House of Commons Environmental Audit Committee Budget 2011 and environmental taxes Sixth Report of Session 2010–12 Volume I Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/eacom Ordered by the House of Commons to be printed 29 June 2011 HC 878 Published on 7 July 2011 by authority of the House of Commons London: The Stationery Office Limited £15.50 The Environmental Audit Committee The Environmental Audit Committee is appointed by the House of Commons to consider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development; to audit their performance against such targets as may be set for them by Her Majesty’s Ministers; and to report thereon to the House. Current membership Joan Walley MP (Labour, Stoke-on-Trent North) (Chair) Peter Aldous MP (Conservative, Waveney) Richard Benyon MP (Conservative, Newbury) [ex-officio] Neil Carmichael MP (Conservative, Stroud) Martin Caton MP (Labour, Gower) Katy Clark MP (Labour, North Ayrshire and Arran) Zac Goldsmith MP (Conservative, Richmond Park) Simon Kirby MP (Conservative, Brighton Kemptown) Mark Lazarowicz MP (Labour/Co-operative, Edinburgh North and Leith) Caroline Lucas MP (Green, Brighton Pavilion) Ian Murray MP (Labour, Edinburgh South) Sheryll Murray MP (Conservative, South East Cornwall) Caroline Nokes MP (Conservative, Romsey and Southampton North) Mr Mark Spencer MP (Conservative, Sherwood) Dr Alan Whitehead MP (Labour, Southampton Test) Simon Wright MP (Liberal Democrat, Norwich South) Powers The constitution and powers are set out in House of Commons Standing Orders, principally in SO No 152A. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/eacom. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Simon Fiander (Clerk), Edward White (Second Clerk), Lee Nicholson (Committee Specialist), Andrew Wallace (Senior Committee Assistant), Jill Herring (Committee Assistant), Emily Harrisson (Sandwich Student) and Nicholas Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Environmental Audit Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6150; the Committee’s email address is [email protected] Budget 2011 and environmental taxes 1 Contents Report Page Summary 3 1 Introduction 5 Our inquiry 5 2 Principles of environmental taxation 6 Increasing the proportion of environmental taxes 6 Definition of environmental taxes 8 Setting the tax rate—raising revenue or promoting environmental change 10 Complexity and fairness 13 Evaluation 15 Natural capital 16 Strategy 18 3 Transport taxes 19 Motoring taxes 19 Aviation taxes 22 4 The Carbon Floor Price 26 The impact on competitiveness 26 Nuclear power 27 5 The ‘Plan for Growth’ 30 Green economy 30 Green Investment Bank update 31 6 Conclusion 34 Conclusions and recommendations 35 Formal Minutes 40 Witnesses 41 List of printed written evidence 41 List of additional written evidence 41 List of Reports from the Committee during the current Parliament 43 Budget 2011 and environmental taxes 3 Summary Taxation has an important role to play in helping to protect the environment. Whether ensuring at least some of the environmental cost is borne by those responsible, or making an environmentally damaging activity economically unattractive, environmental taxes create an incentive to move towards more sustainable behaviours. For environmental taxes to be effective they need to be straightforward so that taxpayers understand the behavioural change signal being sent, and seen as fair so that political momentum can be gained for higher environmental taxation. In practice, however, many perceive them as just another means of raising revenue, and their growing complexity means that many businesses are unaware of the cumulative impact of the environmental taxes affecting them. There is a pressing need for Government to take a more coherent approach to environmental taxation. A clear strategy should be adopted, setting out their objectives and rationale, the basis on which rates are set, and how their impact will be evaluated. Even partially hypothecating revenues from environmental taxes for environmental ends can also help to build greater acceptance, whilst also providing much needed funding for the low-carbon transition. Announcements on transport taxes in the Budget were disappointing. By dropping a penny on Fuel Duty rates and providing few tax incentives to switch to lower carbon transport alternatives, the Government missed an opportunity to be much clearer with the public about the long-term need to switch to lower carbon alternatives. The proposed changes to Air Passenger Duty will do nothing to make it a more effective environmental tax. Abandoning plans for a per-plane duty, albeit on legal advice, and relying on the EU Emissions Trading System (EU ETS) is a risky approach, because its success in reducing aviation emissions turns on the wider effectiveness of the EU ETS in curbing emissions more generally. It cannot be all stick and no carrots. A shift to environmental taxes must be accompanied by a corresponding reduction of taxes on the things that are valued by society, such as jobs, incomes and profits. There is also a role for other policy instruments alongside taxes to help achieve the desired change. The Government’s definition of a ‘subsidy’ in relation to nuclear is not robust and does not hold up to scrutiny. Nuclear will be subsidised in the same way as renewable energy sources, which have no adverse environmental impacts, and nuclear will benefit the most from the Carbon Floor Price mechanism. The Plan for Growth did not provide the much needed step change to aid the transition to a low- carbon economy, and in some areas—e.g. the zero carbon homes standard—the Government has taken a backwards step. The forthcoming Roadmap to a Green Economy must demonstrate a greater Government commitment to the green economy, and in doing so dispel any suggestion that a green economy is an ‘add-on’ rather than an integral part of the Government’s sustainable development plans. The Green Investment Bank could be a driver for the green economy but preventing the Bank from borrowing will limit its impact on renewables and the support it can provide for the Green Deal. Fresh consideration should be given to when, and under what fiscal circumstances, the bar on the Bank’s lending powers might be eased. Budget 2011 and environmental taxes 5 1 Introduction 1. This report follows a series of annual inquiries on the Pre-Budget Report and the environment in the previous Parliament by our predecessor Committees.1 They consistently found that Government was not doing enough to shift the balance of taxation from ‘goods’ (for example profits and income) to ‘bads’ (for example pollution) and expressed concerns that existing taxes such as Fuel Duty and Air Passenger Duty were not structured effectively to drive the change in behaviour needed for the transition to a low- carbon economy. 2. The 2011 Budget was delivered on 23 March 2011, and followed the current Government’s Spending Review in October 2010.2 The Budget Report stated: The Government is committed to being the greenest Government ever. A simple, efficient and cost effective policy framework will meet environmental objectives while supporting growth and maintaining a sound fiscal position. Market-based solutions to price carbon are at the heart of this approach, achieving objectives at the lowest possible cost. The Government will increase the proportion of tax revenue accounted for by environmental taxes.3 Alongside the 2011 Budget, the Government set out measures to deliver its priorities for the economy in the Plan for Growth,4 and launched a consultation on Air Passenger Duty.5 Our inquiry 3. Against this background, we decided to explore the principles of environmental taxes (Chapter 2). Our aim is to set out some foundations for future inquiries on environmental taxation and Budgets during the course of this Parliament. In this first report in this series, we go on to examine the application of these principles for transport taxes in particular (Chapter 3), the Carbon Floor Price (Chapter 4), and whether the Budget and Plan for Growth further the green economy agenda (Chapter 5). We received 43 submissions and took oral evidence from non-governmental organisations, think-tanks, academics and the Economic Secretary to the Treasury, Justine Greening MP. We are grateful to them all. 1 Most recently: Environmental Audit Committee, Third Report of Session 2008-09, Pre-Budget Report 2008 —Green Fiscal Policy in a Recession, HC 202. 2 HM Treasury, Spending Review 2010, Cm 7942, October 2010. 3 HM Treasury, Budget 2011, HC 836, March 2011, paragraphs 1.110 and 1.111. 4 HM Treasury and Department for Business, Innovation and Skills, The Plan for Growth, March 2011. 5 HM Treasury, Reform of Air Passenger Duty: a consultation, March 2011. 6 Budget 2011 and environmental taxes 2 Principles of environmental taxation 4. Taxation has an important role to play in helping to protect the environment by helping to incorporate the costs of environmental damage into the price of the goods, services or activities which give rise to it. Often, the side-effects of production and consumption that impact on the environment (‘environmental externalities’) do not enter into the calculations of producers and consumers.