5 December 2002
Speech by Economic Secretary to the Treasury, John Healey MP, to the Green Alliance on Tax and the Environment – Using Economic Instruments
Dialogue with green groups
I want to start today by looking back.
In his first Budget, back in 1997, the Chancellor said:
“The tax system sends critical signals about the economic activities a society wishes to promote and deter. Today I start to put these principles into practice by demonstrating our commitment to the environment.”
At the same time, on the same, day, my predecessor as Treasury Minister with responsibility for the environment set out our Statement of Intent on Environmental Taxation.
That speech and that statement sent out a powerful message on environmental policy, to green groups and to business. Environmental issues were on the agenda. And, for the first time, the terms under which they were to be considered were clearly defined.
That framework for discussion has enabled the environmental lobby to engage constructively with the policy process.
Regular meetings between special advisers and officials and a range of green groups, coordinated by the Green Alliance, meetings between my predecessors and the Green Alliance, and SERA, and the Parliamentary Environment Group, structured consultation processes, informed debate over policy proposals: these have all helped to improve understanding, on both sides, of the issues which concern us all.
The framework we have put in place has improved dialogue with the green lobby and with industry. That dialogue, in turn, has helped us deliver the Climate Change Levy, the aggregates levy, and the landfill tax, duty differentials to encourage moves to cleaner fuels, the Green Technology Challenge, and the Emissions Trading Scheme. We are promoting the efficient use of scarce environmental resources without damaging the competitiveness of British business.
Statement of intent
The essential principles of this framework for discussion have been in place since 1997. These principles have been developed and extended in the document we published alongside the Pre-Budget report: ‘Tax and the Environment: Using Economic Instruments’. It says in the statement, and I state again now, that our policies are designed to confront the market failures which send the wrong signals about the use of environmental resources. That means we are:
a. Tackling negative externalities, in line with ‘polluter pays’ principle: ensuring market prices reflect the environmental costs;
b. Promoting investments which have positive externalities: remediating contaminated land, bringing in investment to run-down areas – with a 150% tax credit in Budget 2001
c. Protecting public goods: with new funding for agri-environment schemes in SR2002
d. And correcting information failures: the information schemes run by the Carbon Trust are a clear example.
We said in 1997, and we say now, that intervention should be underpinned by a rigorous analysis of costs and benefits. That means:
a. We need to understand environmental costs: the aggregates levy was underpinned by an assessment of costs of aggregate extraction;
b. We take account of the precautionary principle: lack of scientific certainty should not be used as a reason for postponing cost-effective measures – action on climate change operationalises this principle;
c. Equally, the social and economic costs of taking action need to be considered. That’s why have not taxed domestic energy, and why the Climate Change Levy has discounts for energy-intensive sectors of industry. Considering the impact of environmental measures on the competitiveness of British business falls under this heading. ‘Considering the impact’ means thinking about international competitiveness, competition within and between sectors, time for business to adjust, potential perverse consequences, and the administrative burden of compliance. It does not mean that any impact on business will preclude the introduction of environmental measures. It means the impact will be considered.
d. Finally, we need to weigh up the costs and benefits through a process of economic appraisal. The revised draft Treasury Green Book - the Government’s ‘bible’ for investment appraisal - sets out an updated methodology.
We take the same approach to setting targets. Proposing uncosted targets is cheap for those who don’t have to pay to meet them – and that holds at an international as well as at a domestic level.
Working within this framework, and taking account of administrative costs, of distributional impacts, and of competitiveness, we have delivered the Climate Change Levy, the Aggregates Levy, the Emissions Trading Scheme, the graduated vehicle excise duty, and a Spending Review earlier this year that has been described by Tony Hams as ‘the greenest yet’.
Working outside of these principles, failing to take account of the evidence, failing to listen to the experts, leads to inefficient outcomes. The Bathing Water Directive is a good example: not based on particularly sound science; compliance measured on the wrong basis; no allowance made for regional variations. In consequence, compliance is low, an opportunity to improve the quality of bathing water has been missed, and nearly every Member State has faced the possibility of legal action at one time or another.
It is exactly these types of problems that our framework is established to avoid.
Rebutting the accusations
So I reject as unfounded the accusation from certain elements of the environmental lobby that, in the Treasury, we are only interested in GDP, only interested in labour productivity, only interested in growth – not quality of growth. The Treasury now has a PSA target to protect and improve the environment. And the measures we have introduced to correct market failures, considered alongside investment in skills and R&D, will also help improve resource productivity.
Equally, I reject the accusation from industry that all this amounts to is stealth taxes and revenue raising: the Landfill tax, CCL and aggregates levy have all been broadly revenue neutral.
Policy development process – key features
We welcome informed debate on these important issues. But the framework for that debate has to be clear, and it has to be understood by all parties. Just as we reject ungrounded assertions from business that ‘red tape’ is damaging competitiveness. So too we reject uncosted and ill founded proposals from the environmental lobby. We want to engage with both groups on similar terms, and with a shared understanding of the aims of environmental policy and the method for arriving at agreement on environmental measures.
Building on the Statement of Intent, our paper on ‘Tax and the environment: using economic instruments’ establishes the parameters for the debate.
First, early signalling, providing certainty for business. With the Climate Change Levy, the need for action was first signalled by agreement on the Kyoto Protocol in 1997, this was followed by the Marshall report in 1998, proposals for the levy were announced in 1999 and the tax was introduced in 2001.
Second, rigorous economic analysis, to ensure that environmental savings are delivered cost-effectively. On biofuels, we have announced duty incentives underpinned by the latest evidence on the environmental benefits of these fuels, including lifecycle carbon and air quality benefits. On top of that, the Government-Industry Forum on the Non-Food Uses of Crops has commissioned an independent study on the environmental benefits of biodiesel from Sheffield Hallam university, which will be published early next year.
Third, consultation, so all stakeholders have a fair and equal chance to contribute to the debate. On the aggregates levy there was consultation during development of the voluntary proposal and further consultation on implementation in 2000 and 2001 before introduction in 2002. On pesticides, we consulted on various options between 1999 and 2001. Taxation is not always the way forward and we agreed a voluntary initiative in 2001.
And fourth, revenue recycling. Our sustainable development strategy is about efficient use of scarce environmental resources, it is not about raising revenue. The CCL, the Aggregates Levy, and the Landfill Tax are all broadly revenue neutral.
These are the principles, developed through practice since 1997, that will underpin our actions going forward. They are not intended to pre-judge outcomes, or tip the balance one way or the other. The government does not have a predetermined view on aviation, on waste management, or on domestic energy efficiency. The principles we have put in place are intended as a framework for constructive debate, not as a mechanism for engineering outcomes.
Clear principles; economic analysis; extensive signalling and consultation in advance of action; revenue recycling and links with other policy measures: this has to be the way forward. It is an approach designed to ensure that measures are economically efficient; effective in achieving objectives; take account of issues relating to distributional impact and competitiveness; avoid unforeseen side-effects as far as possible; and give those affected adequate time to respond. This is a disciplined and deliberate approach to policy making. And it is an approach which departments, implementing policy, and the Treasury, designing it, all feel comfortable with.
With guidance for departments on incorporating sustainable development into their spending proposals, and revisions to the Green Book, the set of principles on the use of economic measures complete the picture. We now have, for the first time, a coherent framework covering the entire scope of Treasury activity – environmental principles locked into the structure of taxation and of public spending.
Levelling the playing field
Across government we have taken important steps to ensure transparency and accountability. The Public Service Agreements and the codes for fiscal and monetary stability are clear examples. In our approach to the use of economic instruments to protect the environment, we have taken this process several steps forward: introducing extra dimensions to ensure transparency and accountability throughout the system; spelling out our objectives, and our methodology; facilitating debate by establishing the terms within which that debate can take place.
The green lobby has always been at a disadvantage when it comes to engaging with the policy process. Typically, businesses have more resources, better contacts, more political capital. These principles define the terms on which the government will proceed with decisions on economic instruments, with the stages clearly set out, and expectations established. They can be regarded, and they should be regarded, as a way into the policy debate, and that has to be valuable for green groups.
We have published a set of principles, so future policies can be tested against them and the government can be held to account. We expect Select Committees in the House of Commons to take them into consideration when reviewing the effectiveness of policy. We are making it easier for Parliament and the public to hold government to account, committed, for example, to publish summary tables on the appraisal of environmental effectives of fiscal measures on our website.
We have enabled other organisation to make proposals – using the framework we have set out.
And we have spelled out our commitment to ongoing action in this area – building on the momentum we developed in our first term.
What Government will expect from green groups
There is a correspondent obligation on environmental organisations to engage with the structures we have put in place. I have said that this document should stand as warning to green lobbyists who come up with ill informed ideas for environmental taxation. I stand by that. Proposals that are made to us need to be clear on how, exactly, they address market failures; how, exactly, they are costed, who, exactly, will benefit and who, exactly, will pay.
Where there are alternatives to taxation we will explore them. Voluntary agreements can be effective and we will not rush to regulate. Equally, where the industrial lobby does come forward with alternatives, we will expect them to address market failures, to be costed, and to set out who will pay and who will benefit.
Where we do implement measures proposed by green groups, we expect and welcome constructive criticism. The recent report from the Green Alliance on the Climate change Levy is a good example. We do not welcome, and we do not expect, criticism about the pace of reform or the necessary process involved in making difficult decisions, balancing economic, social, and environmental objectives, within a democratic process.
Conclusion
Working within the principles set out in the Statement of Intent, we have delivered the Climate Change Levy, the aggregates levy, the landfill tax escalator, graduated vehicle excise duty, fiscal incentives for cleaner fuels, and we have a voluntary agreement on pesticides. None of this would have been possible without the constructive dialogue which the Green Alliance, and organisations like them, promote.
Now, building on the Statement of Intent, we have established a set of principles for the use of economic instruments. This is the framework within which we must coalesce, as we move forward with our proposals on the environmental impacts of agriculture, on aviation, on waste management, on incineration, and on domestic energy efficiency.
It is a framework for dialogue, and I have talked for long enough, so I am looking forward to hearing your views.