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Tax and the Environment

The environmental team at Deloitte will be analysing the Chancellor's announcements on Budget Day.

Key contacts for environmental team:
Jason Moore         020 7007 2932
Helen Devenney   020 7007 3713
Daniel Lyons         0117 984 2748



The Chancellor has already taken steps to achieve environmental objectives, by using the tax system. For example, the Chancellor has introduced new taxes such as Climate Change Levy. He has increased significantly some environmental taxes, such as Landfill Tax and adjusted Vehicle Excise Duty (VED) so as to increase the tax on high-polluting vehicles, whilst reducing it to encourage low-polluting cars.

What factors might influence his environmental tax policy in the 2007 Budget?


Climate Change

The UK has always taken a strong global stance against climate change. In 2005 as president of both the G8 and the EU, the UK raised greater awareness of the problems faced globally, with the result that the G8 leaders formally recognised that climate change is a serious and long-term challenge that demands an urgent response. However, there are limits to the steps that the UK has taken to reduce its effect on climate change.

The Climate Change Levy (CCL) was introduced in 2001, as a direct attempt to encourage business to reduce energy usage (and thus emissions). The Government estimates that the levy (and Climate Change Agreements entered into by business to benefit from reduced rates) will have reduced emissions by 6MtC by 2010. However, there appears to be an increasing disparity between the carbon emissions resulting from energy usage and the CCL charged on it.

Other efforts to combat climate change through the modification of taxes, such as VED, which is now based on the fuel efficiency of the car rather than its engine size, may have encouraged individuals to consider environmental implications of their daily lives.

Gordon Brown stated in the Pre-Budget Report 2006 that it was notable that “the UK accounts for only 2% of global carbon dioxide emissions”. However, we should remember that the UK accounts for less than 1% of the global population.

The Government has just launched a consultation around the Climate Change Bill, where it seeks the views of local authorities, public bodies and other interested parties in establishing binding targets for carbon emissions.



This graph shows that the UK has seen a reduction in greenhouse gases since 1999. However, the levels of CO₂ have remained relatively steady. This means that, although the UK is on track to meet its Kyoto target, it appears the domestic CO₂ target will not be met, without further changes to reduce emissions.


Waste

In the Pre-Budget Report 2006, the Chancellor stated “the UK is committed to reducing the volumes of waste sent to landfill”. However, the UK is one of the worst EU countries in terms of volume of municipal waste sent to landfill (as shown below).



The Landfill tax was introduced in 1996 and can be seen to have had a positive impact on the percentage of municipal waste sent to landfill (as shown below). However, the UK still sent over 65% of its waste to landfill in 2005 in contrast to the Netherlands, Sweden and Switzerland which all sent less than 5% of waste to landfill in 2005.



The pre-budget report announced a £3 per tonne increase in the standard rate of Landfill Tax, currently £21, effective from 1 April 2007, and suggested there would be steeper increases in years to come. We should thus expect Budget 2007 to announce a further increase for 2008. Further increases would see the UK fall in line with the more successful European countries such as the Netherlands, whose Landfill Tax is €85 per tonne (approximately £57).

However, it’s important that the Chancellor uses the proceeds to finance recycling projects.


What next?

Clearly the Chancellor is committed to using the taxation system to improve the environment despite studies that suggest that tax does not significantly improve the green footprint of either business or individuals. The difficulty is that for many a tax increase simply becomes a cost, rather than offering an incentive to change. The scale of tax increase needed to provoke change may be unreasonably high.

However, it remains likely that existing environmental taxes will be raised further and will increasingly become a significant cost for businesses. In fact the environmental tax cost is arguably reaching the desired tipping point whereby business will become incentivised to look at ways of managing environmental tax costs. For some, this will mean not just by becoming more environmentally friendly, but starting to trade energy or allowances.

For individuals, the Chancellor’s options are open – but it remains an area where it’s hard to influence behaviour through the tax system. Increasing tax is never popular and there’s a danger that measures could be seen as pricing out the less well off. Some measures are completely impractical – such as weighing domestic rubbish and charging accordingly. One option that has caught on in Ireland is a “plastic bag tax” on the use of shopping bags at retailers. It’s simple to implement, easy to understand and has apparently been successful – the one downside being that there has been an increase in the theft of supermarket trolleys as some customers transport their shopping home. Is it better to offer incentives or to levy tax?