HomeResourcesIt’s odd that taxes are being left out of environmental policy

It’s odd that taxes are being left out of environmental policy

Last year the Department for Transport published the imaginatively named paper Decarbonising Transport (I was more a fan of their earlier work).

It’s an expansive document, covering plans for the whole transport system to 2040. But peek under the bonnet and you’ll notice something odd.

The strategy barely mentions taxation, despite taxes levied on fuel raising more than the defence budget. As petrol and diesel cars are phased out, these revenues will dry up which isn’t just a problem for HMRC; how much it costs to drive directly affects how much people take to the road in their cars. That affects how many roads, charge points and alternative forms of transport like bikes and trains are needed. All of these are big matters for the DfT.

The same goes for last year’s Heat and Buildings Strategy which sets out plans to tackle the country’s second biggest emitting sector. Taxes don’t get a look in, despite affecting the balance of running costs between boilers and heat pumps.

Effective policy making is being held back
This is mostly a story of Whitehall machinery. DfT and the Department for Business, Energy and Industrial Strategy control policy in their own patches but taxes, which overlap with the work of all departments, are in the domain of the Treasury. This prevents truly effective policy making, where taxes are combined with carefully designed regulations and other measures for maximum effect. The departments effectively have to make policy with one hand tied behind their back.

This has other side effects. Last year, our research on public attitudes towards environmental taxes uncovered that people were, perhaps unexpectedly, not opposed to the idea of new environmental taxes. However, they did want taxes used as part of a wider policy package and vision to tackle the climate and nature crises. Our citizens’ jury pointed out that a vision like this could rightly highlight the positives – cleaner air, better health and more comfortable homes – that would accompany a successful transition.

The tax system can drive and benefit from the low carbon economy
The government should have the confidence to do this, and publish a roadmap for what the tax system should look like for a future low carbon economy. Setting out its approach would allow it to explain its reasoning, supplemented with context and supportive policies. This would be an improvement on the status quo, where tax tweaks are announced at successive budgets with little coherence with other government priorities.

Treasury tends to view taxation as a way of raising revenues only. But taxes can also play a primary role in changing behaviour and this is especially true of environmental taxes.

This difference in thinking is laid bare in a letter last year from then Exchequer Secretary to the Treasury Helen Whately to the chair of the Public Accounts Committee, Meg Hillier. In it, the Treasury minister explains that the government doesn’t think it is appropriate to give forewarning of tax changes because of issues caused by ‘forestalling’, when people change behaviour to avoid a tax.

Changing behaviour should be a tax aim
This reveals a misunderstanding of environmental taxes, many of which are precisely designed to change behaviour. And if that change happened sooner rather than later it would be a success. An example of this from public health is the Soft Drinks Industry Levy which raised almost £200 million less than predicted because, as soon as it was announced, the industry invested heavily in reformulating to reduce the sugar in drinks.

The tax on sugary drinks has another lesson for environmental policy makers. Uncertainty is the enemy of investment.  The levy gave businesses the confidence to invest and make changes at the right time. Poor rates of business investment are widely blamed for holding back productivity and growth in the UK economy and the government should be doing everything it can to encourage private investment that also helps us meet our climate and nature goals.

Luckily, there are some signs that the government is beginning to think ahead. In last week’s budget, the chancellor announced plans to the change the way Vehicle Excise Duty is applied to electric cars from 2025. If he had announced this change with immediate effect it could have knocked business confidence, which is precious during the early stages of a tech transition. That change isn’t perfect, but it’s a start. The chancellor should now forge ahead with a holistic and purposeful tax roadmap for net zero.

Written by

Policy analyst at Green Alliance

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