Something in the air? The Autumn Statement and pollution

Wednesday’s joint spending review and Autumn statement (SRAS) ought to give us some insight into the George Osborne’s thinking about the current and future state of the economy, and his priorities for how it should be managed. So what environmental and other implications can we infer from the document and the decisions within it?

Hastily prepared policy documents are perhaps more common than one would like to think. There was, though, something about the Autumn statement that gave the impression of a particularly rushed job. Last minute changes seem to abound in the document, with the majority of the decisions within it seeming to have been made on the hoof in the last couple of weeks. It smacks of panic, and a chancellor back on the heel of his back foot. However, as a result the headlines were mainly focused on the Chancellor’s spending decisions – his U-turn on tax credits, the additional spending on defence and the police – rather than the continuing cuts to many departments’ spending.

Check your receipts

The Chancellor found his hands somewhat freed by the much discussed £27bn improvement in the public finances. This arose from revisions in the Office for Budget Responsibility (OBR) forecasts in respect of tax receipts (up) and debt interest payments (down). It does make you wonder when the OBR decided to adjust its views…

Perhaps it’s simply a manifestation of the considerable uncertainty surrounding any economic forecast, particularly in an increasingly interconnected world: the available levers don’t give as much control over the prospects for our economy as we might imagine. However, the Chancellor’s choices will have significant environmental impacts.

In some previous posts on this site, I’ve discussed the Treasury’s take on environmental taxes, and highlighted the damages associated with air pollution. Recent reviews covering EU member states environmental taxes demonstrate that air pollution is singularly ‘under-taxed’, given the damages we know it causes. Even in Nordic countries, where taxes are highest, they are set at levels that are a fraction of the known damages – the so called externalities.

It’s baffling that taxes on air pollution aren’t widely implemented. From the perspective of economic orthodoxy, with which one would hope the Chancellor is familiar, that most likely means that EU economies function with a level of air pollution which is inefficient. Expressed in the vernacular, too many people are suffering as a consequence of air pollution.

Air apparent

There are, of course, regulatory measures intended to deal with air pollution. What is now the Industrial Emissions Directive will set limit values for pollutants on a sector by sector basis; whilst there may be reasons to applaud the approach, it is somewhat bureaucratic, and effectively allows pollution below the levels identified to continue with no incentive to pollute less. The polluter isn’t paying.

It’s interesting to see what the joint SRAS said about this issue. In Budget 2012, Mr Osborne announced that he was going to bring company car tax rates for diesel vehicles into line with petrol driven ones. I’m not entirely sure why he chose to do this, but the Joint SRAS announced that the differential between the two will now be maintained out to 2021.

I’d like to think that Mr Osborne has been persuaded of the merit of this in the light of the fact that other duties (Vehicle Excise Duty (VED) and Fuel Duty, for example) favour diesel vehicles. It’s more likely, however, that he saw this as a straightforward way to grab back £265-280 million a year. Still, it’s puzzling: if the Chancellor decided (probably rightly) that harmonisation was a bad idea, why just delay the change? Why not abandon it? Perhaps a rationalisation of the other duties is planned, so as to develop an incentive-compatible set of measures – but it seems more likely that there is no coherent strategy here.

Air transport

The SRAS also announced “the biggest investment in transport infrastructure in generations”, including a significant chunk of investment in rail – particularly in the construction of the controversial High Speed 2 (HS2) line. However, the £46.7bn capital expenditure allocated to DfT over the next 5 years includes £13.4bn is to be invested in the roads, including:

“resurfacing over 80% of the strategic road network, and delivering over 1,300 miles of additional lanes, the equivalent of travelling from Bristol to Newcastle four times.”

From 2020-21, roads investment will be supported by a new Roads Fund paid for directly from VED revenue, with a strategy for its use to be published before the end of the Parliament. But without much by way of countervailing instruments and policies to address air pollution, the additional investment must be expected to lead to additional journeys, and with it worsening air pollution.

Air quality is the pits – and doesn’t seem likely to improve as a result of the Joint SRAS. Photo: HMSO (Crown Copyright), of ‘At the Coal Face’ by Henry Moore

Finally, the SRAS confirms a trend which emerged when Osborne announced new environmental taxes in the early days of the Coalition government. He has been steadily seeking to exempt energy intensive industries from the costs of policies which influence the price of energy. Now:

“The government will provide an exemption for Energy Intensive Industries, including the steel industry, from the policy costs of the Renewables Obligation and Feed-in Tariffs, to ensure that they have long-term certainty and remain competitive.”

Sheltering energy intensive industries from increasing energy costs diminishes their incentives to use energy more efficiently, ensuring that the air pollution damages caused by industry remain at, or close to, their existing level. I imagine that there will also be pressure to reduce the costs of the IED on industry in due course.

And irony of ironies, the savings offered to industry will be added to household bills: an example of ‘the polluted pay’ principle.

Taking the heat

While Amber Rudd’s policy re-set speech had little of substance to say on heat, the SRAS sounded upbeat about the Renewable Heat Incentive (RHI):

“The government will increase funding for the Renewable Heat Incentive to £1.15 billion by 2020-21, while reforming the scheme to deliver better value for money. By the end of the Parliament the government expects to have incentivised enough additional renewable heat to warm the equivalent of over 500,000 homes.”

But this announcement was in fact a reduction in funding compared with previous plans. The accompanying tables show the change saving £30m next year, rising to £690m in 2020/21, a net reduction of £1.5bn in the period to 2021. While hard to quantify, reducing investment in renewable heat seems unlikely to have a positive impact on air pollution

It wasn’t all bad: an announcement of £295m over five years to improve the energy efficiency of schools, hospitals and other public sector buildings is welcome, though pretty small beer. Let’s hope the amount belies the effectiveness of the measures.

The “£300 million of funding for up to 200 heat networks” might also be of interest, though the statement that this “will generate enough heat to support the equivalent of over 400,000 homes and leverage up to £2 billion of private capital investment” deserves some critical scrutiny. Heat networks have not proven so easy to develop on a commercially viable basis.

The big picture

There was also the commitment of providing “up to 10% of shale gas tax revenues to a Shale Wealth Fund, which could deliver up to £1 billion of investment in local communities hosting shale gas developments”. However, I have recently highlighted the fact that air pollution consequences of gas fired electricity are of the same order of magnitude as the climate change impacts: the “up to £1 billion” gives a worrying indication of the scale of investment Government is anticipating in shale, and doesn’t look so fabulous when one considers that the air pollution externalities of energy generation today are of the £5 billion annually.

So I ask again – why do we refuse to tax air pollution?

Amber Rudd, in announcing her policy re-set, commenced her speech by referring to Nicholas Evans’ painting At the Coal Face. It reminded her that efforts to power our homes have been ‘a very human endeavour’. That is true. But as my wife will testify, many human beings – her father included – died in that endeavour: he was a Pole who escaped from the labour camps in World War II, but he was powerless to combat the ceaseless ingress of coal dust into his lungs. His only mistake was that he breathed.

Air pollution kills people. A policy re-set that reifies gas when we know we can do so much better – for the climate and for our health – looks criminal. Ministers have a choice: allow for a continuation of air pollutants that, in the arcane language of economists, ‘bring deaths forward’, or opt for something altogether cleaner.