George Bull

Written by: George Bull

George Bull

Senior Tax Partner

What does the climate emergency mean for our taxes?

Taxation is one of the great levers available to governments to change people’s behaviour. Sometimes these levers work more or less as intended – for example, a carbon tax which has helped reduce coal-fired electricity generation, or the landfill tax which has driven a reduction of more than 75 per cent in biodegradable waste being sent to landfill. Then there are those levers which are highly effective but unpopular – for example, fuel duty which used to rise annually but which has remained static for the last 10 years.

There is also an unsettling pattern: the UK is often too quick to remove incentives, for example the Government has recently announced that the enhanced capital allowances regime for energy-efficient plant and machinery will be abolished from 1 April 2020. This does not sit comfortably with the declaration that climate change is a national emergency.

So when the UK Committee on Climate Change published its report ‘Net Zero: the UK’s contribution to stopping global warming’  we couldn’t resist delving into the report’s 275 pages to find out what is proposed on the tax front. The timing of the report, coinciding as it did with the Extinction Rebellion protests, helps governments, businesses and individuals answer the question, ‘What will it cost me to make my contribution to halting climate change?’ So what does the report say about tax?

On a first reading, the report seems to disregard taxes, which are seen simply as a transfer from one part of the economy to another. However, digging into the detail a different picture emerges. 

Transport

It is expected that private motoring costs will reduce because, by 2030, both the purchase price and the running costs of electric cars will be cheaper than conventional cars. Vehicle and fuel taxation from the 2020s is likely to be designed to incentivise commercial operators to purchase and operate zero-emission HGVs. Tax and other incentives will be phased out so that, by 2050, transport’s tax contribution to the UK economy will be maintained. Transport taxation in a low-carbon era will look very different to the way it does today.

Industry decarbonisation

A level playing-field will be required to ensure that emissions are reduced, not offshored. The issues here are complicated and may involve the creation of a low-carbon market, sectoral agreements to deal with international competition, border-tariff adjustments and funding for carbon capture. In a nutshell, these will lead to higher prices for consumers and higher taxes, so that industry is compensated for costs resulting from UK climate-change policies. However, the report holds out hope that, as other countries meet their commitments under the Paris Agreement, taxpayer funding of industry decarbonisation will reduce with consumers paying higher prices in a low-carbon environment.

Heating

Low-carbon heating is a major challenge. The tax costs of different fuels, such as electricity, oil and gas, will be reviewed to ensure that the full carbon costs are reflected in their price. The intention is to strengthen the economic case for electrification. This will inevitably result in higher heating costs and therefore greater demand for energy-efficiency and better insulation.

Greenhouse gas removal

To achieve net zero will require a solution for difficult-to-address industries such as agriculture and aviation. The report suggests that this might be achieved through CO2 removal, with carbon capture and storage systems funded partly through increased taxes. It is not clear who will pay those taxes, but inevitably they would find their way through to consumers.

The report’s authors are concerned to avoid sudden and dramatic changes to consumers’ bills and to the burden of taxation. They suggest that the aggregate of all the changes being proposed would be broadly neutral by 2050. However, the planet and the UK economy will be very different places by then. 

What is clear now is that government needs to provide consistent, stable leadership with economic, environment and tax policies aligned to deliver the net-zero goal. Cross-party leadership on tax matters – for example the Irish border and the possibility of remaining in a Customs Union with Europe – has been woefully inadequate. When it comes to the far more pressing problem of climate change, let’s hope that the British Parliament’s recent performance is no guide to the future.

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