MPs Criticise Government’s Green Tax Strategy

The Government has published its response to last year’s Environmental Audit Committee report on environmental taxes. The response fails to address the Committee’s first four recommendations, which collectively called for an environmental taxation strategy and a definition of environmental taxes.

In opposition, George Osborne said that he wanted “to move towards more effective and fair taxes on pollution. I want the proportion of tax revenue raised by green taxes to rise.” Since he became Chancellor, George Osborne, has not set out a strategy for how the Treasury will increase the proportion of environmental taxes except to say that revenues from the new Carbon Floor Price, the Carbon Reduction Commitment and receipts from auctioning of EU Emissions Trading System allowances will primarily deliver the increase.

The Committee’s called on the Treasury to set out its detailed plans for increasing the proportion of environmental taxes as part of an environmental tax strategy, along with details of how these taxes are defined. The Committee favoured the Office for National Statistics’ definition of an environmental tax, which considers the effect of a particular tax rather than the specific reason for introducing it.

Based on the ONS’s definition, taxes such as the Fuel Duty and the Air Passenger Duty would be considered to be environmental taxes. However, the Treasury disagrees. It does not consider either to be an environmental tax because the primary reason for introducing them was not to change environmental behaviour.

Another of the Committee’s recommendations was for the Government to introduce tax incentives, such as a Council Tax rebate, to encourage the take up of the Green Deal. Whereas the Government does not respond to this specific recommendation it does point to the announcement in the Autumn Statement that £200 million of capital spending resource will allocated to the support the uptake of the Green Deal. The Committee also called on the Government to consider the ring fencing of revenues from some environmental taxes and earmarking them for specific purposes. The Government rejects the recommendation and concludes that the hypothecation of environmental taxes leads to inflexibility in spending decisions.

An important consideration in determining environmental taxes is the extent to which they adequately reflect the environmental damage they are seeking to reduce (the externalities). The Committee called on the Government to build a consensus on a methodology for calculating environmental externalities. In its response, the Government states that when designing environmental taxes it “considers the efficiency of the taxes and the extent to which they minimise distortions, the sustainability of the tax base and the fit with other environmental policy levers.” It does not respond to the Committee’s point about ensuring that environmental taxes are set at a level that adequately reflects the damage being caused and, therefore, whether they are having the desired effect on changing behaviour.

Tags: Carbon Floor Price, Environmental Audit Committee, Environmental taxes, George Osborne, Green Tax, HM Treasury