This post by was originally published on Business Green.
Tax is one of the most powerful tools the government has at its disposal to address the challenges of the 21st century. In combination with the right regulation, targets and strategies, taxes could be used to shape a sustainable economy, giving people and businesses alike the incentives they need to do the right thing.
But, so far, the government has been hesitant to test the potential of tax for this. Taxes with a positive environmental impact account for only seven per cent of UK tax revenue (the majority coming from fuel duties). And these, in any case, are too often countered by tax breaks that work against the government’s stated environmental aims. In fact, the National Audit Office recently identified five such tax reliefs that together cost the government £17bn in lost revenue each year.
The largest of these perverse subsidies is the reduced rate of VAT on fossil fuel and power for domestic use, which exists on the grounds of preventing fuel poverty. But making it as cheap as possible for everyone across society to burn gas is not a sensible approach: ending the subsidy and protecting the poor through a combination of improving housing stock, helping low income households move to sustainable heating and targeted redistribution would be much more effective. The wrong incentives are found in other ways in the application of VAT. Too often it discourages activities that would lead to a greener, healthier society, like retrofitting buildings or switching to low carbon heating, while encouraging the opposite, a cycle of demolition and new build and the continued burning of subsidised fossil fuels.
And VAT is just one example where the tax system falls short. Too often, the costs of climate change and nature’s decline are not reflected in the price of materials, fuels and products that are driving destruction. In other words, people and businesses are not getting the right financial signals to steer sustainable choices. But, it turns out they’d overwhelmingly like them.
This spring, for our TransformTax project, Green Alliance has been working with the research agency BritainThinks to understand public attitudes to greening the tax system. The representative survey of more than 2,000 people that BritainThinks carried out in March has shown great enthusiasm for the idea: six in ten support the general principles that tax should be used to make environmentally damaging behaviour more expensive and beneficial behaviours less expensive, while only one in ten opposes this approach.
We asked about some specific tax reforms that the government could develop to deliver environmental benefits and were surprised at the high level of support for each of the ideas we presented. We asked about greening the VAT system (in part to address some of the perversities mentioned), about implementing carbon taxes on producers and consumers, and about creating new material taxes to reduce high impact material use and drive up the use of recycled content in products. For each of these, a majority said they were good ideas and only between five and 12 per cent said they weren’t.
The outlier was road pricing, though even with that, people were more likely to think it was a good idea (37 per cent) than a bad one (28 per cent). This suggests Treasury policy makers should think hard (but sill urgently) about how such tax reform can be made fair and acceptable, laying the groundwork for replacing those fuel duties that make up the bulk of the current environmental tax base and that will dwindle as petrol and diesel cars become less common.
In fact, our results show that, across the board, support for green taxes is not unconditional. The proportion of people that said specific reforms were ‘very good’ ideas was much smaller than those that said the ideas were ‘good’. And over a quarter stayed neutral on all options.
The government, therefore, needs to be very careful about new tax design and communicating the reasons for change. It should always be clear why taxes are being used, why they are the best option (because they aren’t always), and how they are being tailored to make them appropriate to the circumstances in which they are applied. Any regressive outcome must be prevented or mitigated by commensurate government action.
This survey surprised us. We wanted to know the baseline appetite for green tax reform to inform our TransformTax project. What the results showed, in fact, was that the public is already ahead of the government on this and support for green reforms to the tax system is strong. With plans for a green recovery underway, the Treasury should finally start transforming the UK’s outdated tax system to meet government priorities and help businesses and individuals contribute to a more sustainable future. In its forthcoming Net Zero Review, it has the perfect opportunity to signal how it intends to achieve this.