greentaxreport.co.uk

The UK has a long history of recognising the problems associated with environmentally unfriendly behaviour (the Keep Britain Tidy campaign has now been running for nearly50 years). However, the idea of using taxes to influence behaviours in a green way is relatively new.
The first specific environmental tax was not introduced until 1996, but since this time the green tax landscape of the UK has been constantly changing with new measures being introduced, existing measures being amended, and non-environmental taxes being made more ‘green’ to achieve various environmental objectives. As the environment remains a headline issue on the political agenda, we can only expect this trend to continue and for green taxes to play an even more significant role in future.

The creation of a new environmental tax framework is challenging. In practice, behavioural patterns can be difficult to influence through taxes alone. Further, environmental objectives must be weighed up against economic and social considerations. This can prove a difficult balancing act, especially in times of economic downturn. Given that environmental taxation is a new area, policymakers have little previous experience to rely on.

The increased ‘greening’ of the tax net over recent years has presented a new set of challenges for business. Taxpayers need to understand the taxes that apply to them, to comply with the various reporting requirements, and to ensure that the environmental tax effects of business decisions are considered upfront. A significant number of businesses are still largely unaware of how they are affected by environmental taxes – but as the impact of these taxes continues to grow we expect that more and more businesses will consider taxes as a reason to ‘think green’.

This chapter looks at operation of green taxes in the UK. We first provide a history of the UK’s current green tax framework. We then look at the contribution made by environmental taxes, both from a revenue perspective and in terms of environmental benefits. Our next section examines the practical effects of environmental taxes on businesses, and finally we consider what future environmental measures may be on the horizon.

2. HISTORY OF GREEN TAXES IN THE UK

The Office for National Statistics¹ reports regularly on six specific environmental taxes collected in the UK:

• Fuel duty;
• Vehicle excise duty;
• Air passenger duty;
• Landfill tax;
• Climate change levy; and
• Aggregates levy.

These are the major environmental taxes considered by this chapter, although many more taxes have an effect on the environment. We set out examples in section 2.4 of how some of the more traditional taxes have been ‘greened’.

2.1 Fuel and vehicle taxes

As we will explore further below, the majority of ‘environmental’ revenues comes from vehicle related taxes: road fuel duty and vehicle excise duty. Whilst these may not have started life as green taxes, these are almost certainly the environmental measures with the longest history. Fuel duty has now been in existence in various forms for a full century, while a vehicle tax was first introduced by the 1888 Budget.

Traditionally, both fuel duty and vehicle duties were ways of raising revenue for road and infrastructure projects (although these revenues have for some time been paid directly to the Exchequer and not directly allocated to spending on roads). However, fuel duty and vehicle excise duty are now both included as part of the Government’s environmental policy.

Fuel duty is applied to hydrocarbon oils used in almost all road vehicles and the current rate of 52.35 pence per litre² is one of the highest rates applying in Europe. In 1993, a 'fuel duty escalator' was introduced by the Conservative Government, whereby the rate of duty was raised each year above the rate of inflation. This policy was continued by the Labour Government until it was abandoned in response to the fuel duty protests in 2000 (a move that was unpopular with environmental groups). The ‘escalator’ has not been reintroduced but the Government’s stated policy is that duty should be raised every year by at least the rate of inflation, and further increases are scheduled in 2009 and 2010.

During recent years the Government has supported the use of biofuels as a supposed cleaner alternative to hydrocarbon oils. This support was traditionally by way of duty incentives, but these are to be withdrawn from March 2010, with fuel suppliers instead being required to comply with targets set out under a Renewable Transport Fuel Obligation (RTFO). Recent evidence on the potential negative consequences arising from biofuel production has caused a re-think in this area. The Government has recently issued a new consultation which proposes slowing down targets under the RTFO.

Vehicle excise duty is charged on all cars used or kept on public roads, through vehicle owners paying for an annual tax disc. Since 2001, the rates of duty have been based on the vehicle’s carbon emissions.

2.2 Air Passenger Duty

The United Kingdom is one of a small but growing number of European countries that tax domestic and international passenger flights leaving local airports. Air Passenger Duty ranges from £10 to £80 per passenger.

APD was introduced in 1994 by the Conservative Government as a way of raising revenue from a relatively under-taxed industry. Environmental objectives were not part of the rationale for the introduction of the tax. More recently however, the Government has stated that APD has a role to play in tackling the climate change impact of aviation. With this in mind, the rates of APD were controversially doubled with effect from 1 February 2007 – a change that was met with dismay from the airline industry. As we explore later, the doubling of rates significantly increased tax revenue but had a negligible impact on passenger numbers and the environment.

Proposals were put forward later in 2007 to replace APD with an aviation duty payable per flight rather than per passenger from 1 November 2009. It was initially hoped that the new aviation duty would incentivise airlines to operate fuller flights. However, critics of the proposals argued that economic conditions (including fuel prices) already provide this incentive and that the measures would not encourage investment in new fuel efficient technologies.

The Government announced in the 2008 Pre-Budget Report that the aviation duty would be scrapped and APD would remain, with higher rates (from £11 per to £170 per passenger) and an amended framework with four new geographical bands. Interestingly, the report stated that Government did not wish to pursue a per-plane tax in order to “protect competitiveness in a time of economic uncertainty”.

The remaining three taxes are the only ones introduced specifically for an environmental purpose.

2.3 Landfill and aggregates

Landfill tax came into force on 1 October 1996, with the specific environmental aims of discouraging landfill and encouraging more sustainable means of waste management, such as recycling. By increasing the cost of landfill (historically, a relatively cheap and easy method of waste disposal), alternative waste treatment technologies have become more financially attractive. The current rate³ of landfill tax is £40 per tonne for active waste, although there is a reduced rate of £2.50 per tonne for inert materials such as rock or gravel.

Landfill tax is seen as a key mechanism in enabling the UK to meet the targets set out in the EU Landfill Directive, which aims to prevent or reduce damage to the environment and human health from the landfilling of waste. The UK is one of many EU Member States to have a landfill tax: businesses disposing of waste to landfill in countries such as Denmark, Sweden and Finland all need to pay landfill tax. Despite this the UK remains one of the worst-performing European countries in terms of waste sent to landfill.

With this in mind, the Treasury recently implemented steep increases in the rate of landfill tax, increasing from the £24 per tonne in place in 2007 by £8 per tonne each year until at least 2010-11.

The Government has also recognised the negative effects on the environment from the extraction of aggregates, such as visual, noise and dust pollution, as well as negative impacts on bio-diversity. An aggregates levy applying to all commercial exploitation of aggregate was introduced from 1 April 2002. The rate of aggregates levy was initially £1.60 per tonne but increased to £1.95 per tonne from 1 April 2008.

The introduction of aggregates levy caused controversy within the aggregates sector, with businesses claiming the tax was discriminatory and that it would put them at a competitive disadvantage, especially when compared with businesses quarrying materials exempt from the levy (such as slate). The eligibility of aggregates levy has in fact been challenged in the British and European courts by the British Aggregates Association, and this challenge was still under consideration at the time of writing.

2.4 Climate Change Levy

CCL was introduced from April 2001 and affects supplies of energy to industrial, commercial, agricultural and other sectors (but not on domestic supplies). The levy was seen as a key factor in meeting the UK’s commitments under the Kyoto Protocol; however many businesses were resistant to facing another bottom line cost.

Prior to the levy’s final introduction, the Government undertook a public consultation exercise and agreed to exempt renewable energy and good quality Combined Heat and Power (CHP) generation, and also agreed to a number of measures to incentivise energy efficient investment. One such measure was the ability for businesses to enter into Climate Change Agreements, allowing substantial CCL discounts (up to 80% of a business’s CCL bill) in return for taking on demanding CO2 reduction and/or energy efficiency targets. Most sectors with major energy use have in fact entered into CCAs, with the exception of the water industry, which has not been able to do so given the current eligibility rules.

The rates of CCL are not based on values of the supplies but rather the quantity of energy supplied (i.e. per kilowatt hour or kilogram). As such, the rates vary by each type of energy and are intended to reflect the pollution associated with the production of that fuel; therefore the rate for coal is much higher than that for gas, for example. Each rate was subject to an increase from 1 April 2008 and the Government has announced that these rates are to continue to increase in line with inflation.

2.5 ‘Greening’ of other taxes

It is not just the environmental taxes that encourage taxpayers to act in a more environmentally responsible fashion – the traditional tax framework is increasingly being changed to reward ‘green’ behaviour. The appendix to this chapter looks at everyday taxes and levies and provides examples of where these have been specifically amended with environmental motives in mind.

More generally, the economic nature of taxes means that any tax change may result in an environmental impact. These impacts can often be unintended – for example, the introduction of transferable allowances for inheritance tax may discourage elderly homeowners from downsizing and hence remain in family homes with the inevitably larger carbon footprint. This illustrates the difficult balancing act faced by the Government in setting policy, and how important it is for policymakers to consider the environmental effects of any tax or economic policy changes.