Three years ago, Green Alliance set out to identify how to transform the tax system, with a project generously funded by the Joseph Rowntree Charitable Trust. The project ended in June with our final briefing examining the future of carbon pricing. We rounded off with a high profile event contemplating the wider question behind our work: how should the next government green the tax system?
The Climate Change Committee sounded a strong warning last week about the speed of government progress towards net zero. As one of our speakers, the committee’s CEO Chris Stark, observed “tax is a completely fundamental lever that we haven’t really used so far”.
From our three years analysing the tax system, we’ve learned a great deal about its environmental impacts and how, as a fundamental lever of change, it could be used. Here are our three top takeaways:
1. The tax system has major impact on the environment, whether good or bad
As it stands, the UK’s tax system is geared for a high carbon economy. Too often, it rewards polluters and incentives to encourage greener behaviour are absent. Some of our early research looked at VAT, the tax on consumption, which is driving the wrong type of consumption. For instance, in the construction sector, new build is zero-rated for VAT while most renovation and repairs are levied at 20 per cent. So wasteful, high carbon demolition and rebuild is being actively encouraged over lower carbon restoration and resource and energy efficiencies.
While we were conducting our study, others also turned their attention to these perversities, with the National Audit Office (NAO) and the Public Accounts Committee (PAC) both issuing damning reports into the government’s approach to tax and the environment. The NAO highlighted five major tax reliefs in 2019-20 that actively worked against the government’s stated environmental objectives, also, incidentally, losing £17 billion in revenue. It noted the approach to evaluation provides “limited insights into the environmental impact of taxes”. The PAC was even more explicit, criticising Treasury and HMRC officials for not being able to “explain clearly to us how the tax system is used in achieving the government’s environmental goals”.
2. The public is very ready for change
As part of our project we worked with Thinks Insight and Strategy (formerly BritainThinks) to find out what the appetite for greener taxes was. The large public attitudes survey they conducted for us in 2021 showed widespread support for the idea that taxes should be used to drive positive environmental changes. For example, six in ten (59 per cent) supported using tax to make environmentally damaging behaviours more expensive with only one in ten (12 per cent) opposed the idea.
We followed the survey with citizens’ juries, made up of 18 people from rural Wales, suburban north west England and urban south west England, aged between 19 and 81, to get further into the detail and understand how a cross section of people felt about taxes. Again, there was still widespread support but the discussions indicated that certain conditions would have to be met for change to be acceptable. Notably, people want it to be fair; for instance, they want greener behaviours enabled, rather than simply punishing damaging behaviour. And they wanted it to be effective. So instead of simply raising money, they thought the main purpose should be environmental improvement. In fact, we were amazed by the extent of the enthusiasm for the idea that the tax system could be used this way. One even expressed a surprising ‘love’ for the idea that VAT could be tweaked so prices of environmentally harmful products would go up while those for environmentally beneficial products would come down.
3. The government is a long way off the mark
Along with other organisations, like the Public Accounts Committee, the Institute for Government and the Chartered Institute of Taxation, we’ve called for the government to publish a tax roadmap to clarify how the tax system will support, and be adapted for, the move to a low carbon economy. But the government has resisted, citing the need to avoid “forestalling activity”, whereby taxpayers’ behaviour changes in advance of tax increases, reducing revenue. This reaction makes sense if the primary purpose of every tax is just to raise funds, but we propose tax should be used as a major tool to change behaviour so, by design, revenue would diminish. But this can be countered by changes elsewhere in the tax system, and is exactly why a roadmap is needed.
Tax is a major lever that can be used to bring about universal changes to the world we live in. It can enforce policy aims, stimulate solutions to societal challenges and discourage adverse behaviours. But its huge potential to drive a green economy has barely been tapped into. The UK’s tax system is not in any way fit for a net zero, nature positive future.
Although our TransformTax project has now ended, there’s a lot more that needs to happen to convince political leaders and the Treasury that change must come. Over the past three years, we worked with many likeminded organisations and an advisory panel of tax and economic experts who provided us with invaluable insights and advice and we have built a considerable body of evidence. We’re pleased that there has been increasing momentum for change over the course of our project and we will certainly remain as one of the growing number of voices making clear the case for a greener tax system.