Is the UK government rethinking its stance on green taxes?

Governments around the world are increasingly using taxation to achieve their environmental targets. Many countries now offer tax incentives to promote “green” behaviour and impose specific levies, duties or energy and environmental taxes to discourage undesirable behaviour by incorporating a proxy for the cost of the damage into the price paid for goods and services and incentivising the use and development of greener alternatives. 

Unfortunately, data shows that UK revenues from environmental taxes are only mid-range compared to other European countries and have largely stagnated over the last 20 years relative to GDP. The UK government has not used the tax levers available to it to full effect to deter environmentally damaging practices. Worse, its use of green taxes appears to be ill-conceived. These taxes not only fail to target the root of the evil they purport to tackle but they also lack any demonstrable links between the taxes and a positive impact on climate change. 

The National Audit Office (NAO) has investigated this, finding that taxes aimed at helping the environment raised £34.7bn in the UK in 2019. This demonstrates the potential to raise revenues while reducing environmentally damaging behaviour, provided the former does not undermine the latter. Disturbingly, the NAO found that at present HMRC and the Treasury do not measure whether green taxes are having any impact on the environment. The UK government is too focused on raising money from these taxes, rather than checking they are actually achieving their intended policy effect.

Because both the March 2021 Budget and Tax Day had been environment-light, many interpreted as little more than “green-washing” the Chancellor’s pledge to put green investment at the heart of economic recovery.  Quite reasonably, observers expect the government to back up fine words with specific actions. With the prospect that the Prime Minister will shortly pledge to reduce emissions by 78 per cent by 2035, compared to 1990 levels, we might be about to witness a greater commitment to the use of green taxes to drive positive environmental behaviour and raise tax revenues.

In reaching this point, there have been many thrills and spills in the UK’s implementation of green taxes. Between 2010 and 2020, the landfill tax is credited with a 72 per cent reduction in the weight of local authority-collected waste sent to landfill. However, there is no record of the amount of waste which is now being illegally dumped.

Increasing fuel duty, which has been frozen at 59.75 pence per litre since 2009, would be an easy win in the government’s campaign to abolish petrol and diesel cars and to improve public health. Leaving aside the rather important detail that the government has not worked out how to replace the revenues raised by fuel duty, this easy win for the environment might backfire, becoming a polling-booth loss for the Conservatives in 2024.

The intended increase in the rate of VAT on domestic heat and power in the 1990s to the standard rate is another example of the government failing to have the courage of their green convictions. The first step was to raise the rate to 8 per cent, but political willpower crumbled under public criticism so the rate was reduced to 5 per cent, the lowest allowed under the prevailing EU rules. Perhaps we will now see the Prime Minister proposing to zero-rate domestic heating power produced from renewable sources, with a phased increase from the current 5 per cent to 20 per cent in respect of non-renewable supplies.

What could such a tax system look like? Sunak referenced decent well-paid green jobs so might we see lower income tax for people who work for green companies? A lower rate of corporation tax for businesses that meet stated ESG criteria? A tax on the amount of carbon used to produce goods and services? However, this would increase complexity of an already convoluted tax system and contradict another aim: tax simplification. Developing a system of taxation that is underpinned by policy-makers identifying what a successful environmental outcome looks like and aligning the tax framework to meet that aim, with no divergence to increase tax take, is critical if green taxes are to be used to full effect and the UK government is to materially move the dial towards its net-zero target.