Environmental Taxation Ben Etheridge and Andrew Leicester Institute for Fiscal Studies

Motivation Environment close to top of political agenda Stern Review painted bleak picture of economic costs of climate change Though many critics Domestic and international targets for emissions reduction Domestic target looks extremely difficult to hit Possible wholesale reform of green tax system Carbon tax, road pricing Growth of global emissions trading

A note of caution Revenue not a direct measure of Governments green credentials High revenue could be too high Falling revenues could represent tax base erosion Though not a key factor yet Environmental policies not all revenue-raising Greening existing taxes Trends should be seen as indicative

Latest revenues, 2005 Source: ONS Environmental Accounts, Autumn 2006

Historic receipts Sources: ONS Environmental Accounts, Autumn 2006; Authors calculations

Rate increase needed to raise £1bn TaxChangeIllustrative Rate Fuel Duty (+ VAT) VED APD Landfill Tax CCL Aggregates Levy Sources: HM Treasury Tax Ready Reckoner; Authors calculations

Rate increase needed to raise £1bn TaxChangeIllustrative Rate Fuel Duty (+ VAT)4%50.28p/litre + VAT VED18%£177 (petrol band E) APD50%£15 (standard EEA) Landfill Tax100%£42/tonne (standard rate) CCL200%£1.29/100kWh electricity Aggregates Levy200%£4.80/tonne Sources: HM Treasury Tax Ready Reckoner; Authors calculations

Revenue raising – some issues Fuel Duty Overwhelmingly largest green tax Decline in revenues/GDP began when fuel duty escalator abandoned (1999 PBR) Returning duty to real-terms peak from April 2000 would raise £4bn per year No indication that above-inflation rises to come – will be hard to raise revenue/GDP share using existing instruments Big increases may have distributional concerns: some of the very poorest may be hit hardest Not clear that duty regressive over rest of the distribution

Revenue raising – some issues Air Passenger Duty Unclear distributional effects – some low income people affected badly but are they poor? Reforms to air taxes sensible but difficult – threats of international action under Chicago Convention EU Emissions Trading Aircraft Tax proposed by Liberal Democrats

Revenue raising – some issues Climate Change Levy Reform into a business carbon tax proposed by Conservatives Extension of energy taxes to domestic sector conflicts with fuel poverty objectives and has distributional implications Landfill Tax Rates set to rise towards £35/tonne in medium-term PBR suggested higher target rate or faster acceleration towards it Rates now far higher than estimates of external costs of landfill Tax used to hit EU Landfill Directive – too severe a target?