Green recovery: MPs call for VAT breaks for energy efficiency, electric vehicles and circular economy

The Government is legally required to publish an Environmental Improvement Plan in January 2023 that will set out how these targets will be met

The calls to action have been made through the Environmental Audit Committee’s (EAC) latest major report, published today (17 February) and entitled ‘Growing Back Better: Putting Nature and Net-Zero at the Heart of the Economic Recovery’.

While the Prime Minister’s Ten-Point Plan for a green industrial revolution points in the right direction, the report argues, the UK’s broader approach to the economic recovery from Covid-19 cannot be labelled completely “green”. Moreover, the EAC has heard evidence that businesses within some of the sectors highlighted in the Ten-Point Plan, including heavy industry and transport, do not feel it gives enough long-term certainty to be “investible”.

On the former issue, the EAC accuses the Government of failing to deliver the level of support needed for nature or for the circular economy. The report praises Defra’s investments in nature-based climate solutions and in natural capital accounting but argues that a more holistic approach is needed. It urges the UK Government to at least pilot a National Nature Service in partnership with conservation charities. Such a service would help unemployed people into nature-related jobs. The Treasury had been mulling such a scheme in early 2020 but has since shelved plans.

Similar trends can be seen in the Government’s approach to the circular economy, the EAC claims. The report highlights the intersections between the net-zero transition and the need for better ways of using resources. It recommends that the government provides targeted supports for businesses that offer repair services or use high quantities of recycled materials.

As for the sectors covered by the Ten Point Plan, the EAC welcomes the initial commitment but highlights several remaining policy gaps.

Its report urges the Government to prevent further delays to the Hydrogen Strategy and the Heat and Buildings Strategy while accelerating work to investigate potential changes to carbon tax and carbon border adjustment requirements. The EAC has also joined the Environment, Food and Rural Affairs (EFRA) Select Committee in calling for a broader and longer-term approach to creating low-carbon, low-air-pollution transport systems.

Fiscal and financial incentives

The EAC’s specific recommendations for policies made in this report mainly centre around fiscal and financial “carrots and sticks”.

It has proposed VAT reductions for businesses that offer circular economy services like repair – a recommendation the government previously threw out for the fashion sector after the EAC’s first ‘Fixing Fashion’ inquiry. VAT reductions should also broadly apply to products made using recycled content, building on the Government’s preparations to tax non-recycled plastic use.

Such policy levers could “reset” the way that UK businesses, and those importing to the UK, design products, the EAC claims.

The EAC also sees VAT reductions as part of the solutions in sectors including home energy efficiency and ultra-low emissions vehicles. It believes that this move could offer longer-term certainty than the widely-criticised Green Homes Grant and current scrappage schemes.

On the “sticks” side, the report touts the potential of new requirements for businesses to invest “blunt” environmental taxes in low-carbon technologies. The Air Passenger Duty, for example, could be used to help airlines invest in electric, hydrogen, biofuel-powered or simply more efficient planes.

It additionally calls for the Government to “begin scoping work” on a carbon tax for the whole economy and on carbon border adjustments.

Questions regarding the forthcoming Sovereign Green Bond – the first in the UK’s history – and the creation of the new National Investment Bank (NIB) are also raised. The EAC wants Chancellor Rishi Sunak to guarantee that the bond is only used to support projects which deliver “demonstrable, significant and measurable environmental benefits” and that the Bank will have a net-zero and nature recovery mandate. Sunak announced both the bond and NIB late last year and has faced mounting pressure over their environmental requirements.

“The Covid-19 crisis must be treated as a wake-up call; it is a symptom of a growing ecological emergency,” EAC chair Philip Dunne MP said. “The economic recovery will shape our national economy for decades to come, and it is crucial that tackling climate change and restoring nature is at its core.

“A tax system fit for net-zero Britain is key. It will encourage innovation, give confidence to the sector and support companies to make the low-carbon transition. There are endless initiatives that can lead to a greener future and the Chancellor should use his upcoming Budget statement to start this process.”

Sunak will deliver his Budget statement in early March.

Green economy reaction

Reacting to the EAC’s report, Wildlife and Countryside Link’s chief executive Dr Richard Benwell said: “This welcome report rightly shows that a truly green recovery must reach every corner of the economy. 

“Investing in a green recovery to restore our failing natural world and decarbonise our economy could create hundreds of thousands of new jobs, as well as making our streets, rivers and the air we breathe healthier. In particular, we welcome the recommendation to pilot a National Nature Service, which would follow the example set by President Biden in deploying a large-scale environmental employment scheme.

“The forthcoming Budget and Spending Review are key opportunities for the government to put nature and net-zero at the heart of its spending decisions and back up policy ambition with the funding needed to deliver radical change.” 

Green Alliance’s head of climate policy Caterina Brandmayr added: “Frontloading investment in climate solutions, nature and the circular economy, and ensuring recovery plans are consistent with our climate and environmental goals, must be a priority in the upcoming budget and government strategies.

“This will help create jobs, benefit businesses and communities across the country, and ensure the UK is seen as an environmental world leader as it prepares to host first the G7 and then COP26.”

BEIS Secretary Kwasi Kwarteng recently admitted that the UK needs a stronger and more joined-up policy framework to deliver its net-zero target and claimed that decisions such as not blocking a new coal mine in Cumbria “send mixed messages” on an international stage.

Sarah George

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