by Peter Jones
8 minute read
The Budget last week offered little to excite the environmentally minded, as George Osborne produced no new green measures from his battered red box. One of the main talking points in the waste sector has been the absence of any clarification of what will happen to Landfill Tax after it reaches £80 in 2014/15. The Green Alliance advocates further increases, but the Environmental Services Association and various local authority representatives are looking for the escalator to stop. At the same time, the planned fuel escalator increase for September 2013 was cancelled.
The continuing lack of any clear articulation of principle regarding environmental taxation was disappointing. Indeed, the Chancellor made no mention of the environment at all in his speech; his focus was on family finances and encouraging growth. So, is there a rationale for either escalator to continue?
Externalities and beyond
The Landfill Tax was announced in 1994 by Kenneth Clarke and introduced in 1996, initially with the aim of recognising the externalities of the use of landfill. As early as 1993, a report by the Royal Commission on Environmental Pollution expressed concern that “the private costs to the operator are not likely to reflect fully the overall cost of waste disposal to the community”.
The 1995 UK Waste Strategy made clear that internalising externalities was the primary goal of the tax, which might in turn increase recycling and reduce landfill use. Exactly how the initial level of £7 per tonne was set was never entirely clear, but a Eunomia report concluded that it was based on work by the Centre for Social and Economic Research on the Global Environment (CSERGE). This found a mean negative value for landfill of around £3 per tonne, due mainly to transport impacts and methane emissions. Incineration was found to have positive externalities of around £4 per tonne as a result of ‘pollution displacement’. The figure of £7 appears simply to be the difference between these two values.
The introduction of the Landfill Tax escalator in 2005 represented a major change of focus, driven in part by the need to meet Landfill Directive targets for diversion of waste from landfill, and in part recognising criticism from commentators as diverse as Coopers and Lybrand and Friends of the Earth that the £7 rate was “simply not high enough to persuade waste producers to change their behaviour and either reduce their taxable waste, or invest in alternative and expensive disposal/recycling methods.” The Landfill Tax escalator was designed to give clarity to the industry and allow them to react effectively and to plan their capital investments.
The escalator came into effect in 2005, and has been successful, both as a tax raising measure and as a tool to change behaviour. Recycling and energy recovery facilities have proliferated, and both local authorities and commercial waste collectors have greatly increased the extent to which they recycle waste. The declared amount of waste landfilled has fallen from almost 52m tonnes in 1997 to 19m tonnes in 2012; meanwhile, tax receipts have risen from £378m in 1997 to £1.1bn in each of the last two calendar years.
There are two more £8 April increases before the tax reaches its announced maximum of £80. In this context it is perhaps explicable (if optimistic) that the Treasury should be predicting an increase of £65m in the 2014/15 tax take. Rather less readily understood is the forecast that it will remain £60m above the current level through to 2017/18; none of the supporting documents supplies a rationale. It is unlikely that the Treasury would be pricing in unannounced further tax increases, so presumably the Government expects that the tonnage landfilled will remain constant. In view of the large amount of residual waste treatment capacity coming on stream over the coming years, this would appear to be rather unlikely, leaving something of a hole to fill.
The budget left us in the dark on the landfill tax escalator. Photo by Paul Vlaar, via Wikimedia Commons
With the CSERGE estimate of externalities from landfill vastly exceeded and behaviour change happening apace, this tax escalator may have reached the top floor. The policy justification for a further step change isn’t apparent – although small increases to maintain its real terms value would ensure that the current incentive to invest is not eroded.
A fuel and his money
How does this compare with fuel tax? The Hydrocarbon Oil Duty, as it is less commonly known, has a long history: a tax was first levied on petrol in 1908. The escalator also has also followed a longer, and far more gradual path than landfill tax, having been introduced by the Major government in 1993. Set at 3% above inflation, the pill was sweetened by a substantial reduction in taxes on profits from oil extraction, but successive governments through the 1990s continued to add 5 or 6p per year to the duty.
Increases slowed under Gordon Brown’s chancellorship, and it peaked at 58.95p per litre in January 2011. George Osborne has since presided over a rare cut to the rate, 1p in January 2012, and has replaced the escalator with a stabiliser mechanism that allows for duty increases only if the oil price falls below £45 per barrel. Brent crude is currently over $100 per barrel, and not predicted to fall any time soon.
It is striking how similar the logic for implementing the fuel duty escalator was to the argument for landfill tax rises. In the current political context, Norman Lamont’s comments in his budget speech sound radical:
“The largest contribution to the growth in United Kingdom carbon dioxide emissions in the coming years is expected to come from the transport sector. I therefore propose to make clear today the Government’s long-term intention on road fuel duty. We intend to raise road fuel duties on average by at least 3 per cent. a year in real terms in future Budgets…. In deciding the level of duty to be levied in any particular Budget, we will, of course, take full account of conditions at the time…. However, my announcement today will help manufacturers and consumers to plan ahead. It should provide a strong incentive for motorists to buy more fuel-efficient vehicles….”
If the logic was the same, the effects have been rather different.
- There has been a small decline in annual fuel consumption since it peaked in 2007 at 49.5 billion litres to 45.1bn litres in 2012 – marginally below the level in 1990. However, compared with the 60% reduction in waste landfilled, a 10% fall in fuel use is modest. Consumption grew during the period when the escalator was in full effect, and since 2007 duty on petrol has only increased by 4p. It seems that the wider economy and the price of crude oil rather than the duty is behind the fall.
- Our dependency on fossil fuel-powered cars declined very little. The National Transport Survey for 2011 reports that the number of car/van driver miles per person per year has decreased by 5% between 1995/97 and 2011, although this is partly explained by a small decline in the overall number of trips and miles travelled, by whatever means.
- Cars have become more efficient, but not remarkably so. Diesel has overtaken petrol as the main fuel used, in part because of better fuel economy – but as a driver of a 40 year old car, I can attest to not feeling priced off the road.
- There has been significant scholarly work on valuing the externalities of fossil fuels used for transport. One of the leaders in the field is Ian Parry, whose 2002 study “Does Britain or the United States Have the Right Gasoline Tax?” may now be dated, but sets out an interesting if methodology. He concluded that the optimal tax level to capture externalities was $1.01 per gallon for the US and $1.34 per gallon for the UK, the difference being due mainly to a higher marginal congestion cost on the UK’s crowded roads. Congestion was the biggest single externality identified by Parry, who priced in CO2 emissions at £25/tonne – accounting for just 6 cents per gallon. Converting from US gallons, Parry’s work implied tax of $0.354 per litre, substantially below the current fuel duty rate.
Like Landfill Tax in the 1990s, UK fuel duty may already have exceeded widely quoted estimates of externalities. Excluding VAT, duty makes up around half the price that is paid at the pump. This is not unusual for Europe, but far higher than in the US. Landfill tax in the UK comprises more like 75% of the cost to the user – again with VAT on top. However, while Landfill Tax rapidly provoked investment in recycling and treatment and drove a great increase in recycling, fuel duty has not led to comparable behaviour change.
I would trace this to two main factors. One is that fuel remains relatively affordable, and has not risen dramatically real terms. Considering that oil is a volatile substance that must be prospected and drilled for, extracted from often harsh environments, transported, refined, transported again retailed and taxed, it is remarkable that it costs less per litre than premium orange juice – seemingly a far easier fluid to obtain.
More importantly, we are hooked on personal transportation, and Government has not articulated a clear alternative. Is the duty supposed to prompt a move to electric vehicles? Fund a comprehensive public transport network? Price people into a greater reliance on walking and cycling? Or perhaps just reduce the amount of travel that we do? The status quo is comfortable and popular, and there is little political mileage in driving people towards change.
For a chancellor eager not to repeat the omnishambles budget of last year, faced with heavy dependency on road transport and the desire to stimulate growth while controlling inflation, setting aside an increase in fuel duty is an easy call, despite the foregone income. But to do so without a coherent message about the future of this tax is far more damaging than the uncertainty regarding the Landfill Tax escalator, whose main effects have already been felt. Individuals, vehicle manufacturers, and even oil companies need a clear message about whether to plan for greater fuel efficiency and less car reliance, or for more of the same.
I agree that the LFT escalator has gone well past the point of covering environmental externalities associated with landfill but perhaps not of the externalities of resource waste more broadly. It has been used as a primary driver to achieve recycling targets and arguably doesn’t need to go any higher to achieve that shift. But that doesn’t mean the escalator has to stop. It could be considered simply as a tax raising measure – we need tax income and taxing bad things like waste is arguably better than taxing jobs. The criteria here are different and about efficiency of collection – which LFT scores highly on- and avoid ability, buoyancy etc – where it does less well. We do need to consider the behavioural response and continuing the escalator without considering the impact on alternative treatments could lead to a whole switch to EfW beyond what the waste hierarchy requires.
The fuel escalator raises different questions. it has proved hard to sustain when consumer costs are being impacted by significant market movements outside the tax regime and at the end of the day it is the total cost -and not how it is made up which affects behaviour.
Price elasticities are complicated here – there are short and long term effects which take time to reveal themselves. Combined with a long term regulatory programme to improve engine efficiencies we have seen a shift to more efficient cars as a long term response to rising fuel costs. It is an interesting question how high costs would have to rise before we see other more fundamental changes like people choosing to work much closer to home to cut commuting mileage and how they would trade off that against reduced job opportunities.
The other confounding factor of course is what is happening to the cost of alternative transport modes where the escalator on rail fare increases is surviving for now.
Phillip, thanks for your comment – there’s a lot in it that I agree with, but I would take issue with a couple of points. If the chancellor is looking for tax-raising measures, landfill tax would not be a great choice. At £64 per tonne it is bringing in only just over a billion, and the large amounts of new waste infrastructure coming on stream will see the taxable tonnage continue to decline. A higher tax will make the case for shipping waste overseas for RDF stronger, further pushing down the tonnage. This could be one tax where, under the circumstances, something like the Laffer curve might really apply!
It might perhaps be made to work if it was accompanied by something far more controversial – an incineration tax (levied both on incineration in the UK and waste shipped overseas for RDF) to genuinely push waste up the hierarchy faster.
I agree that the fuel duty escalator has proved politically difficult in part because of volatile underlying fuel prices, but as I argue in the article the real terms increase in prices at the pump has not been dramatic compared with the rise in the cost of landfill. You’re right to highlight the contrast with rising rail fares (and the same is true of bus fares outside London).
Fuel efficiency may be improving, but the real prize would come from facilitating the sort of lifestyle change you highlight in your comment. Are there ways in which we can reduce commuting mileage without decreasing people’s access to work?
Peter
I think we are agreeing – though I could perhaps have spelled out my points about avoidability and buoyancy further. LFT is very easy to collect and that makes it attractive to the Revenue, but since it is relatively easy to avoid by using alternative waste treatments – including prevention- it’s yield is ultimately limited. It is therefore a fine call for the Treasury whether to keep increasing the rate to maintain the existing yield for a while longer. I also agree that the danger is that, even at current levels, the tax provides incentives to adopt poor practice from a resource point of view – whether that is a switch to RDF or exports of low grade materials for recycling.
That does suggest some other regulatory intervention may be needed – a UK incinerator tax would tend to push up exports while an EU wide tax would be opposed in principle I imagine by the Treasury. Which all suggests that robust action on the quality action plan currently being consulted on by Defra is going to be important.
On commuting costs and changing work patterns it is hard to predict how peoples’ habits might change because there are many trade offs to be made, the main ones being house prices, so people can afford high commuting costs if they are able to live in a cheaper housing area. But technology has a big role to play. If the infrastructure existed people would not need to travel everyday to work and could cut down on work related travel to meetings. That is just one of the reasons why I am rueful about the government’s insistence on giving priority to HS2 over a proper universal genuine high speed data network.