I welcome readers to the CIOT Green Tax Report and encourage you to contribute or comment online if you so wish. This report has been published at a time when there is an ever increasing recognition that we all live in a world facing harmful environmental change. There has been recent political change towards tackling these problems. With the election of Barack Obama as President, the US administration is now committed to negotiating a new climate change treaty and introducing a 'cap and trade' system. This is in stark contrast to the approach taken by the Bush administration. In the UK, the Government has committed Britain to reaching significant reductions in carbon emissions over the next decade.
It is also clear that non governmental activity in this area will simply not go away as environmentalists and other pressure groups step up their efforts to get governments to do far more to control emissions and protect the planet. One can say with some certainty that tax and other fiscal measures are expected to play an important role in tackling this worldwide problem.
The question then becomes ‘in what way will tax be deployed in achieving these environmental goals?’. Will taxes be used creatively as agents to modify and change behaviour, or imposed in a blunt manner to penalise 'bad' environmental practices, possibly using the revenue to reward the environmentally 'good'?
Understanding how the effect of changes in tax law can affect peoples’ behaviour is vital. This means when new environmental tax measures are to be introduced, the behavioural aspects need to be considered carefully beforehand to ensure that the environmental objectives sought by the Government can be achieved. This is true of any new legislation or proposal but given how high the climate change stakes are, it becomes vital to get the tax measures right.
Few informed commentators disagree with the notion that there is a strong need to do something now to protect the environment. As Professor Paul Ekins points out in his chapter on the ‘Theory and practice of environmental taxes’, policy makers recognised the need for action some time ago but initially considered that regulation could deal with the problem. Since the 1980s however, it has become increasingly clear that regulation has to be supported by fiscal measures such as taxation and other charges.
This Green Tax Report was commissioned by the CIOT with the aim to set out to look at what we understand by environmental taxes, the different characteristics of these taxes and what is needed to drive forward green taxes as an instrument of change. It recognises that the manner in which environmental taxes can be used to combat the adverse impact of human behaviour on the environment is in its infancy. The CIOT recognise that the report is simply a step along a long path of debate and discussion and cannot in any way be regarded as expressing definitive positions on green taxation.
The chapters in this report have been prepared by a number of authors, each of whom are specialists in their areas and so each bring out particular and differing aspects which add to the breadth of the discussion.
THE ECONOMICS OF CLIMATE CHANGE
In Chapter 2, Paul Suff analyses key issues from Sir Nicholas Stern’s report on climate change. One issue that stands out is the cost of climate change. At the lower estimate quoted in the report of $85 (£58) per tonne of carbon emitted and an annual average of 9.8 tonnes of carbon per person, the cost that needs to be recovered in respect of each person in the UK is $833 (£570) or about £35 billion in total.
We learn that Stern sees the need for a three-pronged approach to policy – regulation, information and financing. However, he notes that a global approach is necessary to achieve the most efficient outcome.
Professor Paul Ekins provides an overview in Chapter 3 of key theoretical and practical issues in relation to environmental taxes (or environmentally related taxes – his preferred term). First, he establishes the rationale for environmental taxes in a clear and concise way. The essential elements, as supported by a range of other writers, are set out in order to provide a framework for what follows.
Before looking in detail at the different types of environmental taxes, Paul Ekins provides a theoretical base for these taxes in sufficient detail to explain the issues to readers who are not economists. His analysis of the different cost, incentive and revenue raising aspects of environmental taxes will also encourage further research by readers who wish to delve into these issues in more detail.
Taxes inevitably involve political choices and a balanced discussion of the political challenges of environmental taxes is included.
GREEN TAXES IN OPERATION
Chapter 4, written by Helen Devenney and Matthew Parkes provides a history of the UK's current green tax framework and examines the contribution made by environmental taxation, its practical effects on businesses and looks ahead to the future.
The history examines the introduction and current operation of specific taxes as well as the ‘greening’ of the more traditional taxes, e.g. corporation tax and VAT.
The chapter looks at how green taxation can be used to achieve specific objectives rather than as a revenue raising tool. The authors ask the question of how successful the taxes have been in achieving their objectives - it remains unclear whether the relative fall in revenue compared with total tax revenue is actually reflective of success in changing behaviour. The impact on, and concerns of, business are also highlighted.
With enhanced corporate awareness of social responsibility and the green agenda, the authors conclude that environmental taxes and incentives are here to stay.
Mark Schofield and Toula Theodosiou examine in Chapter 5 how other developed countries are approaching the issue of environmental change. While it is encouraging to see that many governments have implemented measures to protect the environment, it is also clear that there is a need for a far more joined-up approach to prevent taxes in one country simply shifting the problem to another where similar measures have not been adopted. Apart from detracting from the effectiveness of tax measures, this approach leads to a ‘why should we do anything?’ mentality - for example even a 100% reduction on emissions in the UK would only affect 3% of global emissions.
The authors recognise the difficulty of ‘governments levying the same taxes at the same levels and applying entirely consistent laws and regulations’ but note that, if taxes are to be effective, general consensus at inter-governmental level is essential.
COMPLIANCE, AVOIDANCE AND EFFECTIVENESS
The impact on taxpayers is developed further by Chris Sanger and Will Bush in Chapter 6, dealing with compliance and effectiveness.
One of the key issues raised in the chapter is the question of avoidance. Tax authorities traditionally have concerns about tax avoidance and seek means to counter it. The authors distinguish between positive avoidance – measures that reduce the tax imposed because the taxpayer changes his behaviour, which is to be encouraged, and negative avoidance – measures that reduce the tax collected without achieving any of the objectives of the tax.
Evasion is also an issue with ‘fly-tipping’ cited as a typical example of how taxation can lead to illegal measures being taken to avoid costs.
The chapter also examines the effectiveness of green taxes taling Climate Change Levy as an example.
Finally, in Chapter 7, Hilary Foster considers the options for future control of carbon emissions, particularly looking at how a carbon tax might be constructed, and at the comparative strengths and weaknesses of regulation, tax and cap and trade. The chapter concludes that a combined approach may be the most effective.
THE CIOT AND ENVIRONMENTAL TAX
One of the key objectives of the Chartered Institute of Taxation is to seek to achieve a better, more efficient, tax system for all affected by it. As an instrument in combating climate change, there can be few measures more important than environmental taxes. However, there is much to do before real progress can be shown to be the direct result of imposing environmental taxes.
This report illustrates those challenges and opportunities. When any new tax proposal is put forward, the CIOT always asks of government that it should consult widely and ensure there is sufficient time available for that consultation. Like all taxes, environmental taxes can have unintended consequences. If the aim is to alter behaviour, it would be a serious concern if, through lack of adequate consultation, a worse environmental outcome was the result. This is why the consultation period needs to be long enough to bring in a wide range of views.
The CIOT will continue to respond to such consultations and encourage debate on environmental taxes more widely. It looks forward to making contributions to such an important subject and will do so in the same way that it approaches all proposed tax law: impartially, considered and with intellectual vigour.
I should like to express my sincere thanks to a number of people. First, to each of the authors for the generosity of their time in providing individual contributions to this Green Tax Report. Second, to the editor, Mike Truman at LexisNexis, who has played a vital role in bringing the report into fruition, and last, but by no means least, to my colleagues at the CIOT for their assistance and support for this report and in various other projects that have enabled me to develop my presidential theme of ‘green taxes’.
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