Autumn statement – missed opportunity for confirming strategy on environmental taxes

Business craves long-term certainty in order to invest, but in perpetuating uncertainty with green taxes and levies, the Government risks failing to achieve its environmental policy objectives and putting up the costs of investment - the worst possible outcome.

Environmental taxes have the potential to drive environment and sustainability right to the heart of business decision making, by gaining the attention of the finance director and catalysing improved environmental performance. However, if poorly conceived, they act as a cost on business, undermining competitiveness without achieving their full environmental potential.

Striking the right balance on environmental taxes can be fraught with difficulty. Set them too high and it raises questions of affordability; too low and they act as a business cost without changing behaviour.

With attention in the run up to the Autumn Statement focused on energy bills and ‘green levies’, there was a real risk of government forgetting its own policy approach of using market mechanisms to achieve environmental outcomes at the lowest possible cost.

In case the Chancellor is in any doubt, it’s worth reminding people what he put in place when he led negotiations to form the current government. The 2010 Coalition Agreement included the commitment to increase the proportion of revenue that comes from environmental taxes, a policy that George Osborne reiterated in Budget 2011:

“The Government is committed to being the greenest Government ever. A simple, efficient and cost effective policy framework will meet environmental objectives while supporting growth and maintaining a sound fiscal position. Market-based solutions to price carbon are at the heart of this approach, achieving objectives at the lowest possible cost.

Osborne continued: “The Government will increase the proportion of tax revenue accounted for by environmental taxes. Tax policy will be developed in the context of wider Government levers (such as voluntary agreements and regulation) and overlap of policy instruments will be avoided.”

HM Treasury – Budget 2011

The Treasury defines environmental taxes as those which meet all of the following three principles:

  • the tax is explicitly linked to the Government’s environmental objectives;
  • the primary objective of the tax is to encourage environmentally positive behaviour change; and
  • the tax is structured in relation to environmental objectives – for example, the more polluting the behaviour, the greater the tax levied.

Why does all this matter to business? Not only does the definition of environmental taxes signal where underlying costs will rise, it also provides the basis against which investment decisions on environmental improvement can be made, as well as likely payback periods.

With pressure from business for further financial support to energy intensive users on the carbon floor price, and the Chancellor’s previously stated desire to scrap the CRC when the public finances allow, the Chancellor should have offered longer-term certainty.

Instead the Chancellor has missed an opportunity to provide a clear and consistent strategy on environmental taxes that drives long term investment and benefits business and the economy.

Martin Baxter, Executive Director of Policy, IEMA

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