George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Is environmentally sustainable also fiscally sustainable

In October 2021, the Government published its Net Zero Strategy: Build Back Greener. At 367 pages, it’s a weighty document. In his 2012 Budget statement, then Chancellor of the Exchequer George Osborne noted that “environmentally sustainable has to be fiscally sustainable too”. The Net Zero Strategy must therefore be read alongside the 27 October 2021 Budget material. To do so highlights the chasm between words and actions, between the environmental rhetoric surrounding COP26 and the Treasury’s plans for UK taxes.

In increasing order of significance, four fiscal failings illustrate this.

Domestic fuel prices

Domestic gas and electricity benefit from the reduced 5 per cent rate of VAT. Following Brexit, the Government can reduce this rate. At a time of high energy prices, households would have welcomed a cut in this VAT levy on their bills. Although the economy is doing better than expected, the Chancellor did not feel able to afford this. Surprisingly, he even ignored the opportunity to reduce the VAT on domestic electricity generated from renewable sources, which would have been a significant encouragement to users to transfer to renewable power as part of the UK response to the climate emergency.

Green energy surcharges

Current energy surcharges achieve precisely the wrong effect: they penalise electricity more than gas. This flies in the face of the Government’s pressure on citizens to end their use of gas. That conflict may not end well. Having resisted extensive lobbying to reverse the impact of the surcharges at a time when energy prices were lower, the Government in its Net Zero Policy promises to deliver cheap electricity by “rebalancing of policy costs from electricity bills to gas bills” over the remainder of this decade. While a belated and poorly implemented reaction now might trigger some of the “uncontainable social anger” mentioned by the Prime Minister in his COP26 address, the wider logic of allowing a long-term and clearly identified policy conflict to continue for anything up to eight years is unfathomable. The problem was created by Parliament and can be solved by Parliament at the stroke of a pen.

Fuel duty replacement

Fuel duty raises an impressive £27 billion annually for the Exchequer. The Government needs a plan to shift the taxation of motoring as the proportion of EVs on the road increases. To borrow from George Osborne’s 2011 Budget speech, “Let’s be clear about what is within our control and what is not… British governments are in charge of the duty we levy on petrol.” While promising changes “to ensure that we can continue to fund the first-class public services and infrastructure that people and families across the UK expect” neither the Net Zero Policy nor the Budget contain any clues as to how this grand promise might be kept. With the sale of new petrol and diesel cars and vans to be banned from 2030, time is running out for the Government to demonstrate that it is in control by consulting on a specific plan. A pay-as-you-go levy on road use seems to be the favoured approach, but whether this will be operated by central government, local authorities or private companies is another great unknown.

Carbon tax

“Sin taxes” are commonly used to deter individual behaviours which may have an adverse impact on public services. Tobacco duty and alcohol duty are important examples of this. With carbon – in the form of CO2 – now among the biggest threats to humanity, surely the time has come to introduce a proper carbon tax?

I recognise, of course, that the UK already has an emission trading scheme (ETS) which requires heavy industry, power generators and airlines to buy permits or credits to emit CO2. Governments earn revenue by auctioning credits which are then traded on the secondary market. The price of credits on the secondary market will continue to rise unless the demand for carbon emissions declines.

By contrast, earlier this year it was reported that the Chancellor and the Prime Minister had ordered the preparation of sector-by-sector estimates of CO2 emissions along with proposals on how a carbon tax could be implemented. This carbon tax is very different from the ETS. The tax would be levied by the Government at rates which it controlled, and which would almost certainly increase over time. The principles are relatively straightforward:

  • the fixed rate would be easier for companies to manage than the variable credit prices available under the ETS;
  • to avoid the market prices of their products becoming uncompetitive, manufacturers would be forced to make their processes more sustainable;
  • consumers would shop around for lower-priced goods; 
  • imports from high-carbon jurisdictions would be subject to a similar tax, often called a carbon border tax or carbon border adjustment mechanism (CBAM). The Environmental Audit Committee of the UK Parliament is conducting an inquiry into CBAMs.
The net effect, therefore, would be to reduce the CO2 emissions of manufacturers. While this satisfies the test that Government should make it easier and desirable for people to do things which are better for everybody, on its own carbon tax would be more stick than carrot. Carrots are, of course, better for you in the long run. 

The carbon tax could be made much more attractive to consumers by offering a very simple carrot: each year, the carbon tax collected by the Government would be paid as a tax-free dividend to every resident. Each person would receive the same amount, which would in turn provide financial support for households facing the need to better insulate their homes, decarbonise their heating systems or buy an electric vehicle.

While care would be required in the design and implementation of a carbon tax, in this form it would provide a constructive means of tackling so many of the climate change problems that the Government currently finds intractable. It is therefore especially disappointing that, while carbon pricing is high on the agenda at COP26, a carbon tax does not secure a single mention in Net Zero Policy.

In the opening session at COP26, Boris Johnson likened humanity to James Bond “strapped to a doomsday device as a red digital clock ticks down remorselessly to a destination that will end human life as we know it”. It grieves me to say this but, having studied both Net Zero Policy and the Budget documents, it’s difficult to escape the notion that the only sound coming out of the Treasury is that of a can being kicked down the road until after the next election. I would dearly like to be proved wrong.

Those interested in COP26 and climate change issues may want to join our online Business Leaders’ Special Event on Thursday November 11th on COP26 and the climate economy. You can register for this event here
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