A tax system fit for net-zero Britain is key, say MPs

25 Feb 2021

The House of Commons Environmental Audit Committee (EAC) published its ‘Growing back better: putting nature and net zero at the heart of the economic recovery’ report last week (17 Feb) which includes a call for VAT reductions to encourage energy efficiency, the use of recycled materials, and repair services.

The EAC’s remit is to consider the extent to which the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development. In this latest report the EAC warns that if the economic recovery from COVID-19 is not used as an opportunity to 'grow back better', climate change and biodiversity collapse may deliver an even greater crisis. The report calls for the Government to front-load its investment in areas such as energy efficiency, the circular economy, climate adaptation and nature recovery, to counter rising unemployment by creating green jobs.

In addition to promoting specific sectors, wider tax changes could offer a reset to design an economy fit for net-zero Britain, say MPs on the committee. The EAC believes that this should include VAT reductions to repair services and items that have been recycled to encourage a circular economy. VAT reductions on energy efficiency upgrades in homes and tax incentives to encourage more take-up of ultra-low emission vehicles could make greener options more attractive to consumers. The Government should also look wider and consider applying carbon taxes in areas across the economy.

On industry, the report says the hydrogen strategy is long-overdue, and its publication cannot come soon enough to offer incentives for the private sector to invest in hydrogen production, which could play a key role in the low-carbon energy mix. It argues that the Government should begin scoping work on a carbon tax to incentivise low-carbon changes across the whole economy. The EAC is also calling on the Government to investigate the merits of carbon border adjustments, to accompany work on a carbon tax, as one way of addressing carbon leakage.

The report makes a number of recommendations on fiscal and financial incentives for a green recovery. These include saying that further tax incentives should be introduced to make ultra-low emission cars more affordable. Where current environmental taxes, such as Air Passenger Duty, are blunt in their effect, the Chancellor should consider fine-tuning them to reward and incentivise investment in cleaner, more efficient, low-emission technology, say the MPs. The report also urges the Government to begin scoping work on a carbon tax to incentivise low-carbon changes across the whole economy.

As the UK recovers from the immediate crisis, a shift towards green taxation could help direct investment into job-rich low carbon activity, shift behaviour and increase resource and energy efficiency, says the report. The Government now has the latitude to propose the variation, or the abolition, of VAT on certain categories of goods.

They also recommend that the Government investigate the merits of carbon border adjustments, to accompany work on a carbon tax, as one way of addressing carbon leakage. But MPs recognise this would also require measures to ensure that such policies do not adversely impact developing countries.

An interesting part of the report is where MPs outline external proposals for tax changes to support the transition to a sustainable society, although not all are addressed in the report.

  • Anglian Water Services calls for the Government to apply the ‘polluter pays’ principle to manufacturers of polluting plastic wet wipes: ‘nuisance single-use plastic products that cause fatbergs, local sewer flooding and pollution, and severe and lasting damage to wildlife and the natural environment.’ This is an issue the committee will be examining in its inquiry on Water Quality in Rivers.
  • Green Alliance recommends a reduction in VAT on home retrofit, pointing out that building renovations are currently subject to 20 per cent VAT, while new build is zero-rated for VAT.
  • Zero Carbon Campaign call for a carbon tax.
  • ClientEarth suggests extending the plug-in grant scheme until ZEEVs (zero-emission electric vehicles) reach cost-parity with their petrol and diesel counterparts. It also recommends that the Government introduce a time-limited VAT exemption to reduce the upfront cost of ZEEVs and reform Vehicle Excise Duty to better reflect the health and environmental impacts of petrol and diesel vehicles.
  • The Society of Motor Manufacturers and Traders (SMMT) proposed a package of incentives to make electric vehicles effectively tax-free (for example paying no VAT, vehicle excise duty or company car tax for an extended period).
  • Green Alliance called for an increase in fuel duty. It said that the ten year fuel duty freeze had cost the Treasury an estimated £8 billion in lost tax and increased emissions.
  • The CBI advocated a net zero mobility credit, which would give people the option to scrap their high-carbon transport options and move towards lower-carbon forms of transport, be that electric vehicles or scooters.

Aside from tax, the report makes recommendations on green transport. The MPs say air pollution has been linked to higher COVID-19 mortality rates. They argue that the Government should use the upcoming transport decarbonisation strategy to set out plans for long-term investment in public transport, and enhance travel infrastructure to support more walking and cycling in towns and cities. It is also clear, the MPs say, that cutting-edge manufacturing processes are required for the roll-out of electric vehicles and their batteries, with estimates suggesting the UK will require up to eight gigafactories. Together, these initiatives will improve the air we breathe, cut carbon and improve our health and fitness. The Government's road building programme must be rigorously assessed against the UK's air quality, biodiversity protection and climate change targets before individual projects proceed, say the committee.

The MPs also say that the nature recovery network that the Government has promised must not be an afterthought established after other infrastructure is built. Nature recovery must be integral to the Government’s infrastructure plans, they argue. The EAC realises that investment in nature recovery projects could protect UK wildlife, and could create thousands of job opportunities. The idea of a National Nature Service should be piloted – in partnership with conservation charities – to test its feasibility and open up conservation opportunities, says the committee.

The EAC recommends that the Government introduce embodied carbon targets for the construction of new homes, so as to increase demand for low carbon materials, thereby stimulating growth in low-emission manufacturing of traditional, local materials and promoting the use of new low carbon materials. The Green Homes Grant must be overhauled and given a multi-year extension if it is to meet the Government’s target of issuing 600,000 vouchers, they say.

The full report is here.

By Hamant Verma