What’s in a name? The Treasury’s green tax-onomy

The Treasury has finally settled on its definition of a green tax and it is a narrow one. Why? – because the Coalition agreement included a commitment to double the proportion of total taxes represented by green taxes. The smaller the amount of tax take that is included within the definition, the less the Government will need to do in order to meet its commitment.

A tax will therefore count as green only if it is explicitly linked to the Government’s environmental objectives; its primary objective is to encourage environmentally positive behaviour change; and it is structured so that the more polluting the behaviour, the greater the tax levied.

On this basis, the Government has determined that only the:

• Climate Change Levy
• Aggregates Levy
• Landfill Tax
• EU Emissions Trading System (EU ETS)
• Carbon Reduction Commitment Energy Efficiency Scheme; and
• Carbon Price Support

will count as green taxes. Forecasts provided by the Treasury show the yield from these taxes growing from £2.5bn last year to £6.6bn in 2015. That looks a lot but it is in fact an increase from approximately 0.5% to 1% of the total projected tax take.

Excluded from the list of green taxes are those which, while impacting on environmental behaviour, are deemed to be essentially about revenue raising. These include three taxes which are having a big impact on some of our most polluting behaviours: vehicle excise duty, fuel duty and air passenger duty.

Call of duty

A few things leap out at me from this announcement. First, the Chancellor is not going to put himself on a hook that might require him to raise fuel duties except on his own terms. After the fiasco with the cancellation of the planned August rise and his humiliating U-turn, that is perhaps not surprising and arguably fuel prices are already sufficiently high to keep driving fuel economy for now.

But one down side of the narrow definition he has chosen is that it seems he needs to do nothing else on green taxes in this Parliament in order to achieve the Coalition’s commitment, assuming that the OBR’s projections of the yields of the different taxes are realistic.  The take from Landfill Tax, which is projected to rise significantly while waste volumes are expected to fall, is already being challenged. The Chancellor is not of course barred from exceeding the commitment but this looks like a clear signal that he is not interested in creating additional taxes specifically to change environmental behaviours – although further revenue raising is not ruled out.

I don’t even see an upside here in a reduced interest by the Treasury in other environmental policies like the PRN system. They will still regard these as taxes – just not green taxes – and insist on having the final say as they do now.

Shifting the burden

The fact that surprised me most in this announcement is the low proportion of the total tax take represented by green taxes. At a time when for both economic and environmental reasons, there is an arguable case for shifting the burden of taxation from labour to consumption, there seems to be no ambition to explore other options. It means that the letter of the Coalition Agreement will be met but not its spirit.

The Chancellor, of course, has form on green scepticism and no doubt that is partly reflected in these decisions. But there is also a fair measure of political and operational reality involved. With staff resources and morale falling at HM Revenue and Customs and a pressing need to increase the efficiency of the big earner taxes, diverting resources to setting up new green taxes is bound to get a lower priority. Introducing taxes that impact on the rate of consumer inflation can play havoc with index linked benefits and pensions, as we saw with the increase in VAT and the fuel duty escalator, quite apart from their political unpopularity.

So is this the end for green taxes? I think we are certainly entering a quiet period, but there seems still to be scope to argue for revenue raising to be done in a way which encourages better environmental behaviours.

In the longer term, those interested in shifting the burden of tax will need to help politicians understand better how this can be done while managing the downsides. I offer as an example the Climate Change Levy, where the potential impact on big energy users was offset by offering a lower tax rate in exchange for sectoral agreements to achieve energy saving targets.