The color of money
Hard on the heels of the climate change levy and associated energy-saving enhanced capital allowances, the government has launched for consultation the Green Technology Challenge. Matt MacAllan reports.
The Budget of 2001 announced the government’s intention to consult on the
establishment of a Green Technology Challenge, with the intention of
offering enhanced first year capital allowances for environmental objectives
and innovative technologies.
Businesses write off the cost of capital against taxable profit, normally on
a depreciated balance basis, such that the cost of any investment is offset
against profit over time. Enhanced capital allowances allow businesses to gain
the benefit of this tax relief earlier. In the case of 100 per cent allowances,
the entire cost of an investment
can be offset against taxable profit in the same financial year as the investment
itself. Thus, it is claimed, a cash-flow benefit derives which offers direct
present value to the business. Simple.
But why go down the road of incentives at all, given the government’s much-vaunted
shift from the taxation of ‘goods’, to the taxation of ‘bads’, and stated commitment
to the ‘polluter pays principle’?
Andrew Field, HM Treasury: “One of the arguments for incentives is that
they complement or accelerate the effects of environmental taxes, and that’s
certainly the approach that we’ve taken with the climate change levy. The tax
applies to business, but as part of the package there are incentives, through
enhanced capital allowances, for investments in energy-efficient measures which
enable businesses to improve efficiency and thereby reduce exposure to the levy.”
Tax incentives are particularly useful in accelerating the adoption of desired
behaviour when there are specific, i.e. internationally-agreed, targets to be
met. Kyoto, for example.
Other than social considerations which may make it inequitable, or electorally
hazardous, to tax the polluter, tax incentives serve to overcome barriers; to
incorporate externalities that otherwise are not reflected in prices.
“That is one of the key differences from regulation,” says Field.
“There is no requirement on business to invest, and there is no requirement
for them to do so in a particular way. The business still has the opportunity
to determine the most cost-effective approach, taking account of the fact that
if it invests in certain ways, it benefits from enhanced capital allowances.
Clearly, this measure will then reduce financial barriers to investment, so
if financial barriers are impeding improvement in some areas, this measure will
The Green Technology Challenge consultation sets out to answer two fundamental
questions. The second is: Which environmental objectives are suited to being
targeted in this way, given: the extent to which there is a market failure,
i.e. an environmental externality or information gap; the extent to which that
failure may be addressed through capital allowances, as opposed to other government
policies; and the effectiveness of offering capital allowances, i.e the extent
to which the policy will deliver real quantifiable environmental improvements
above regulatory standards at minimum cost and encourage further innovation.
The first question is whether the Green Technology Challenge is a good idea
per se. Additional concerns relate to how the scheme could operate and evolve
over time, including the definition of technologies and how – and by whom –
standards are set.
Many countries, including many in Europe, in fact already operate similar schemes
where some sort of tax reward is granted for investing in specific environmental
technologies. Whilst State Aid rules will not permit EU Member States to present
tax-breaks where the desired result is already required by law, requirements
set out in forthcoming EU directives are elligible.
The Environmental Ind-ustries Commission (EIC), having long campaigned for
the introduction of fiscal incentives for companies purchasing environmental
technologies, in its response to the Green Technology Challenge, voiced concern
that the ECA scheme may undermine much of the UK pollution control regime. Pointing
out that around 7,000 industrial installations across the UK will soon be required,
under the Integrated Pollution Prevention and Control (IPPC) regime, to use
Best Available Techniques (BAT) to reduce environmental impact, the EIC claims:
“The awarding of an ECA to a particular technology could mean that the
regulatory authorities consider that technology to be sufficiently cost effective
to designate it as BAT for certain installations, where it was not previously
considered to be so. It would undermine the effectiveness of the scheme and
the regulatory regime if the Treasury were then to remove the ECA on the grounds
that the technology was now required by legislation.”
The EIC also recommends that companies be allowed to carry forward unused relief
to future years. For, in the face of a mounting global recession, it would be
well to remember that, in order to offset capital investment against taxable
profit, you first need taxable profit.