Green Tax Receipts Falling, Says IFS

by Jason Gorringe, Tax-News.com, London

03 November 2006

According to new research published by the Institute for Fiscal Studies (IFS) this week, despite the findings of the Stern Report, the UK Government now receives a smaller share of both national income and total tax receipts from environmental taxes than when it was elected in 1997. Meanwhile total carbon dioxide emissions have risen.

The Stern Review found that all countries will be affected by climate change, but it is the poorest countries that will suffer earliest and most. Unabated climate change risks raising average temperatures by over 5°C from pre-industrial levels. Such changes would transform the physical geography of the planet, as well as how and where we live our lives.

Adding up the costs of a narrow range of the effects, based on the assessment of the science carried out by the Intergovernmental Panel on Climate Change in 2001, the Review calculated that the dangers of unabated climate change would be equivalent to at least 5% of GDP each year.

The review also examined the national and international policy challenges of moving to a low-carbon global economy.

It stated that:

"Climate change is the greatest market failure the world has seen. Three elements of policy are required for an effective response."

"The first is carbon pricing, through taxation, emissions trading or regulation, so that people are faced with the full social costs of their actions. The aim should be to build a common global carbon price across countries and sectors."

"The second is technology policy, to drive the development and deployment at scale of a range of low-carbon and high-efficiency products. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about what they can do to respond to climate change."

The IFS report, entitled 'The UK Tax System and the Environment', examined in-depth the current system of green taxes in place in the UK, their design and effectiveness, in addition to examining the recent history of green tax revenues and greenhouse gas emissions.

In terms of revenues from green taxes, the report looks at trends between 1993 and 2004 from the Office for National Statistics. Unavailable at the time that the report was written, more recent data to 2005 reveals that:

• In cash terms, total revenues from green taxes rose from GBP27.3bn in 1997 to GBP35.0bn in 2005, the highest value on record. Adjusting for inflation, however, real revenues expressed in 2005 values have increased only by GBP2bn, from GBP33.0bn to GBP35.0bn over the same period. Real revenues peaked at GBP37.7bn in 1999.
• Receipts from green taxes have fallen from 3.4% of national income in 1997 to 2.9% in 2005 having peaked at 3.6% in 1999, and from 9.4% of total receipts to 7.7% over the same period. They now make up a smaller share of total revenue and national income than at any time since 1993, from when figures are available.
• These trends have been almost entirely driven by the decision to abandon the annual fuel duty escalator in 1999. Since abandoning the escalator, real fuel duty per litre has fallen by 16.9% and real fuel duty revenue has fallen by almost GBP3bn, from GBP30.4bn in 1999 to GBP27.4bn in 2005.
• However the UK is not alone in these trends – the latest data from the OECD shows that in 2003 environmental tax revenues made up a smaller share of GDP across developed countries than in 1994. Further, the UK takes a larger share of revenues and GDP in green taxes than the OECD average, largely due to the relatively high fuel tax rate.

According to the IFS:

"Since 1997, a number of new green taxes have been introduced and other taxes have been adjusted to give them a greener hue: the Climate Change Levy and Aggregates Levy have been introduced, the rate of Landfill Tax has been tripled, incentives to install energy saving materials have been incorporated into the VAT system, and Vehicle Excise Duty and the company car tax have been adjusted so that the amount payable depends on the emissions rating of the vehicle."

"In addition, 2002 saw the launch of the UK Emissions Trading Scheme (ETS) and 2005 the EU ETS. There has therefore been considerable activity in environmental taxes in recent years even as total real-terms revenues have fallen."

"Some reforms have gone the other way: for most passengers, the rate of Air Passenger Duty was halved in 2001 and whilst the cut in the rate of VAT on domestic fuel from 8% to 5% in 1997 will have had positive distributional impacts for the poorest, the environmental effects of the move are likely to have been negative."

The report’s author, Andrew Leicester, concluded by observing that:

“Green tax revenues are now at their lowest in real terms for almost a decade and have not represented a smaller share of total revenues in 15 years, yet we now have a greater number of green taxes than ever."

"This apparent paradox can be explained by two factors. First, the decision to abandon the fuel price escalator – the new measures simply don’t bring in enough revenue to cover the revenue cost of a fall in real duties of almost 20% since 1999. Second, the growing importance of emissions trading schemes, which haven’t brought in revenues but still provide environmental incentives to businesses to reduce emissions."

"In the wake of the Stern Report, there will doubtless be strong pressure on the Chancellor to push up green tax revenues and/or extend emissions trading schemes.”

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