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The run up to Budget 2007 saw the main political parties
competing for green votes: Gordon Brown addressed the Green Alliance
Campaign Group on matters such as carbon neutral homes, the Government
issued a draft Climate Change Bill containing mandatory carbon emissions
targets and the Tories consulted businesses on reducing emissions in the
aviation sector. Indeed, the environment received noticeable emphasis in
Gordon Brown’s Budget 2007 speech and a range of tax measures to tackle both
air and ground pollution was announced. What were some of most interesting
of the measures and how effective are they likely to be?
Ground pollution |
Air pollution
Ground Pollution
The Chancellor brought in some simple but significant tax changes to combat
ground pollution. The rate of Aggregates Levy1
was increased for the first time in the history of this tax (from £1.60 per
tonne to £1.95 per tonne from 1 April 2008) to take account of inflation
since the introduction of the levy in 2002. Major increases in Landfill
Tax were also announced. The standard rate was due to increase from £21
to £24 per tonne of waste sent to landfill with effect from 1 April 2007;
however, the Chancellor announced further increases of £8 a year in the
standard rate from 1 April 2008 until at least 2010-11. This will mean a
significant additional cost for all businesses generating waste and should
encourage businesses and householders to reduce waste and recycle.
The UK sends approximately 375kg of waste per person per year to landfill2
and this makes us one of the worst performing European countries in this
respect. Looked at another way, over 65% of our waste was sent to landfill
in 2005 compared to less than 5% in the Netherlands, Sweden and Switzerland.
Under the Chancellor’s measures the rate of Landfill Tax in the UK will be
£48 per tonne on 1 April 2010. This is still well below the current rate of
landfill tax in the Netherlands of €85 (£58) per tonne so there may be room
for further increases. The Dutch experience shows that tax has had an
important role in reducing waste sent to landfill, although regulation and
schemes to encourage the recycling of household waste are also important.
A measure that the Chancellor could have taken would have been to introduce
a new tax to discourage the production of waste rather than to tax the
method of disposal of the waste. A Plastic Bag Tax was introduced in
Ireland in 2002 and there was speculation before the Budget that a similar
tax on packaging might be introduced in the UK, following pressure from the
Women’s Institute amongst other organisations! Within five months of
introducing the tax in Ireland the carrier bag usage had fallen by 90% and
almost €3.5 million3 had been raised
to pay for environmental schemes.
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Air Pollution
Whereas a few significant tax changes were made to combat ground pollution,
a wide range of arguably less significant measures were announced by the
Chancellor in respect of air pollution. It is therefore more difficult to
assess the overall impact of the Budget’s tax changes on reducing future
emissions.
Climate Change Levy (CCL) has been credited with producing cumulative
savings of 16.5 MtC to 2005, and by 2010 will be saving around 3.5 MtC per
annum4. No doubt the CCL inflationary
increases announced in the Budget were necessary to keep the carbon savings
associated with CCL on track. However, an inflationary rise cannot be
expected to reduce emissions at a greater than current rate. Most businesses
are unaware of how much CCL they actually pay as the tax is not separately
itemised on bills. Perhaps simply requiring electricity companies to show
CCL on their invoices would provide more incentive for businesses to switch
fuel sources or become more energy efficient?
The most recent data provided by DEFRA shows that only 4.2% of the UK’s
electricity is being generated by renewable sources, a considerable distance
behind the EU target of 20% by 2020. The UK is trailing behind other EU
countries in terms of generating electricity from renewable sources, with
countries such as Denmark, Austria, Portugal, Sweden, Croatia, Latvia and
Turkey already ahead of the EU target.
To encourage more investment in clean generation technology, the Chancellor
is introducing a new environmental tax credit
for qualifying investment. At present it is not clear what investments will
qualify for this relief. Although welcome, this new relief means that tax
legislation in this area will become more complicated, despite Government
attempts in the Budget to simplify similar direct tax legislation. The
Government have not yet fully aligned the existing tax and incentive systems
for such new technologies; for example, Renewable Obligation Certificates
are not yet available to Carbon Capture Storage generation facilities (ROCs
would enhance the value of CCS projects5)
and power generated by CCS would not be eligible under current legislation
for Climate Change Levy exemption. As well as looking at new measures to
encourage investment in new technologies, there is some way to go in
refining and improving existing measures.
The Chancellor himself acknowledged that households produce a quarter of UK
greenhouse gases emissions. It seems that the Government is tackling
emissions from householders by providing a wide range of incentives such as
tax relief on insulation, tax breaks on selling Renewable Obligation
Certificates from micro-generators and stamp duty exemptions for zero carbon
homes. Is there a danger that the wide range of measures and reliefs
available are becoming too complicated and wide ranging for the average
householder to fully take advantage of them? An alternative approach would
be to charge CCL on domestic fuel use, but no doubt this would be
politically unpopular and could be criticised on the grounds that it is
socially regressive.
Road transport is another area of Government focus. The changes made in the
budget increase Vehicle Excise Duty in the most polluting cars to
£400 in 2008-9 whilst the rate will be reduced for low carbon cars to £35.
This echoes similar regimes in other European countries to encourage
motorists to take the environment into account in their purchasing
decisions, although in Denmark the tax differential between polluting and
low carbon cars is already in the region of £600. An obvious limitation of
this approach is that VED increases do not provide motorists with any
incentive to drive less as it is charged regardless of how much the vehicle
is actually used.
A similar criticism applies to Air Passenger Duty (APD) which is
levied by passenger rather than by reference to the emissions generated by
flights, thus providing no encouragement for investment in more efficient
aircraft and fewer ‘ghost flights’. The rate of APD doubled from 1 February
2007. In his Budget speech the Chancellor ruled out charging VAT on flights
in favour of other measures to tackle emissions by airlines. Of course, APD
contributes directly to Treasury funds whereas VAT would be recoverable by
most businesses.
In general, while private transport costs have not risen in comparison to
earnings since 1990, rail and bus fares are now around 30% more expensive in
real terms than in 1990 and have both risen more quickly than earnings6.
It is imperative therefore that real and affordable low carbon transport
alternatives are available to businesses and individuals if tax measures are
to be effective in altering behaviour.
Overall, experience in the UK and other countries suggests that tax can be a
useful way of encouraging businesses and individuals to make environmentally
friendly decisions. In particular, simple and neutral tax measures can be
effective in reducing both air and ground pollution especially if they
generate significant cost differentials between polluting and low carbon
alternatives. The measures announced in the Budget are a step in this
direction, although, while ‘environmental taxes’ still only account for 7%
of tax receipts in 2007 (with the majority attributable to fuel and oil
duties not originally introduced for environmental purposes), scope remains
for increasing differentials still further.
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Useful comparatives
1Aggregate
Levy is a tax on the extraction of aggregate and is intended to ensure the
external costs of extraction are reflected in the price of aggregate whilst
encouraging use of alternative materials such as recycled aggregate.
22005 Eurostat figures
3Figures provided by Irish
Environment Minister Martin Cullen
4The Cambridge Econometrics and PSI
study in 2005
5ROCs have a market value and can be
sold to generate an additional revenue stream. Inclusion of this revenue
stream in the Net Present Value calculations would make CCS more attractive
to investment.
6IFS report |
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