Matching taxation principles with environmental policies

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With the discovery of a previously unknown planet, one of the first things we would want to know is its capacity for supporting any form of life. These days we think we know what clues to look for and have even built spacecrafts that can supply much of the data we think we require.

Given this human fascination with the life-sustaining properties of other planets, it may seem odd that it is only recently that many of us have started to take seriously the prospect of life on Earth becoming unsustainable.

This case study looks at one of the main ways in which governments are becoming involved in co-ordinated efforts to protect society and 'save the planet'. It focuses on how governments can introduce taxation policies and practices that are designed to bring about changes in human behaviour and its impact on the environment.

In particular, it concentrates on the use of environmental taxes, and the important role played by HM Customs & Excise in administering these taxes in support of the UK government's hopes and plans for environmental improvement.

 The nature of the problem

Your actions are putting the future of the planet at risk'. Most of us will have heard the warning calls by now. But are we taking notice of them. Unfortunately, there is no guarantee that, left to their own devices, individual people and organisations will take matters such as 'the future of the planet' seriously or acknowledge the part they themselves are playing towards putting the future at risk.

People and organisations need to see their behaviours and activities are significant in the overall order of things, otherwise it is probable that, for example:

  • factory owners will continue to pollute land, sea and sky with toxic wastes and emissions
  • trawler skippers will set out to catch as many fish as possible
  • landowners will continue to uproot hedges, enlarge fields and mechanise production
  • property developers will flood valleys, drain meadows, destroy forests, despoil agricultural land
  • final consumers will continue to increase their levels of consumption
  • consumers (individuals or organisation) will seek to dispose/discard rather than recycle/re-use
  • car owners will demand more new, bigger, better roads
  • car manufacturers will continue to build bigger, faster, more powerful, thirstier cars
  • airlines will clamour for more airports, longer runways, a greater number of 'landing slots'.

All of these are examples of human economic activity.

In the past, this type of activity has enabled us to survive and flourish. Nowadays, however, it is the nature and scale of human economic activity that is seen as a major factor in jeopardising the future.

 The role of government

With this kind of scenario, governments have had to become involved at both domestic and international level. Not all governments are equally enthusiastic about 'getting involved'. In some countries, including the UK, some previous governments have believed economies work best when government intervention (in the form of ownership, control, legislation and regulation) in the economic activities of individuals and firms is kept to a minimum.

Such an approach is very different from that being taken today. Increasingly, governments are emphasising the link between the actions of individuals and organisations and their likely impact on the quality of life of present and future generations. Also, governments are looking to 'do something about it'. That has become their aim. Their main problem lies in how to achieve it.

 Some key questions for government

Questions that governments have been forced to ask themselves include:

  • How can governments ensure that individuals and organisations take their responsibilities towards the environment seriously?
  • How can individuals and organisations best be persuaded to consider and reduce the adverse environmental impact of their own consumption and production activities?
  • What steps might government take to modify the impact of consumer and producer behaviour on the environment?
  • In what ways can a taxation system help to make consumers and producers become more environmentally responsible?

In recent times the UK government has shown particular interest in the last question. It believes that tax structures really can change economic behaviour, and for the better. So, in pursuit of its policy of safeguarding the future of the environment and the welfare of its citizens, it has given a key role to one of its major departments: HM Customs & Excise.

 HM Customs & Excise

HM Customs & Excise is a government department. Its aim is 'to provide a world class tax and customs service in accordance with government objectives'. In pursuit of its aim, it sets out to:

  • collect a range of duties and taxes (including VAT) accurately, on time and in a courteous and impartial manner
  • protect UK and business interests through the control of imports and exports.

HM Customs & Excise also has a unique role as a front-line organisation for protecting society against the threat of illegal drugs, firearms and, more recently, paedophile materials. The department has always been both adaptable and flexible in the way it continues to protect society.

This case study concentrates on the protective role of HM Customs & Excise in relation to the environment. The department's task is to ensure that the various taxes introduced by the government as part of its environmental protection policy actually 'work'. This task is a lot harder than it may sound. It requires that taxes be well conceived, carefully designed, and efficiently administered.

 Some features of a ´good´ tax

Taxes that are linked to types and levels of economic activity have one very important feature. People and organisations know that one way to reduce their tax bill is to reduce their level of activity in that particular sphere, e.g. car drivers who want to pay less tax can think in terms of owning a smaller-engined car, reducing their annual mileage, and staying out of congested city centres.

A 'good' tax is one that works in the way intended by those who introduced it. An environmental tax can be said to be working if it is seen to:

  • discourage producers and consumers from economic activities that are harmful to the environment e.g. indiscriminate production and dumping of pollutants and waste; excessive use of fuels; opening up of new quarries and opencast mines as a first resort
  • encourage producers and consumers to engage in economic activities that are 'environmentally friendly' e.g. design, build and operate power stations that are more fuel-efficient; undertake far more recycling and waste reclamation; design, build and sell more fuel-efficient cars, trains and aircraft; devise ways and means of re-using secondhand building materials
  • generate revenues greatly in excess of the cost of administering the taxes. These revenues can then be used constructively in ways that also improve the environment e.g. replanting of forests, restoration of meadows, regeneration of waste land and brownfield sites
  • avoid undesirable side-effects e.g. large numbers of businesses closing down or moving to other countries rather than 'improving their act' at their present location
  • be borne by the persons and organisations at which they are targeted, and only by them
  • gain the understanding, consent and even the active support of the persons and organisations that find themselves paying the tax.

This is a formidable list of requirements for any tax, and by no means easy to achieve in all respects. Not everyone would agree on the extent to which each of the taxes within the UK government's portfolio of environmental taxes currently meet all of these requirements. The main features of some of the taxes are outlined below.

 Some UK environmental taxes

In recent years the UK government has diversified the range of taxes intended to contribute to environmental improvement. In addition to the well-established taxes on, for example, car ownership and fuel consumption, there are now operating in the UK:

  • Landfill Tax
  • Aggregates Levy
  • Climate Change Levy.

These taxes are aimed principally at firms, in their capacity as producers. HM Customs & Excise is responsible for their efficient administration.

The Landfill Tax obliges many producers of waste products to pay a tax each time they take or send away waste for dumping. The tax aims to encourage waste producers to:

  • produce less waste
  • recover more value from waste e.g. through recycling or composting
  • use more environmentally friendly methods of waste disposal.

The tax applies to active and inert waste disposed of at a licensed landfill site. Its effect has been to make it more expensive for firms simply to dump waste materials. The government hopes and expects these firms to look to save themselves money by producing and dumping less waste.

The Aggregates Levy is a response to the environmental costs associated with quarrying operations (noise, dust, visual intrusion, loss of amenity and damage to biodiversity). Its objective is consistent with the government's statement of intent to reduce demand for aggregates (e.g. crushed stone, gravel, chips) and to encourage the use of alternative materials and recycled materials wherever possible.

The Climate Change Levy is charged on businesses that supply electricity, gas, coal and coke to industrial and commercial consumers. It is imposed at the time of supply to industrial and commercial consumers rather than at the time of consumption by end-users. Its effect is to make energy suppliers think twice before encouraging their customers to boost their own consumption of energy. It represents an attempt to make producers less interested in 'selling more' and more interested in encouraging their own consumers to make the most efficient use of the energy supplies that they already receive.

Oils (including road fuels) are subject to excise duty. At the time of each Budget, the Chancellor of The Exchequer reviews the rates for the various duties on different types of fuel, after taking into account relevant economic, social and environmental factors e.g. hardship for people living in remote rural areas; levels of vehicle exhaust pollution in inner cities; representations from interest groups within the fuel, power and transport industries.

The Green Fuel Challenge, first announced in the Pre-Budget Report 2000, has demonstrated the Governments commitment to a range of road fuels, e.g. sulphur-free fuel, in order to deliver air quality and climate change benefits both now and into the future.

 Conclusion

The economic activities of organisations and individuals create both benefits and costs not only for themselves but for society as a whole. For example, a new factory may improve an organisation profitability, create jobs, and increase the range of goods and services available.

At the same time, however, the presence of the new factory may create noise and congestion, increase demand for fuel, raise levels of pollution (in the air, on land, in water), and put pressure on available housing and on social amenities such as schools, hospitals as well as on drainage and sewage systems.

Governments can no longer afford to avoid such issues, and their willingness to become involved appears to be increasing. This has enhanced the roles of several UK government departments and agencies. As a result, HM Customs & Excise finds itself at the forefront of a drive to protect the environment and 'save the planet'.