Environmental Taxes

Wednesday 26th March 2014 Written Statements

[The Economic Secretary to the Treasury (Nicky Morgan)]

In May 2010, this Government committed to increasing the proportion of tax revenue accounted for by environmental taxes.

In 2012, the Government published their definition of environmental taxes which set the baseline for achieving that commitment. This statement provides an annual update of the Government’s progress against that commitment, using the independent Office for Budget Responsibility’s (OBR) forecasts published alongside the Budget.

The Government classifie environmental taxes as those that meet all of the following three principles:

The tax is explicitly linked to the Government’s environmental objectives; and

The primary objective of the tax is to encourage environmentally positive behaviour change; and

The tax is structured in relation to environmental objectives (for example: the more polluting the behaviour, the greater the tax levied).

The Government have defined the following as environmental taxes based on these principles:

Climate Change Levy;

Aggregates Levy;

Landfill Tax;

EU emissions trading system (EU ETS);

Carbon reduction commitment energy efficiency scheme;

Carbon price floor.

For Budget 2014, the OBR has changed the accounting methodology it uses for particular taxes, so that the revenue is scored at a later stage. The forecasts, using either the original or the new OBR scoring methodologies, both demonstrate that the coalition remain on track to achieve their commitment to increase the proportion of revenue accounted for by environmental taxes over the Parliament. Table 1 provides figures using the OBRs original methodology for ease of comparison with the figures released at Budget 2013. Table 2 provides an update using the OBRs new accounting methodology.

Revenue Raising Taxes and Fiscal Instruments with Environmental Benefits

These are taxes and fiscal instruments which are primarily designed to raise revenue or to achieve other objectives, and therefore do not qualify as environmental taxes on the basis of the Government’s three principles.

Differentiating environmental taxes from taxes which are designed to achieve other objectives provides greater clarity and transparency to the Government’s overall tax strategy. The Government also recognise that other taxes not included within its definition can deliver environmental benefits.

On that basis, the Government believe that it is important to make reference to transport taxes, levies and exemptions/reliefs in their overall assessment of environmental taxation.

Budget 2014 made several announcements that will act to sharpen the environmental signals of non-environmental taxes, including:

Ultra-low emissions vehicles—Budget 2014 announced that the Government are increasing the company car tax rate differential between ultra-low emissions vehicles (ULEVs) and non-ULEVs from 3 and 2 percentage points in 2017-18 and 2018-19 to 4 and 3 percentage points respectively.

Van benefit charge (VBC) exemption for electric vans—Budget 2014 announced that the Government will extend VBC support for zero emission vans to 5 April 2020 on a tapered basis. Zero emission vans will pay only 20% of the rate paid by conventionally fuelled vans in 2015-16, followed by 40% in 2016-17, 60% in 2017-18, 80% in 2018-19 and 90% in 2019-20, with the rates equalised in 2020-21.

Enhanced capital allowance (ECA) for zero emissions goods vehicles—Budget 2014 announced that the Government will extend the ECA for zero emission goods vehicles to 31 March 2018. To comply with EU state-aid rules the availability of the ECA will be limited to businesses that do not claim the Government’s plug-in van grant.

Enhanced capital allowances: energy-saving and water-efficient technologies—The list of designated energy-saving and water-efficient technologies qualifying for enhanced capital allowances will be updated during summer 2014, ensuring the most efficient technologies continue to be targeted.

Fuel duty incentives for methanol—From April 2015, the Government will apply a reduced rate of fuel duty to methanol. The size of the duty differential between the main rate and methanol will be maintained until March 2024. Like the road fuel gases already benefiting from a duty differential, methanol provides environmental benefits compared to conventional fuels. The Government will review the impact of this incentive alongside the duty incentives for road fuel gases at Budget 2018.