A climate for change in green taxation?

24 Aug 2020

In a guest blog, Jason Collins, chair of the CIOT's new Climate Change Working Group, looks at what role tax might play in delivering a zero carbon Britain

With business leaders calling on the UK government for a 'green' recovery from Covid-19, is it time to rethink our tax system to make it green at its core?

Green government spending

In June 2020, more than 200 UK firms and investors called for the UK government to deliver a Covid-19 economic recovery plan involving government spending which is in line with climate goals – and there appears to be ever increasing support for this objective. The UK is in a strong position to show leadership in this area as it prepares to host the delayed UN climate summit, COP 26, in Glasgow next year. The summit is billed as being the most important meeting since the Paris Agreement was reached in 2015.

Green tax rises

The Covid-19 pandemic has put a severe strain on the UK's finances. The most recent economic statement has already seen the introduction of investment measures to boost the economy aimed at green jobs and housing, with the Chancellor noting that "this is going to be a green recovery". Whilst the Treasury is still fire-fighting the economic implications, and has to date been focussed on "giveaways", it can only be a matter of time before it has to make changes to the tax system to shore up the country's finances. Spotting an opportunity for radical change, the House of Commons Treasury Committee has recently called for evidence on reform of the tax system (Tax After Coronavirus). 

In 2019, the UK committed to reaching net zero greenhouse gas emissions by 2050. That will require an annual reduction in the rate of emissions 30% greater than has been achieved on average since 1990. As with government spending, shouldn't any revenue-raising tax changes be focused in areas which will also help the UK to reach this very ambitious emissions reduction target?

The tax system can be used as a powerful tool to discourage harmful environmental behaviours, by incorporating a proxy for the cost of the damage into the price paid for goods and services; and by incentivising the use and development of greener alternatives. However, at present, UK revenues from environmental taxes are only mid-range compared to other European countries and have remained almost static over the last 20 years relative to GDP.

Time to be radical?

Environmental policy in the UK has developed in a fragmentary manner. Environmental taxes are targeted at particular mischiefs and often involve stand-alone 'new' taxes. Rather than continuing to layer taxation in this way, it would be better to ensure our tax system as a whole is aligned with our environmental objectives. We should ask ourselves what a successful environmental outcome looks like and line up the whole tax framework to meet that aim.

Businesses respond most to changes to corporation tax, so should the government opt for something truly radical such as charging a lower rate to green companies – and even perhaps lower PAYE income tax for those who work for them? Another option might be to have a traffic light system showing the impact that the production and distribution of goods and services has on the environment and adjusting the VAT rate on products accordingly.  Of course any of these would make an already complex tax system even more complex, even if the definitional challenges can be overcome.

If these options are too lofty an ambition, then perhaps we can start to edge forward by building more environmental features into the heart of the existing tax system. We must not forget however that if our aim to become a more climate friendly nation is achieved, there will be the longer term consideration for the government about its tax base – for example, what will replace petrol excise duty when we're all driving electric cars? This is why developing a holistic tax system with the climate at its core is so critical.

Driving the debate

The CIOT is currently in the process of forming a climate change working group to consider the implications of climate change for UK tax policy and to ensure that climate change considerations feed into the work of the CIOT when responding to government consultations or putting forward policy ideas across all areas of taxation. The working group also intends to connect with academics, tax think tanks and campaign groups as well as the UK Treasury and to be at the forefront of the public debate on the role of tax in combatting climate change.

Pinsent Masons was one of the signatories to the call for a green recovery plan and we are passionate about the subject.  I've been asked to chair the CIOT working group and am excited about the important role the group can play in creating debate about environmental tax policy. The initial members of the working group will be drawn from the CIOT's other technical committees so that a range of tax specialisms are represented. The working group is also interested in hearing from other members with an interest in this area who would be interested in joining. Please contact technical@ciot.org.uk to express an interest.  But in any event, if you think this is an important tax policy area, please make your views known through the Tax After Coronavirus call for evidence. Closing date is Tuesday 8 September.

Guest blog by Jason Collins, Head of Tax at Pinsent Masons and chair of the CIOT's Climate Change Working Group