Impact of environmental taxes in the UK

A report from the UK National Audit Office acknowledges the benefits of taxation on organisations but questions what specific effects they achieve. Andrew Warren, chairman of the British Energy Efficiency Federation, discusses the issues in an article  in the April 2021 issue of Energy in Buildings & Industry.


Environmental taxes work – but we’re not sure how

The UK National Audit Office (NAO)  has produced a fascinating report. Blandly entitled “Environmental Tax Measures”, it reveals that in 2019 eco taxes and charges  – as defined by the Office for National Statistics  –  raised some £51.6 bn. Of which three-quarters came from energy use, and almost all the rest from transport taxes.

This report examines how HM Treasury and Her Majesty’s Revenue & Customs( HMRC)  manage tax measures with environmental objectives, including the work undertaken to design, monitor and evaluate them.

The NAO looked in detail at  the oldest of these taxes , the Climate Change Levy(CCL). First collected in 2001, it  now costs business users and public sector organisations “around” £1 bn a year. Together with the Carbon Price Support, introduced in 2013, the two taxes raises a very precise £2.091bn p.a.

The objective of the CCL is to  “encourage businesses and the public sector to use energy more efficiently, and thus reduce greenhouse gas emissions.” Has it worked?  Well, the amount of energy used by industry to produce a unit of output has fallen by two-thirds.

Curiously little attention is paid to the 51 industrial  sectors which have established Climate Change Agreements, whereby they commit to improving energy efficiency in exchange for receiving a discount on the levy, which costs the Exchequer £260m a year . Many earlier studies have concluded how effective these Agreements are.

But as the Treasury acknowledges, given its longevity, the CCL  “has had most of the behavioural effect for many businesses”  and thus  “ongoing monitoring provides limited insight into the. Levy’s effect.”

The NAO is rather scathing that  neither they nor HMRC “hold data, or undertake analysis to help understand how the taxes effect business decisions.” It has now been agreed, to address potential compliance risks, that VAT-related visits should include data on the CCL , particularly “for larger suppliers.”

The NAO has even more question marks about quite why since 2014  highly energy intensive sectors like the mineralogical and metallurgical industries  have avoided paying the Levy altogether. This includes cement manufacture and operation of blast furnaces. Such reliefs cost the Exchequer some £210m each year.

The Carbon. Price Support mechanism has coincided with a huge drop in coal-fired electricity generation. But other policies like emissions  trading systems and renewables tax breaks have also contributed. So,  as new coal generation will be illegal from 2024, the NAO pointedly concludes, the “future role of Carbon Price Support is unclear”

It is the way in which differential tax rates are charged for similar activities that  particularly concern the NAO. They highlight that by failing to levy the standard  20% VAT rate  on domestic fuel , the Exchequer forgoes £5bn each year. The reason given is “to reduce fuel poverty”.

Reducing fuel poverty  is also the policy reason given  for the absence of  fuel duty upon the use of kerosene as a heating fuel  (Treasury forgoes £2.5bn). That is also apparently the justification  for many energy saving measures also being charged VAT at 5% (costing the Exchequer £70m a year). Actually the reason given by the then Chancellor was to ensure that energy conservation was taxed at the same rate as energy consumption.

Taxation of natural gas usage differs enormously, depending upon where it is used. Industry pays three times as much tax per gigajoule of energy use  as  do commerce or public services. But industry in turn pays just one-sixth of the amount levied for gas used in electricity generation.

Overall, the NAO  acknowledges there  is some evidence of the positive impact that taxes do have upon the environment. But too little is known about their specific effects. The exchequer departments tend to focus more on the revenue that environmental taxes raise, rather than the environmental impact they achieve.

The  NAO reckons there are other measures – both taxes and tax reliefs – which impact upon government’s wider environmental objectives but which are not recognised as “environmental” in nature. As such, the exchequer departments do little to identify these measures, or assess their relevance to government’s environmental goals, though the NAO concede they do consider environmental impact in some significant cases when advising ministers.

The scale of government’s environmental ambitions, particularly on net zero, means it must  employ every tool at its disposal if it is to succeed. The exchequer departments need to fully understand the relationship between existing taxes and these ambitions, to ensure the taxes contribute as intended, and to learn lessons for any future taxes which may support wider environmental strategies.

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