My big idea: define green taxes properly

In the third of our series of My Big Idea posts, Tom Burke of E3G argues that the UK needs to get a grip on what constitutes a true green tax. 

On the 16 July the Treasury published its formal definition of a green tax. Chloe Smith, the economic secretary to the Treasury, set out the government’s intent: “By setting out a clear, usable definition of what a green tax actually is, people will be able to judge us against the coalition pledge.”

Well and good. But what is the coalition pledge that has become so significant? According to the coalition agreement, this turns out to be a promise to “increase the proportion of tax revenue accounted for by environmental taxes”. The Treasury’s fixation on increasing tax revenues is easy to understand but what does that have to do with the environment?

Raising revenue vs changing behaviour
On the basis of the government’s performance against its pledge to be the ‘greenest government ever’, not much. Revenue has certainly been raised. Some £5.6 billion between 2010 and 2012. And this will increase further when the carbon support price comes into effect.

Incidentally, carbon support price is often referred to sloppily, and not by accident, as a carbon floor price. It is nothing of the sort. There is no connection between this tax and the EU carbon trading system. It is simply an escalating tax, exactly like the vehicle fuel duty escalator.

It is a tribute to the Treasury’s brilliance in exploiting the infinite elasticity of the English language that it has managed, by this linguistic device, to delude free-market coalition MPs. They think they are supporting a modern market mechanism whereas, in reality, they are actually voting to support an old-fashioned commodity support price.

If you replace the world ‘carbon’ in the government’s documents with the word ‘cocoa’ you have a policy vigorously opposed by Conservatives in the seventies when global commodity prices were falling as an unjustified interference with market efficiency.

What is a green tax?
This kind of familiar Treasury trickery makes it wise to examine any statement about green taxes with care. So it is worth examining the content of the Treasury’s definition in detail.

“Environmental taxes,” they say, “are defined as those which meet all three of the following principles:

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

Possibly I have missed something, but I cannot see what difference there is between each of these principles.

If the purpose is to link the tax to government objectives then, unless you assume that the government might have as an objective encouraging environmentally negative behaviour, the second principle amounts to a restatement of the first.

And if the tax is to be structured to meet the government’s environmental objectives, which are presumably positive, it is difficult to see how that could be achieved by raising the tax for less polluting behaviour. So the third principle turns about to be another way of saying what is in the first two principles.

If by now you have begun to suspect that these principles might be nothing more than smoke and mirrors you are right. Turned into plain language this definition amounts to saying that a green tax is anything the Treasury chooses to say is a green tax. And, what is more, their only clear purpose, as the coalition agreement makes clear, is to raise revenue.

True green taxes
Environmentalists must take some share of the blame for the Treasury’s revenue-raising opportunism. We have failed to take ownership of the definition of green taxes. We have been so keen to punish pollution and over-consumption that we have welcomed any government action that has increased the cost of pollution or resource use.

We have failed to come up with our own definition of what uniquely makes a tax green. This has opened the door to the abuse we are witnessing by the Treasury. Alcohol and tobacco taxes both reduce resource use and pollution but no-one would call them green taxes simply because they have environmentally beneficial effects.

Using revenue for green purposes
The only way you can know for sure that a tax is green is if all the revenues are recycled into paying for incentives that benefit the environment by changing the technology or behaviour being taxed. The Swedish NOX tax is a good example of this. That way you can not only be sure of the motive behind the tax, and thus avoid the trap of revenue dependence that bedevils alcohol, fuel and tobacco taxes, but you also have a self-sunsetting tax.

As the desired environmental objective is achieved the yield from the tax falls and eventually disappears. Thus, another unique feature of genuine green taxes – unlike all other taxes – is that, if they work, you eventually stop paying them.

2 comments

  • No doubt the conclusion you are taking us to, Tom, is the paradox in carbon price support that means that it not only falls foul of the arguments of the free-market liberals which you reflect, but it also fails to meet the final condition of the definition that ‘the more polluting the behaviour, the greater the tax levied’.

    Consider this. With carbon price support, a low carbon price reflects a market that is relatively long in carbon inferring a high level of carbon abatement and a correspondingly low level of pollution. However, under the proposed arrangements for carbon price support, this situation of low pollution then triggers a higher rate of carbon price support. In effect, the less polluting the behaviour, the greater the tax levied.

    Although it might be possible to construct a case for CPS around the first two conditions, it is every difficult to see how It could be construed as meeting the 3rd.

    Graham Meeks

  • [A belated comment having been away.] Tom is entirely right to point out that an environmental tax intended to change behaviour will, if it is effective, inevitably lead to its revenues decreasing, ideally to zero – a process that will be accelerated if the revenues are recycled into promoting the same behaviour change. It is foolish therefore to treat the revenues as just another contribution to the general tax take. The State needs a reliable income from taxes to match its committed outgoings, and for that it is essential to have stable and inelastic tax bases that are not significantly affected by the tax burdens placed on them. The more a tax makes a useful contribution to total tax revenues, the more the Treasury will wish to maintain the tax base that sustains it. If the tax is a true environmental tax, then the Treasury’s instinct will be to undermine its objectives – witness its confiscation of the proceeds of the CRC, instead of distributing them to the better performing participants. It will also always strongly resist applying the proceeds to the tax’s objective on the basis that this is unacceptable “hypothecation”.

    However, although there are numerous criticisms that can be made of the Treasury, the problem here is the coalition agreement itself. Its aim “to increase the proportion of tax revenue accounted for by environmental taxes” was wholly misconceived. It should never have been in the agreement at all, and certainly not in its Tax section. There could usefully have been something in the Environment section favouring a greater use of economic instruments, in place of command and control regulation, to encourage good environmental behaviour, which would have avoided the present confusion. “Green” taxes as we know them are economic instruments, and not taxes at all in the conventional revenue-raising sense. It would be much better never to use the word “tax” in this context, so as to avoid the connotations that it carries for Treasury officials and others who have no feel for the language of environmentalists. “Levies” and “charges” would have an identical economic effect.

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