‘Green’ taxes should go on ‘green’ measures

The Treasury has retreated from its former flagship of environmental taxation: the fuel duty escalator.

With Gordon Brown’s tax concessions on ultra-low sulphur fuel, announced in his pre-Budget speech earlier this month, the Treasury retreated from its former flagship of environmental taxation: the fuel duty escalator.

This was aimed at fighting climate change by cutting transport carbon dioxide emissions, but instead, Brown has turned his attention to a local air pollution issue.

Global warming and local air pollution are serious, but very different, environmental issues.

And jumping from one issue to another did nothing for the credibility of ‘green’ taxation.

During the 1990s successive govern-ments concluded that environmental taxes receive a warmer welcome than most others. Taxes on travelling, consumption or waste are supposed to modify behaviour, so taxing energy use is meant to spur companies into action to avoid the tax. The fuel duty escalator was originally justified as protecting the environment by persuading us to travel less. In recent months, however, it has been credited with supporting everything from the NHS to pensions, while apparently also keeping interest rates down.

The environmental case for the escalator hardly receives a mention, but it is clear that the billions raised have not been spent on cutting CO2 emissions.

The escalator is not the only billion-pound environmental tax which fails to direct much of the revenues to green issues. There is the climate change levy. In the 1990s, industry agreed that environmental taxes might be acceptable to tackle environmental impacts if they were ‘hypothecated’ — recycled for a specific purpose. In reality governments have recycled green taxes as reduced national insurance contributions, which industry perceives as unfair.

Questioning the rationale behind the levy should not be confused with downplaying the prospect of global climate change. What if we are, as policy makers have been saying in The Hague this week, on the cusp of a major global problem? Why not fully recycle the environmental tax, whether on petrol or industrial energy use, to deal with the environmental impact? In fact, only 15% of the levy will go back to helping reduce UK energy use, hardly the best response to a pressing global issue.

The government might improve the chance of meeting its Kyoto commitments to reduce greenhouse gases if it opted instead for smaller, better targeted taxation which ploughs all the money back into boosting renewables and energy efficient production. The levy could have been cut to a third of its current rate, raising around £350m, while still doubling the support to environmental investment offered by the present scheme.

This extra commitment could hasten the arrival of the high energy efficiency, lower carbon economy much beloved of policymakers, without delivering a body blow to manufacturing competitiveness.