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Environment taxes for the good of all

Category Technical Articles
AuthorTechnical Department
Article by Charles Secrett, Director of Friends of the Earth, published in the June 2002 issue of Tax Adviser.

New Labour came to power promising to ‘put environmental concern at the heart of all government decision-making’ and to be ‘the greenest government ever’. These were bold and important commitments, but remain largely unfulfilled. The United Kingdom (UK) economy is fundamentally unsustainable – economically, socially and environmentally. Simply put, we over-consume, over-pollute and take far more than our fair share of the world’s natural resources to maintain our lifestyles. In order to address these market failures, we need to adjust tax and spending priorities. Our tax system is perverse in that we highly tax things we want more of, like work and jobs; and, yet have no or low taxes on what we want less of, like pollution, resource waste and the destruction of wild places. Instead, we should be taxing the ‘bads’ and rewarding the ‘goods’, and we need to do so as much for social and economic, as environmental, reasons.

Targeting the polluter

Poor communities suffer the worst consequences of environmental degradation, including traffic pollution, social severance, toxic emissions from industry and climate change. They live ‘downhill, downwind and downstream’, and cannot buy their way out of trouble in a market economy. These neighbourhoods are frequently deprived of decent services – public transport, energy conservation, waste minimisation – which also help resolve these threats. Polluter-pays taxes are a socially progressive way of cutting pollution and waste, particularly in the energy, transport, agriculture and materials use sectors. They target the polluter responsible, and generate essential revenues to re-spend as tax credits or direct investment to support the development and use of clean, resource-efficient technologies, products and infrastructure. Poor families and neighbourhoods would benefit most dramatically from this type of environment-led economic modernisation, as their quality of life soars, public services improve, and jobs are created.

United Kingdom plc and British companies would similarly benefit from a fiscally driven move away from using dirty and inefficient fuels, power and machinery toward their modern and renewable, resource-efficient and clean alternatives. A polluting, wasteful factory or household is an inefficient, expensively run one. The UK economy uses ten tonnes of raw materials and natural resources to produce one tonne of finished goods (the rest ends up as pollution and waste). That is a ten per cent conversion-efficiency rate, and is simply unsustainable.

Tax reforms to stimulate innovation

Substantive green tax reform is the most effective way of reshaping markets to improve performance, and is important in helping deliver social and environmental policy goals. Building up-market demand at home for goods like renewable energy, clean fuels and production processes, efficient engines, and reusable/recyclable materials will help British companies develop the business strategies and investment programmes to complete this sector restructuring. Judging from the experience of competitor countries like the Netherlands and Germany, properly designed green tax reforms will stimulate technical innovation, resource-cost efficiencies and new product development – leaving British companies better able to compete in the $300 billion global export market for environmental goods and services.

Increased innovation, efficiency, competitiveness, jobs, export opportunities ... yes, environmentalists understand economic priorities, and are demonstrating how policy can integrate economic goals with equally important environmental and social outcomes.

To the initial surprise of many, the Treasury has begun developing a wide-ranging, albeit still shallow, programme of pollution taxes and credits. These reforms have followed effective campaigns run by groups like Friends of the Earth and the Labour Party’s green ‘ginger-group’, Socialist Environment and Resources Association (SERA). They cover some fossil fuel uses, pollution and natural resources, including the road fuel duty, climate change levy, landfill tax and aggregates levy. Other taxes now reflect environmental objectives and reduce environmentally perverse subsidies, such as varying vehicle emission duty (VED) rates and company car allowances to increase energy efficiency; lowering value added tax (VAT) on some household purchases of energy saving goods, and supporting the development of green technologies. Even more importantly, the Treasury’s century old obsession with separating tax from spending decisions – the principle of never hypothecating – has gone. This was a major block to joined-up policy making. Now the Treasury can take pollution revenues, and re-spend them as direct investment or tax credits to encourage industry and households to go green.

Business leaders often claim, without evidence, that green taxes are ‘bad for the economy’, and ‘make firms uncompetitive’; that ‘they cause unemployment’; or ‘discriminate against the poor’; that ‘they do not work’; or that ‘they are unpopular with voters’. Badly designed tax and spend packages may do so. But a properly integrated package of carefully targeted environmental taxes to make those who pollute and waste pay, with revenues reinvested in improving vital public services, encouraging environmental technology industries and reducing employers’ National Insurance Contributions (NIC), will not.

The Treasury reforms are right and necessary. It is right that polluters should be penalised, and pay money while they pollute. It helps make them stop. Economic efficiency improves as enterprises use fewer resources and waste less. Operating costs also go down.

But, people aren’t always persuaded to change by the force of the stick alone. Rewards, benefits and incentives are essential too. Low tax rates should reward environmentally and socially virtuous behaviour by companies and citizens. For example, the green tax point about fuel duties is not that one sets absolutely high fuel duties, but that tax should be high on polluting fuels and inefficient engines, and low on clean ones. Britain’s simplistic media has failed to grasp that point, and pollution taxes have got a bad reputation?

Revenue recycling

There are two types of revenue recycling that can occur as part of a green fiscal reform programme. One is re-spending directly and investment in public and community services, such as nationwide energy conservation schemes, waste minimisation programmes and a modern public transport system. The other is re-spending as tax credits or capital allowances on environmental technologies, products and services, such as energy saving goods and equipment, solar power and other renewables, and clean production technologies, as well as pollution control equipment.

But, after a promising first term start to greening the tax system, Labour seems to be losing its nerve. Aggressive CBI attacks against sensible polluter-pays measures (the climate levy, aggregates tax and road-fuel duty), and the lack of Opposition concern for the eco-tax agenda, have panicked No 10 and the Cabinet into making irresponsible concessions. Under the climate levy, 80 per cent exemptions were quickly handed out to heavy energy user companies; and key measures like the Treasury-approved pesticides tax were blocked. Throw in a few straggling truckers on protest convoy, with sensationalist headlines about Britain running out of fuel, and suddenly more motoring became the order of the day, and go hang the government’s much vaunted climate response policies. Last year’s pre-election Budget duly delivered a £1.5 billion tax cut (sic, voter bribe) for truckers and motorists, and traffic and pollution levels rose as a direct result.

Let’s hope these reversals are simply short-term political expediency because our economy will suffer otherwise. British Petroleum, a British multi-national, is building new solar photovoltaic (pv) plants in Spain and Germany because of the tax incentives and development grants available there – but not in Britain – which encourage this type of clean industrial investment. At a stroke, competitor nations will reap the jobs, export opportunities and cheaper domestic cost of these desirable innovations.

Gordon Brown has built a reputation for planning over the long-term to bring about gradual but radical policy changes and economic restructuring. His ear must not be captured by the siren voices of companies afraid of change. Achieving sustainable development requires a fundamental overhaul of the way markets behave and the type of products and processes used to drive progress. The Prime Minister has begun to recognise the competitive importance of greening ‘UK plc’, and just before the last election called for a ‘green industrial revolution’ to power Britain in the next century. This cannot happen without a broader and deeper comprehensive green tax and re-spend strategy. It is now up to the Prime Minister and the Chancellor to fulfil Labour pledges, and ensure that Britain completes the economic restructuring needed to propel our country into the 21st Century better able to look after and support society, the economy and the natural environment as one integrated whole.

Technical Department
020 7235 9381

div class="taslug">June 2002 by Charles Secrett


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