pay higher rates of VED
than those causing less damage.
(b) The Committee is not satisfied that the Government
took its PreBudget decisions on fuel duty, Vehicle Excise
Duty (VED), and company car taxation on the basis of a comprehensive
appraisal of the tradeoffs between its social, economic
and environmental objectives. It is therefore difficult for the
Committee to be convinced that the PreBudget transport measures
will have the overall, positive environmental impact which the
(c) With so little evidence presented, we can
only rest on the Government's earlier views that higher fuel prices
have curbed demand for fuel, helped decouple levels of traffic
and economic growth and are the best way known to encourage fuel
efficiency. The relevant PreBudget press notice states that
"the environmental benefits of higher fuel prices must be
balanced with the Government's social and economic objectives".
However, this balance has never been set out.
The Chancellor considers many different variables
when making decisions on taxation. Therefore it is not possible
to set out in a formal equation which factors are considered or
the relationship between them: just as we do not do this for most
other taxes or indeed spending decisions. It is a complex relationship.
The Government has to consider other environmental policies and
relative priorities; other social concerns and relative priorities;
and a range of economic factors.
(d) The Committee is disappointed that the Government
only highlighted the revenueraising aspects of fuel duty
during the recent fuel crisis and neglected to make the link to
its role in meeting the Government's environmental objectives.
The Government agrees that there is a need for all
advocates of environmental policies to make their case more forcefully.
(e) The Committee welcomes the Financial Secretary's
assurance that the Treasury would reconsider the need for a fuel
duty escalator in the light of a future sharp fall in the price
of crude oil. If this assurance were formalised it would salvage
some form of longterm pricing signal. This should be coupled
with a commitment to developing public transport and alternative
The environmental benefits of higher fuel prices
must be balanced with the Government's social and economic objectives.
Hence since PBR 1999 decisions on future changes in fuel duty
are taken in the light of environmental, economic and social objectives.
In meeting these objectives the Chancellor considers many different
variables when deciding fuel duty levels. One of these is the
oil price. But the oil price is not the only factor.
However, there is a good reason why the Government
should not set a target pump price. This would send a signal to
OPEC about how much it can squeeze production to maximise its
profits and lead to the erosion of fuel duty revenue and a transfer
of resources from the UK to OPEC
In the 10 Year Plan for Transport the Government
has set out a major programme for investing in public transport
as well as developing viable alternative greener fuels through
the Green Fuel Challenge.
(f) The Committee is unconvinced by the Government's
justification for further reducing the duty on ULSD ie. to maintain
the differential between diesel and petrol. The Committee can
therefore only conclude that this move was politically motivated
to address the concerns of the hauliers. Our impression is strengthened
by the Government's recent decision to match any reduction in
duty on ULSP that is announced in the Budget with a reduction
in duty on unleaded petrol for a temporary period until 14 June
The Government reduced the duty on Ultra Low Sulphur
Diesel by 3p/l to maintain the existing balance between the duty
rates on the main forms of petrol and dieselfollowing the
3p/l cut in duty on Ultra Low Sulphur Petrol since Budget 2000.
The Government believes that the existing duty balance is correct
because it reflects the fact that diesel and petrol have different
environmental merits. Diesel cars tend to produce less CO2
than their petrol equivalents, but more emissions of nitrogen
oxides and particulatesthe two air pollutants of most concern.
Other policy instruments address the petroldiesel balance
and the Government would not want to distort their effect by changing
the duty balance.
The duty reduction on unleaded is temporary and will
end on 14 June 2001. The duty reduction is necessary to guard
against any disruption to the wholesale and retail markets in
the final stages of transition to ULSP. By 14 June 2001 the Government
expects ULSP to be available to all petrol retailers.
(g) The Committee concludes that the Government's
approach to Vehicle Excise Duty needs further work. The proposals
for VED for lorries will better gear the tax to the relative environmental
costs of different lorries. However, the total environmental impact
of the tax will be greatly reduced if, as announced, it is cut
by half overall. The economic rationale for this seems obscure
in the light of the Environment, Transport and Regional Affairs
Committee report and the DTI's evidence to the Trade and Industry
Committee. In environmental terms, the move flies in the face
of the estimates of the National Economic Research Associates
(NERA) report and, therefore, the Polluter Pays Principle.
The new VED scheme will improve the environmental
signals that lorry VED sends out. Vehicles that cause higher levels
of track and environmental damage will pay higher rates of VED
than those causing less damage. The restructuring of the bands
has taken into account the findings of the NERA report into lorry
track and environmental costs. In longer term, the Government
will review the operation of the Reduced Pollution VED discount
and intends to introduce lower rates for new Euro IV vehicles
from around 2004.
Furthermore, the first allocation from £100
million Haulage Modernisation Fund shows that the Government is
committed to reducing the environmental impact of the UK haulage
industry, through earmarking up to £30 million for retrofitting
older lorries operating in areas of pool local air quality and
£15 million for fuel efficiency advice that should reduce
(h) The Committee welcomes the changes to company
car taxation and the arrangements for the business use of private
cars which will reduce the incentive for unnecessary motoring.
The Committee recommends that the impacts of these new incentives
(social, environmental and economic) are regularly monitored and
reviewed to assess how far they are changing behaviour in line
with the Government's policy objectives.
The Government welcomes the Committee's recognition
that the changes to company car taxation support cleaner greener
motoring. The Government intends to monitor the impacts of this
measure, as it does with any tax measure. An extensive evaluation
of the reforms to company car taxation and taxation of business
mileage payments will be undertaken through analysis of Inland
Revenue data and by surveys of employers and employees.
(i) Most witnesses agreed on the key stages of
evolution that the motor car will undergo in the future: ultra
clean vehicles by 2005, breaking the 100 mile per gallon barrier,
and then to carbonfree emissionwith hydrogen as the
front runner. The oil and motor industry seems to be agreed that
hydrogen is likely to be the fuel of the future. However, there
is no real consensus on how the UK might get to a hydrogen economy,
what type of hydrogen systems should be used (and therefore the
supply infrastructures that will be required), and what, if any,
interim steps are necessary.
In the summer, the Government will issue a Powering
Future Vehicles consultation paper. This will consider the Government's
role in relation to the move to a low carbon transport system.
It will focus on fuel cell, hybrid and advanced battery vehicles;
and identify what the barriers are to the development, delivery
on to the market; and consumer takeup of these vehicles.
Following consultation, the Government will publish a Powering
Future Vehicles Strategy by the end of the year.
(j) The Committee welcomes the Chancellor's Green
Fuel Challenge as positive, fiscal incentive to bring new fuels
to market. The "well to wheel" approach should help
to ensure that the environmental and social tradeoffs are
clear for whichever fuels are chosen.
The Green Fuels Challenge was widely welcomed. The
Government is keen to stimulate interest in developing and producing
profitable alternative fuels which offer environmental benefits
over current conventional fuels.
(k) The Committee notes the Environment Minister's
assurance that the Green Fuel Challenge is not formally restricted
to fuels relying on existing infrastructures. However, the Committee
recommends that the Government seeks a suitable forum to debate
and develop a longterm strategy for alternatives to fossil
fuels in road transport and the policy changes which would be
needed to realise such a strategy.
The Powering Future Vehicles consultation paper and
strategy will address these issues.
(l) The Committee recommends that the Government
encourages the Advisory Committee on Business and the Environment
(ACBE) to consider how the work of bodies such as the Cleaner
Vehicles Task Force, Foresight Vehicle Programme and Carbon Trust,
supported by the assessments resulting from the Green Fuels Challenge,
could be coordinated to this end in the course of its work
to develop a new framework for promoting the low carbon economy.
This framework needs to take account of tax and spending decisions
designed to encourage the use of hydrogen and other forms of transport
with lower carbon emissions.
One of the Government's key aims is to take steps
towards a low carbon economy, and the development of transport
fuels and technologies that can offer significant environmental
benefits in the longer term is part of this.
In achieving this aim, the Government recognises
the need to take a strategic approach to the longterm development
of greener transport fuels and technologies. The Powering Future
Vehicles Strategy will draw on the work of a number of bodies,
and responses to the consultation process, and will set out this
(m) The Government's response to us on VAT and
energy efficiency is not persuasive nor even credible. Having
accepted the principle of a reduced rate of VAT on the installation
of energy saving materials, the Government should now extend the
rather limited list of eligible technologies to include materials
and equipment with significant energysaving featuresas
is the case with such installations under its own schemes.
The reduced rate of 5 per cent applies to the installation
of energy saving materials in all homes. It is limited to installations
of certain goods (insulation materials, draught stripping, central
heating and hot water system controls, solar panels, and wind
and water turbines) whose primary purpose is energy saving.
The VAT reductions are a targeted measure where the
main purpose is to deliver energy savings. It is not obvious that
expanding the reduced rates would deliver effective, targeted
results. Furthermore, to extend the reduced to goods whose energy
saving potential is the secondary purpose would blur the clear
borderline which currently exists and would inevitably lead to
calls for the relief to be further extended to other products
with lesser energy saving potential. Such a measure would be extremely
expensive and the lost revenue would have to be made up from elsewhere.
The new Green Technology Challenge announced in Budget
2001 offers the opportunity to expand the support for energy saving
A wider range of goods qualify for relief when installed
under grantfunded schemes, targeting resources where they
are needed most, by the less welloff and pensioners.
(n) We recommend that the Chancellor allows reference
to this Reporta 'tag'to appear on the Order Paper
on Budget Day.
The Government was unwilling to 'tag' the Report
to the debate on the Budget Resolutions because it would have
given undue prominence to a select committee report which had
a relatively narrow focus. The Committee's Report would have been
the only document which was tagged, giving it a disproportionate
significance in Parliamentary terms in the wider context of the
Budget Statement and the ensuing fourday debate.
(o) We regret the decision not to accept Lord
Rogers' recommendation for the harmonisation of VAT on new build
and residential conversions and we recommend that the Government
looks at this again.
Under current law, conversions are standard rated
for VAT and new houses are zero rated.
The package announced in the Budget, worth £1
billion over 5 years, represents a formidable response to the
recommendations made by Lord Rogers and goes a significant way
in contributing to the Government's regeneration objectives. It
targets resources where the market failures are greatest and where
they will do the most good. It is an ambitious package and has
been widely welcomed. However, the Government has no current plans
to make radical changes to the VAT base. That would require detailed
research into the likely social, economic and environmental effects.
(p) The Treasury's environmental appraisal of
its budget measures appears to be little more than a summary list
of the impacts of its environmental measureseven at that
there are some significant presentational flaws.
The Government carefully considers the environmental
impact of all Budget measures and in table 6.2 describes the impact
of measures on the environment whether these be positive or negative.
Furthermore, the Government does not believe
there is any clear value added by having a long list of measures
with 'No significant environmental impact' printed alongside
(q) The Treasury should improve the presentation
of its environmental appraisals as set out below:
The Government has responded to the EAC's concerns
with the presentation of Tables 6.1 and 6.2 of Budget 2001, which
it hopes the Committee will welcome.
setting out a clear
protocol for when and how measures are included and assessed to
avoid accusations of data manipulation;
The Government's position on the presentation of
the environmental appraisal table of Budget measures is quite
clear. Measures are included where they have a significant environmental
impact or serve an environmental purpose.
The table includes all such measuresalthough
it does not include measures which are subject to consultationselecting
particular options could give a misleading signal of the Government's
between overall impact and changes made (ie. where benefits remain
but have been reduced);
The Government has responded to criticism from the
EAC that changes in estimates of environmental impacts when the
FDE was abolished in PBR99 were not easy to follow. Government
has given detailed evidence to EAC on this. And table 6.2 of Budget
2001 sets out clearly the impact of carbon emissions of both the
fuel duty escalator (1996-99) and the Budget 2001 transport package.
setting out full
and clear references to supporting data and analyses; and
The footnotes to Tables 6.1 of Budget 2001 identify
nine separate strategic statements and analysis of Government
policy. The footnotes to Table 6.2 identify the source of every
one of the quantified impacts.
between measures in terms of the stage of policy development that
they have reached (consultation, announcement or implementation).
The Government is committed to appraising the environmental
impact of all proposed budget measures. In table 6.2 the Government
has implemented or fully intends to implement every measure identified
in Table 6.2 of Budget 2001.
(r) We have seen no evidence of any action on
the commitment to evaluate environmental measures annually. We
recommend that the Treasury's list of green budget measures start
to include information on what has been achieved (outturn against
estimate) for those measures that have been implemented. At the
very least reference should be made to where such data is published.
It is hard to understand the EAC's recommendation
as every PBR and every Budget includes the latest and best environmental
appraisal of Budget measures to date.
Furthermore details of references can be found in
the footnotes to Table 6.2, which identifies the source of every
one of the quantified impacts.
The Government is fully committed to the environmental
appraisal and evaluation of all Budget measures and has set out
the appraisal clearly but obviously cannot consider outcomes until
the measures have been fully implemented.
(s) The Treasury should demonstrate, perhaps initially
as a oneoff exercise for the next PreBudget Report,
how it appraised the environmental implications of all its proposals.
This would increase the confidence of outside observers, including
Parliament, in this process.
The Government already sets out the environmental
impact of all Budget measures. The supporting documentation referred
to in the footnotes and repeatedly sent to the Committee has provided
information on the methodology used to provide these estimates.
1 For clarity,
the Committee's recommendations are shown in bold with the Government's
responses below Back