Environmental tax measures
12 Feb 2021 01:51 PM
The recent (12 February 2021) report from the National Audit Office (NAO) has found that HM Treasury and HM Revenue & Customs (the exchequer departments) have a limited understanding of how far the tax system supports government’s environmental objectives.
Environmental tax measures
Tax measures can be an important tool in implementing environmental policy, by taxing goods or services which harm the environment and incentivising businesses and citizens to change their behaviour. The exchequer departments administer four taxes with explicit environmental objectives (environmental taxes) – Climate Change Levy; Carbon Price Support; Landfill Tax; and Aggregates Levy. These taxes raised £3.1 billion in 2019. The government plans to introduce a fifth – the Plastic Packaging Tax – from April 2022.
When designing environmental taxes, the exchequer departments carry out many important practices the NAO would expect, such as consulting with stakeholders and ensuring taxpayers get advance warning so they can prepare. However, they do not quantify all costs and rarely specify how they will measure environmental impact to allow Parliament to assess if taxes are meeting their objectives.
The NAO has found that HMRC only has limited insight into the environmental impact of taxes. HMRC has formally evaluated the impact of Landfill Tax but has not carried out any further evaluations of the impact of environmental taxes. In 2020, HMRC developed a single strategy for reducing the risks that environmental taxes are not paid. However, HMRC only has a partial understanding of the tax gap (the gap between tax due and collected) for three of the four environmental taxes.
Landfill Tax has reduced use of landfill sites significantly, but it has also incentivised more illegal disposal of waste. Between 1998 and 2014 HM Treasury increased the standard rate of Landfill Tax by 700% in real terms, contributing to a 65% fall in total waste to landfill over the period. However, HMRC estimates that the misclassification of waste at authorised landfill sites and waste disposed at unauthorised sites reduced Landfill Tax revenue by around £275 million (28% of tax due) in 2018-19. This figure does not include any revenue lost from illegal exports of waste and fly-tipping. HMRC has sought to reduce tax lost by increasing its compliance work and extending the scope of the tax to unauthorised sites. In 2020, government established a waste crime unit, including HMRC, to tackle the illegal disposal of waste.1
In addition to the four environmental taxes, there are other taxes that have an impact on the environment, such as fuel duty and Air Passenger Duty, which do not have an explicit environmental objective. The exchequer departments told the NAO that they measure the performance of these taxes primarily in terms of revenue raised. However, they are increasingly considering their environmental impact, for example in the 2020 Budget it was announced that the government would restrict entitlement to the reduced rate of fuel duty on diesel used in off-road vehicles, specifically to improve air quality and reduce CO2 emissions.
More widely, HMRC has not identified the tax reliefs which could impact on government’s environmental goals. From published material, the NAO has identified eight tax reliefs with a specific environmental goal or purpose, including a lower rate of VAT for the installation of energy saving equipment (which cost around £70 million in 2019-20). The NAO also identified that five of the largest 25 tax reliefs supporting government’s wider objectives could impact on the cost of producing or consuming products made from or using fossil fuels. Each of the five reliefs cost between £2 billion and £5 billion in 2019-20. The NAO recommends that the exchequer departments should identify and monitor existing tax measures with a significant environmental impact.
The exchequer departments do not centrally oversee how the tax system impacts on government’s environmental goals. While the Department for Environment, Food & Rural Affairs (Defra) and the Department for Business, Energy & Industrial Strategy (BEIS) have overall responsibility for government’s environmental objectives, HM Treasury is responsible for strategic oversight of the tax system. There are good examples where planned changes to tax measures were considered in environmental strategies developed by Defra and BEIS, but the different routes for announcing tax and regulation and spending decisions make government-wide approaches challenging to develop.
In November 2019 HM Treasury began a review, which will conclude in 2021, into how the transition to net zero should be funded. The review’s interim report highlights that tax, regulation and spending are all important tools to support government’s efforts to get to net zero. The final report will look in more detail at how HM Treasury could incorporate climate considerations into spending reviews and fiscal events, and how to embed the principles of the review into policy making across government. HM Treasury and HMRC have told the NAO the report will also look at the environmental impact of other tax measures which do not necessarily have the environment as a core objective.
“Taxes are one of the tools available to government in pursuing its ambitious environmental goals. While there is some evidence of the positive impact that taxes can have on the environment, too little is known about their effect.
“HMRC and HM Treasury should work closely with other departments to ensure that existing and future tax measures are compatible with the wider environmental strategies being developed across government. HM Treasury’s review of how the transition to net zero will be funded is an important first step in this process.”
Gareth Davies, the head of the NAO
Notes for Editors
- This includes HMRC, the National Crime Agency, the Environment Agency and others.
- Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
About the NAO
The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it use its insights to help people who manage and govern public bodies improve public services.
The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO.
The NAO audits the financial accounts of departments and other public bodies. It also examines and report on the value for money of how public money has been spent. In 2019, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £1.1 billion.
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