£37 billion a year of green taxes ‘at risk’ from net zero plans

16 Mar 2021

Officials from the Treasury and HMRC were subject to some tough questioning from the Public Accounts Committee (PAC), as part of its continuing inquiry into environmental taxes. This included evaluation of green tax measures and how great a role tax has in the Government’s strategy for achieving ‘net zero’.

Witnesses at this PAC session were Jim Harra, Permanent Secretary, HMRC, Beth Russell, Director General, Tax and Welfare, the Treasury; Sir Tom Scholar, Permanent Secretary, the Treasury and Ruth Stanier, Director General, Customer Strategy and Tax Design, HMRC. This was the first session on this inquiry since publication of NAO’s Environmental tax measures report last month (February).

Barry Gardiner, Labour, asked for reflections on the UK Budget, particularly whether the ‘super-deduction’ includes any environmental filter on what would be subject to having the deduction applied. Gardiner is worried that it could see fossil fuel investments to the tune of £25 billion at the very time the Government are talking about greening up the National Infrastructure Bank. HMRC’s Jim Harra said the super deduction is a general tax relief and there is no specific restriction of that nature.

Ruth Stanier said that HMRC are ‘certainly developing’ their approach to monitoring the environmental impacts of tax measures. “[O]ur analysts are working with other departments to develop more effective ways of assessing the carbon impacts of different tax measures and tax reliefs. For the new measures announced at Budget, we are putting in place monitoring plans and evaluation plans. I am also pleased that in this year’s Budget we have been able, in our tax information and impact notes, to set out in a more thorough manner carbon impacts across a range of relevant measures.”

Lib Dem Sarah Olney asked how important a role the tax system plays in achieving environmental objectives. Scholar said the Treasury will publish a report on the costs and benefits of net zero in the Spring and later in the year BEIS is publishing a broader government strategy towards net zero. There must be a major cross-government effort to turn that strategy into a proper plan for action, he said. One of the key issues is how to dovetail the Government’s climate strategy into major fiscal events, such as spending reviews and Budgets. He said environmental taxes can both change consumer or business behaviour and raise the costs of something that has environmental harm associated with it, at the same time.

Olney asked if the Treasury is looking to maximise revenue from these environmental taxes, or is it looking to change behaviour? Scholar said it depends on the context - tax is one of a number of levers that the Government has to achieve environmental goals. He said the Treasury is listening carefully to the huge debate outside government as to all the different taxes that people can imagine.

The Treasury works with other departments on environmental taxes, said Scholar. He explained that while the Treasury was developing the plastic packaging tax a couple of years ago, it was working extremely closely with DEFRA, who shared the objective of reducing the amount of single-use plastic being used in packaging. The Treasury also spoke to ‘people across government’ about how to replace the EU emissions trading scheme. He said: “We do not consult widely on the actual Budget decision, but we do consult widely, including publicly, on principles of tax design and we get a lot of contribution through that process on possibilities in the environmental taxation area.”

Scholar told the MPs that there is a “quite comprehensive set of cross-government governance arrangements on climate and environment generally.” There is the climate national strategy implementation group, which is chaired by the director general in BEIS, and there is a net zero strategy implementation group, which is co-chaired by senior officials from BEIS and No. 10, explained HMRC’s Jim Harra. He added that the HMRC-Treasury policy partnership is represented on both. And HMRC are feeding into the net zero review, which the Treasury is leading.

Harra went on to explain that many environmental taxes are quite small revenue raisers in the great scheme of the tax system but tracking whether they are in line with financial forecasts is still important.

Olney asked if the tax system is supporting or detracting from the Government’s net zero target. Scholar said the Government has not taken an overall view of that as yet ‘because the time has not come’.

The Treasury’s Beth Russell intervened to say the Treasury is looking at the role that carbon pricing can play in helping us meet net zero - but that does not have to be through tax, she said – and looking at, in particular, sectors that we know are going to be important to the transition, at the current range of price signals that are being generated through government intervention, including tax.

Olney asked what witnesses think about reducing the VAT rate on electric cars from 20 per cent to five per cent to try to encourage more people to switch to a less carbon-emitting form of travel. Scholar said it is obviously possible to vary the rates of VAT on different issues, and that has a price effect and, through that, a behavioural effect.

The Lib Dem MP then asked for opinions about reducing the VAT rate on period pants to zero, saying period pants that are much better than using towels or tampons from a sustainable point of view. Harra replied that, in relation to ‘period products’, HMRC put that zero rate in recently having previously had a reduced rate. That needs to be evaluated, to see how much of that price saving has gone through to consumers, whether it is the most effective policy intervention to reduce period poverty, for example, or whether there could be other interventions.

HMRC’s Ruth Stanier told Richard Holden, Conservative, that the tax authority has not established a correlation between changes to the landfill tax rate and fly-tipping. Although she did say landfill tax is necessarily a relatively blunt tax instrument and it has been successful in reducing levels of landfill. But Holden said we have seen a massive reduction in the tax take from landfill tax yet the local communities that he represents say they are seeing fly-tipping on an unprecedented scale. Stanier said that about four or so years ago, we saw a significant increase in the use of unauthorised waste sites, and HMRC worked with the Environment Agency on potential solutions to that. That resulted in HMRC proposing a new legislative measure to bring unauthorised sites into the scope of the landfill tax. A joint waste crime unit is looking at how much waste is being exported abroad because of landfill tax.

What are you doing to ensure that revenue from motoring taxes, particularly fuel duty, is not counteracted by the reduction in petrol and diesel vehicles? asked Holden. Scholar said it has been flagged and under review for several years but that did not satisfy Holden who feels the legwork has not been done to look at the impacts on tax take. What other revenues do you consider at risk now in the tax system, alongside fuel duty? asked Holden. Beth Russell replied fuel duty, vehicle excise duty, landfill tax, the emissions trading scheme receipts, and the carbon price support tax. Obviously, the timing for those will differ, but that is £37 billion a year within a few years.

Holden closed his line of inquiry by asking why the Treasury has not set out a ‘serious, comprehensive, and public review and analysis of the potential options’ for environmental taxation, as set out in the Mirrlees review in 2011. Scholar replied that we may not have done a single study of the sort that the Mirrlees review called for, but in Budgets over the last decade, and through other things such as reviews of specific taxes, we have undertaken a lot of analysis and published a lot of it. In a few months’ time, the Treasury will publish a review into the costs and benefits of the transition to net zero, he added.

Barry Gardiner wondered why it is not a requirement for tax information and impact notes (TIINs) to include quantification of the expected environmental impacts of those measures. Stanier explained that they are included ‘wherever we can’, adding ‘we are making progress’, but she ‘absolutely recognise that there is more to do’.

Gardiner asked if the upcoming net zero review will consider that all our taxes are to an extent environmental taxes. Scholar said the main intention of the upcoming report is to give an analytical framework within which to think about the costs. Government will respond to the separate Dasgupta review, and Scholar does not know how the net zero review will sit alongside the Dasgupta review.

Gardiner highlighted that the Institute for Government has called for a tax road map to net zero. (CIOT has also argued for an environmental taxes road-map.) Scholar said the Government will be very conscious of the need to give everybody—all economic actors, households and businesses alike— proper time to understand the nature of the transition to net zero.

Chair Meg Hillier, Labour, said this hearing has highlighted one of the tensions: we need long-term planning, but Budgets are annual and very led by the day-to-day politics.

Craig Mackinlay, Conservative, said he had “a little scepticism on some of the environmental taxes, because some of them are not that environmental; they are just very good taxes, often taxing things in a fairly inelastic way.” He pressed HMRC’s Jim Harra on the taxation of company cars. Harra thought he was probably right that higher taxes on cars with bigger engines was originally a proxy for the cost of the vehicle and therefore the wealth of the taxpayer, rather than a green tax. He accepted company car taxation was not really environmental, rather it is just about trying to achieve ‘neutrality’ in the tax system, making the tax system less skewed towards giving cars as a form of remuneration compared with other methods.

More generally, HMRC have changed the rules for tax on vehicles, whether it is VED or in the income tax system, in favour of more environmentally-friendly cars. That will have an incentive effect, said Harra. Mackinlay said one of his concerns about the ‘hard closure’ in 2030 is that “those technological advancements will simply now stop because Ford or anyone else are not going to invest billions on the new Euro 7, Euro 8, Euro 9 or whatever they might have been.”

Mackinlay suggested Air Passenger Duty (APD) in the UK is just an easy tax to collect and nothing to do with the environment given the high rate of APD, big airports and ’Brits love to go abroad’. Harra said when you go back to the introduction of APD in 1994, it was not professed to have an environmental objective.

Stanier said the plastic tax will drive a 40 per cent increase in the use of recycled plastics.

Harra said the most serious tax gap in all these environmental taxes is the landfill tax gap, which is possibly the result of bringing unauthorised waste sites within the tax. Stanier went on to explain that HMRC do not attempt to calculate estimated gaps for smaller taxes individually.

Peter Grant, SNP, worries that carbon price support incentivises distributors and customers to buy their electricity from abroad rather than the UK. Beth Russell said the main impact of the tax has been about an 80 per cent reduction in coal-powered over the 2013-to-now period. Grant came back and claimed the Treasury is quite happy to carry on importing electricity, leaving untapped our huge reserves of renewable energy in the north of Scotland.

Sir Geoffrey Clifton-Brown, Conservative, asked how far HMRC considers behavioural change when they introduce new taxes, such as the ‘plastic bags tax’ and switch from leaded to unleaded petrol? Stanier said they do and that public and business attitudes to plastics, for example, are changing all the time, ‘so trying to distinguish exactly what the impact of the tax itself is within all that is quite challenging’. On the plastics tax, the MP would like a little more pressure on the producers by making that tax fall at least in part on consumers.

Stanier said HMRC will publish a new evaluation framework later this year, to set out the overall principles and approach that they will be applying to environmental taxes.

Clifton-Brown opined that the current range of instruments (taxes, regulations, etc) that we have will not deliver us the carbon target by 2050, and that they will need to be increased. Tom Scholar said there is no doubt that further government action is need.

The NAO Report said that the taxes that are considered environmental taxes are the climate change levy, carbon price support, landfill tax and the aggregates levy. Conservative Richard Holden said that however much these are talked about as green taxes or environmentally friendly measures that have been taken, if you have got no objective for them, ‘they are actually just taxes’. Scholar countered that they raise considerable amounts of revenue, but they also have a positive environmental impact.

Harra said it is important that alongside the broad incentive that the tax creates, there is also a complementary regulatory and enforcement regime, ‘which is certainly there in the case of landfill tax’.

Gardiner said we need to stop talking about environmental taxes as if they are a solution here, and to realise that all fiscal measures can have an impact.

Stanier said there are a range of reliefs that have environmental objectives, including those relating to home insulation, the lower VAT rate, the corporation tax allowances for low-carbon technology and a whole range of others. We monitor how those reliefs are operating against the objectives that they have been set, she said.

Gardiner asked if the Government could monitor what proportion of tax reliefs are given for environmental objectives or infrastructure that has an environmental objective towards it, and those that are environmentally damaging. Harra replied that HMRC will be publishing later this year their evaluation framework, which sets out how they go about evaluating all tax measures.

The full session is here: https://committees.parliament.uk/oralevidence/1817/default/

By Hamant Verma