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Last Updated: Tuesday, 5 December 2006, 23:43 GMT
Using taxes to get Britons to go green
Money Talk
By Chris Sanger and Jonathan Johns
Partners at accountancy firm Ernst & Young

Floods
Global warming is at the forefront of policymakers minds
Using the tax system to change peoples' behaviour towards the environment is a hot political topic.

With the government's pre-Budget report due on Wednesday, two financial experts look at what tax tactics could be used to encourage people to go green.

There has been a lot of public debate about green taxes, with some applauding them, others claiming they are just a new stealth tax.

Despite this recent interest, they are not new: the first fuel duty was introduced in 1909.

This government's latest framework for environmental taxes was released in 2002, with the 'polluter pays' principle designed to deter environmentally damaging activity.

But green taxes represent a declining share of taxes, partly due to the freeze in real terms of fuel duty.

Estimates vary, but green taxes take around 1% to 1.5% less of total tax now than they did ten years ago.

Restoring the balance could provide an extra 5bn to 6n of tax revenues; that potentially gives quite a bit of scope to the chancellor.

The Stern Report has given him the economic argument to back his actions: he may find winning the political argument easier if he was prepared to offer incentives for 'good' green behaviour at the same time he inflicted taxes for 'bad' green behaviour.

The principal taxes that bite on environmentally bad behaviour at the moment are:

  • Fuel Duty and VAT together mean that on a pump price for petrol of 85 pence per litre, the government takes approximately 61p, or nearly 72%
  • Air Passenger Duty currently ranges from 40 for standard rate flights to a 'discount' down to as little as 5
  • Landfill Tax is paid by operators of landfill sites at 21 per tonne (and is due to increase yearly by at least 3 per tonne) with a reduced rate of 2 per tonne for inert or inactive wastes such as rocks or minerals
  • Climate Change Levy - an additional charge on businesses with significant energy use, raising 700m last year
  • Vehicle Excise Duty ('road tax') - starting from a theoretical 'nil' rate and accelerating up depending on the carbon emissions of the vehicle
  • Congestion Charge - such as the 8 charge to drive in central London during specified hours on weekdays.

So how could the chancellor use the tax system to offer rewards to people for better 'green' behaviour?

We have compiled 'eight green tax changes' that could be hanging on the wall at the Treasury, just ready to fall into the chancellor's lap to help give him have a greener tinge.

  • Fuel Duties - Drivers might accept higher taxes if a proportion of the revenue was directed to provide incentives for the infrastructure necessary to distribute greener fuels to Britain's petrol stations
  • Air Passenger Duty - A sustainable version would recycle some revenue into research on greener aircraft fuels, or offer partial rebates to airlines investing in qualifying renewable energy projects in the developing world
  • Government Internal Carbon trading - Why not set government departments a carbon target that they can trade with other departments, so that they face the same disciplines as the private sector?
  • Smaller council tax increase for energy- Wasting homes could raise money to invest in infrastructure and insulation for the fuel poor, and reduce the rates bill on properties which are energy efficient
  • A carrier bag tax - Already operating in Ireland, the money could be reinvested in community-based recycling schemes. A similar approach could be followed in relation to batteries
  • Household waste - Separating the charge for waste disposal on the council tax bill would make the cost of landfill visible to householders: they might be more prepared to accept this if they received discounts for recycling more of their domestic waste
  • Reform Enterprise Investment Schemes and Venture Capital Trusts - These scheme allow individuals to buy shares in start-up businesses. Add extra incentives for investors who plough money into new companies in the environmental sector
  • Value Added Tax - Greater use of lower rates for clearly carbon friendly goods and services could have an immediate impact.

A congestion charge sign
Despite new initiatives the tax burden on drivers has fallen

In practice, many of these ideas are unlikely to be in the pre-Budget Report, but 'green' measures to encourage taxpayers to think about the environment may be on the cards.

When it comes to the environment the chancellor will want to demonstrate his commitment to this issue and may decide that deterrents are more effective than incentives.

This might encourage the behavioural change and re-direction of investment that will be required to meet carbon reduction targets.


The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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