HMT 2

17 April 2002

WORKING WITH BUSINESS AND CONSUMERS TO PROTECT THE ENVIRONMENT

Chancellor Gordon Brown today announced further important steps in the Government's strategy to protect the environment, continuing to work with business and consumers.

Commenting on the announcements, the Financial Secretary, Paul Boateng said:

"We are today showing that environmental protection can be achieved by working with business and consumers, harnessing the power of markets rather than working against them. Economic efficiency and environmental protection can go hand in hand. Wherever we can make markets and the economy work more effectively and in turn secure environmental benefits we will do so.

"The launch of the greenhouse gas emissions trading scheme this April - the first and only economy-wide scheme in the world - is the most graphic example yet. But it is just one of many steps taken in recent years towards a more sustainable future - economically, socially and environmentally. We are using combinations of taxes and other economic instruments such as permit trading schemes to deliver environmental results more efficiently than extra regulation would achieve - and we are today committing ourselves to investigate where these approaches can be applied to further environmental issues."

Building on its recent Budgets, the Government today announced a series of targeted measures to help to deliver environmental benefits.

Business energy efficiency: the Government has announced further support for business energy efficiency through the climate change levy (CCL) and business tax system. Complete exemption from the CCL will be introduced for electricity generated by good quality combined heat and power (CHP) or coal mine methane, subject to EU state aids approval. Five new groups of energy-saving technologies will join the eight technologies already benefiting from enhanced capital allowances (ECAs) against tax. Furthermore, the availability of ECAs for these environmental technologies will be extended to equipment for leasing. These steps build on the introduction of the CCL and associated measures in April 2001 (forecast to reduce emissions by 5 million tonnes of carbon a year by 2010) and the launch of the emissions trading scheme in April 2002 (in which business committed to save 1.1 million tonnes of carbon a year by 2006). CCL rates are frozen;
Cleaner, more efficient vehicles: as part of its strategy for Powering Future Vehicles, the Government has today introduced a new reduced band of vehicle excise duty (VED) for the most efficient, "low-carbon" cars. Taken alongside its announcement that it will freeze VED for all other cars, this will mean a difference of £100 a year in VED between the most and least polluting cars. The Government has also today announced further support for the most efficient cars in the form of enhanced capital allowances (ECAs), following the Green Technology Challenge. These measures complement changes to VED introduced in March 2001 and the reform of company car taxation in April 2002.
Cleaner fuels for the future: new support for cleaner fuels includes an announcement that the Government intends to introduce a fuel duty differential for sulphur-free petrol and diesel in 2003 and the launch of a second competition for pilot projects researching future fuels to qualify for fuel duty reductions or exemptions under the Green Fuel Challenge. Subject to the outcome of a pilot project under the first round of that competition, the Government intends to exempt hydrogen from fuel duty for a limited period to encourage its further development and early take-up. The Government will also provide enhanced capital allowances (ECAs) for installing compressed natural gas (CNG) and hydrogen fuel infrastructure. And, as announced in Budget 2001, in recognition of its environmental benefits, biodiesel will shortly benefit from a new, lower rate of duty, 20 pence per litre less than ultra-low sulphur diesel.
Modernising road haulage taxation: the Government has today announced that it aims to introduce a distance-based road-user charge for lorries by 2005 or 2006. In recognition that the UK haulage industry already contributes towards these costs, the Government will introduce off-setting tax cuts for the haulage industry when the new charge is introduced. More details will be outlined very shortly. This follows the Government's announcement in the November 2000 Pre-Budget Report of its interest in lorry road-user charging and the wide-ranging simplified and environmentally based reforms to lorry VED in December 2001. To provide stability, Budget 2002 freezes VED for lorries.

Other progress and measures announced today by the Government include:

fuel duty: freezing the rates of duty on road fuels, responding to the recent high and volatile level of world oil prices;
oils fraud: announcing a comprehensive strategy to tackle the rising problem of oils fraud, including the introduction of an approval scheme designed to tighten controls on the distribution network for rebated fuel;
motorcycles: announcing reforms to motorcycle VED reflecting changes to the motorcycle fleet and the benefits of motorcycles compared with cars, especially for commuting, to take effect for licences starting from May 2002, and benefit around 600,000 motorcycle users;
vans: announcing a new, reduced VED rate for more environmentally-friendly vans which meet the euro-IV emissions standard from March 2003, while freezing VED for other vans;
buses: to ensure that the support of over £1 billion a year to buses contributes most effectively to the Government's transport objectives and improving bus services, the Government will review existing support mechanisms, and in particular will review the fuel duty rebate for buses to assess whether it provides effective support for buses in a way that is consistent with the Government's objectives. This review will take place as part of Spending Review 2002 and the current review of the 10-Year Transport Plan. VED for buses is frozen;
employer-subsidised bus services: announcing that employees receiving free or discounted travel on buses subsidised by their employers will not pay tax on it as a benefit in kind;
fuel for employees: announcing a revenue-neutral reform of the fuel scale charge, under which employees pay tax on fuel received free from their employers for personal use, to make it reflect from 2003-04 the environmental efficiency of their car rather than its engine size, in line with the company car tax system;
air passenger duty (APD): freezing the current rates of APD and, from 1 November 2002, extending the scope of the reduced rates that currently apply to European Economic Area destinations, to include Switzerland and countries applying to join the European Union. The Government will be considering the role of economic instruments to deal with the environmental impacts of aviation as part of the Aviation White Paper;
waste: building on the annual £1 per tonne increases in landfill tax, including in April 2002, the Government anticipates that the standard rate of landfill tax will need to be increased significantly in the medium term as part of the mix of future policy measures. Future decisions on landfill tax and the case for a tax on incineration will be informed by the Performance and Innovation Unit (PIU) waste project findings. The Government has also announced that it will consult during 2002 about the tax treatment of waste oil used as a fuel, as part of its commitment, outlined in Waste Strategy 2000, to examine ways of enhancing the competitiveness of regenerated, or recycled, oils;
aggregates levy: confirming that the aggregates levy was introduced from 1 April 2002, with all revenues from the introduction of the levy recycled back to business via a cut in employers' NICs and the £35m Sustainability Fund;
pesticides: reporting back on the progress to date of the voluntary agreement to reduce the environmental impact of pesticides, while confirming that a tax on pesticides remains a real option for the future;
improvements in the public space: taking forward changes to the operation of VED to ensure that car-owners remain liable for their cars, to help crack down on abandoned vehicles and to assist more generally in tackling crime.

The Government also announced that it will review the potential to extend the use of economic instruments for environmental purposes, including to:

address environmental issues, such as nutrient pollution, associated with agriculture, helping to provide a level playing field for less environmentally harmful forms of farming;
improve household energy efficiency, while tackling fuel poverty and maintaining its commitment not to introduce new taxes on the use of energy by households.

The Government will also develop with stakeholders its strategy to tackle environmental issues using economic instruments where appropriate over the coming months.

DETAILS

Climate change levy

1. The exemption for electricity from good quality combined heat and power (CHP) systems will mean that all the energy used and produced by such systems will now be exempt from the levy. This recognises the environmental benefits of CHP and will provide a further incentive for business to use this technology. Similarly, the exemption for electricity produced from coal mine methane will encourage the beneficial use of this form of energy which otherwise leads to damaging emissions of methane gas to the atmosphere. These exemptions are subject to EU state aid approval.

2. The Government welcomes the European Commission's recent decision that the exemption from the levy for fuel used in dual-use processes is a logical and integral part of the levy. The Government has considered options for extending relief to certain secondary processes which compete with processes which benefit from the dual-use or non-fuel use exemptions, and has taken up this idea with the Commission. The Government welcomes the Commission's decision that such an exemption would be a compatible state aid, and will now be evaluating these options further.

Business energy efficiency

3. Enhanced capital allowances (ECAs) for spending on designated energy-saving plant and machinery were introduced in 2001 as part of the climate change package to help businesses reduce their energy needs. From today, they are extended so that lessors may claim ECAs on qualifying energy-saving assets for leasing.

4. Proposals for enhanced capital allowances are announced today for five further groups of energy-saving technologies, as part of the follow-up to the Green Technology Challenge. The new qualifying technologies are:

heat pumps;
radiant and warm air heaters;
solar heaters;
energy-efficient refrigeration equipment, including display cabinets; and
compressor equipment.

Work to define precise performance standards is continuing and, subject to EU state aids approval, the Government anticipates that the technology groups will be added to the list of qualifying technologies during the Summer

Emissions trading scheme

5. The Government's emissions trading scheme was launched on 2 April 2002. Thirty-four organisations successfully bid to join the scheme in an auction for permits held on 11-12 March 2002. In addition, nearly 6,000 companies with targets under the climate change levy negotiated agreements will be able to engage in trading to meet their targets at the end of their first target periods later this year. Approved emissions reduction projects will also be able to sell credits into the scheme. Further information is available in DEFRA news release 99/02, published on 13 March 2002.

Fuel duty

6. The rates of duty on road fuels and non-road fuel oils (such as red diesel) are frozen, reducing duty on the main road fuels in real terms by around 1 pence per litre.

7. As announced in Budget 2001, the Government will introduce a new rate of duty for biodiesel of 25.82 pence per litre, 20 pence per litre below the ultra-low sulphur diesel (ULSD) rate, to take effect from Royal Assent.

8. In 2003, the Government intends to introduce a duty incentive to encourage the production and use of sulphur-free fuels.

9. Subject to the outcome of a pilot project, the Government intends to exempt hydrogen used as a road fuel from fuel duty in the future for a limited period to encourage its further development and early take-up.

Oils fraud

10. Like other forms of indirect tax fraud, the use of illicit fuel in road vehicles drains government revenue, funds other forms of organised crime, and undermines honest businesses. The abuse of rebated fuels, which tend to have higher sulphur contents than ordinary fuels, also threatens the Government's environmental objectives and damages vehicle engines.
11. Following consultation in the November 2001 Pre-Budget Report, the Government today announced a comprehensive strategy to tackle the rising problem of oils fraud, comprising:

· the introduction of a new approval scheme designed to tighten controls on the distribution network for rebated fuels, such as 'red diesel' intended for off-road use and kerosene intended for home heating, helping Customs to prevent and detect their misuse;

the introduction of tighter controls on the use of duty-free oils in industrial processes (known as 'tied oils');
the introduction of a new, EU-wide 'Euromarker' to be added to rebated fuels, designed to make it easier to detect vehicles using rebated fuel purchased abroad for illicit use on the UK's roads; and
the release of additional resources this year to enable the effective enforcement of these new controls, including the deployment of over increased staff and investment in new technology to support the detection and investigation of oils fraud.

Enhanced capital allowances for low emission cars

12. From today, all businesses can claim 100 per cent enhanced capital allowances on their investments in new cars emitting up to 120g/km of carbon dioxide; and vehicle refuelling infrastructure for compressed natural gas or hydrogen fuel. These allowances will be reviewed over time.

Free fuel for employees

13. From April 2003 the new fuel scale charge will be linked to the Carbon dioxide emissions of the car, including the same discounts and premiums as in the company car tax system. There will also be a proportionate reduction if an employee receiving free fuel decides to opt out part way through the year.

Employer-subsidised bus services

14. Budget 2002 introduces a benefit-in-kind tax exemption for employees receiving free or discounted travel on buses subsidised by their employers.

VED

15. Budget 2002 freezes VED rates on all vehicles.

16. For new licenses commencing from May 2002, the Government is introducing a new 'AA' VED band for low carbon cars emitting up to 120g/km of carbon dioxide and first registered from March 2001. This will reduce the VED rate for these cars by £30 and increases the incentive to choose the very cleanest cars to up to £100. Cars that will qualify for the new reduced band include the most efficient versions of the Ford Fiesta, Vauxhall Astra and Peugeot 206, as well as the hybrid electric-diesel Honda Insight and Toyota Prius.

17. From March 2003, new vans which meet the new euro IV emissions standard will qualify for a reduced VED rate of £105.

18. For licences commencing from May 2002, there are new rates for motorcycle VED as follows:

Engine size	VED rate
Up to 150 cc	£15
151 - 400 cc	£30
401 - 600 cc	£45
Above 600 cc	£60

19. VED licences used by the motorcycle trade will be reduced to £60.

20. For licences commencing from May 2002, the new rates for tricycle VED will be £15 for vehicles up to 150 cc, and £60 for all others.

21. For licenses commencing from June 2002, all lorries registered on the islands of Harris and Lewis, and Orkney and Shetland and which travel only 5 kilometres from their disembarkation point on the UK mainland, will have the option to pay the small islands goods vehicle VED rate of £165.

22. Finance Bill 2002 will include provisions for a new offence to ensure that, in future, the registered keeper is liable for an unlicensed vehicle.

23. From Royal Assent of the Finance Bill, the DVLA will be able to use information contained on the databases of the Department of Work and Pensions and the Ministry of Defence to enable the efficient licensing for those disabled motorists who qualify for a VED exemption.

24. Finance Bill 2002 contains provisions to correct an anomaly in the Vehicle Excise Registration Act to ensure that the engine capacity for all vehicles is calculated on the correct basis.

Lorry road-user charging

25. Budget 2002 announces the Government's decision to introduce a distance-based lorry road-user charge following its consultation launched in the Pre-Budget Report. This will make foreign lorry operators pay towards the costs they impose in the UK and, as it will be complemented by offsetting tax reductions when it is introduced, will not increase costs for the UK haulage industry. The Government aims to introduce the new charge in 2005 or 2006. Further details will be outlined shortly.

Air passenger duty

26. From 1 November 2002 the European Economic Area for the purpose of setting APD rates will be redefined to include all EU applicant countries (including Malta) and Switzerland. Flights to the following countries (as well as those within the UK) will now qualify for the EEA rate: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherland, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland and Turkey.

Aggregates levy

27. The aggregates levy was introduced as planned on 1 April 2002. Part of the revenue from the levy is being used for the new £35 million per year Sustainability Fund. DEFRA are responsible for the Fund in England, while the Devolved Administrations are responsible for the Fund in Scotland, Wales and Northern Ireland.

Waste

28. The increase in the standard rate of landfill tax to £13 per tonne on 1 April 2002 was part of the planned annual increase in the tax from 2000 to 2004. The Cabinet Office Performance and Innovation Unit is currently undertaking a review of waste policy and future waste taxation will be considered in the light of the PIU's conclusions.

29. The Government is currently consulting on the future of the landfill tax credit scheme (LTCS). The consultation seeks views both on options for funding mechanisms and on priorities for support. Responses to this consultation will be considered in the context of Spending Review 2002.

NOTES FOR EDITORS

Further details of the Government's strategy to tackle indirect tax fraud are available in press notice C&E 1.Copies of the PBR paper Tackling Indirect Tax Fraud are available from the HM Treasury and HM Customs and Excise websites (addresses below).

HM TREASURY PRESS OFFICE

Press enquiries: 020 7270 5238

Non-media enquiries: 020 7270 4558

INLAND REVENUE PRESS OFFICE

Press enquiries: 020 7438 6692 / 6706 / 7327
(out of hours: 07860 359544)

Non-media enquiries: 020 7438 6420
(office hours only)

HM CUSTOMS AND EXCISE PRESS OFFICE

Press enquiries: 020 7865 4775 / 5472
(out of hours:020 7620 1313)

GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to Budget 2002 may also be found on the Internet at the following addresses:

Inland Revenue www.inlandrevenue.gov.uk

HM Customs and Excise www.hmce.gov.uk

Budget 2002 Press Notices: index