Are environmental taxes changing behaviours?

In a bid to encourage more sustainable behaviour, successive governments over the last three decades have introduced various environmental taxes. The latest government statistics show a fall in tax revenue in the largest contributors to this array of taxes, including Landfill Tax (LFT), Climate Change Levy (CCL) and Carbon Price Floor (CPF).

Does this indicate a long-term shift in behaviour amongst taxpayers, or is this the outcome of wider economic factors? It also begs the question, with tax rises expected by some later this year, could there be increases in these taxes?

In terms of the other so-called green taxes, Plastic Packaging Tax (PPT) figures will be published separately later this year. Environmentalists will be hoping that receipts will fall further after last year’s figure showed a decrease in the amount of PPT paid. Our experience suggests that this, in part, reflects businesses moving towards increasing the recycled content in their packaging.

Despite the initial figures showing a change in behaviour, our experience is that HMRC is applying more pressure on how businesses calculate their PPT. Several businesses have received HMRC letters stating that the estimations they use can no longer be used to calculate PPT. This may reflect the fact that PPT receipts are higher than originally predicted (£235m was originally expected in 23/24, but £268m was ultimately collected). Our experience is that the estimations many businesses use overstate the amount of PPT due. However, that may be a worthwhile trade-off as the sheer complexity of making more accurate returns (along with the evidence required to support these figures) may outweigh the increased tax bill.

In addition to the taxes already in place, the government has announced the introduction of a Carbon Border Adjustment Mechanism (CBAM) in January 2027. CBAM is designed to prevent carbon leakage by taxing carbon-intensive goods imported into the UK from countries where a carbon tax has not already been paid. HMRC has estimated an exchequer impact of £205m for the first full year of implementation.

There is no doubt that most organisations are more aware of their impact on the environment than previously, and tax has played a part in that process. However, our view is that tax has only a relatively small part to play in this process as consumers have also applied pressure. The most significant feature of these green taxes is the sheer cost of compliance for businesses weighed against the amount of revenue generated for the Exchequer. An increase in green taxes may be a perfectly reasonable expectation from the next budget. However, the reality is that even doubling the rate of these taxes is unlikely to get close to plugging the gap which the Chancellor must address.

The figures suggest the taxes have been successful over time in encouraging businesses to make greener choices by diverting waste from landfill, reducing carbon emissions, and moving to recycled plastic. However, we expect HMRC to keep pushing businesses within the scope of PPT to make their reporting more accurate, meaning significantly increased costs of compliance, but a more accurate measurement of the effect the tax is having. This compliance burden will only increase from 2027 for those businesses within the scope of CBAM.

authors:grace-kirk,authors:philip-munn