Green taxes: Green with envy

When Gordon Brown trailed the government’s green credentials by hiking tax on air travel and reinstating the “fuel escalator” in last December’s budget statement, business reacted with well-honed cynicism.

“Doubling air passenger duty is a calculated move by the Chancellor to raise revenue rather than reduce carbon emissions, however much he dresses it up in green rhetoric,” says Patrick King, a tax principal at accountants MacIntyre Hudson.
In fact, environmental taxes account for only £37bn – 7.4% – of Britain’s tax take. Around 80% of that comes from fuel duty, vehicle excise duty and VAT on fuel. Air passenger duty, climate change levy, landfill tax and aggregates duty raise just £3.8bn of the total.

King voices whatmany FDs are thinking more generally about green taxes. A poll of 119 of them by Financial Director found that 85% believe that so-called green taxes are just a way of plugging a hole in the national accounts.

That doesn’t imply they don’t think the environment is important. For example, 71% of FDs say their companies consider the environmental credentials of potential suppliers either at the outset or when shortlists are being drawn up.

But 44% of FDs admit they’re doing these things because they will improve the bottom line. An insignificant 1% claim that government incentives influence their decisions.

There are certainly FDs who agree that green taxes could work. “Green taxes will undoubtedly stimulate more environmental behaviour – after all, when money talks, people start to listen,” says Po Tang, chief financial officer at Euro RSCG Skybridge, a marketing agency which has already made a commitment to be carbon neutral.

“But the acceptance of the green tax – and whether or not it hampers competitiveness – is really dependent on the cost element,” Tang adds.

“Most companies will embrace more environmental policies and accept the business cost – up to a point. There certainly needs to be some research into what the threshold of acceptable cost will be, before businesses start to feel that the environmental investment is affecting their competitive edge.”

In fact, a model of the economy constructed by Dr Terry Barker, director of the Cambridge Centre for Climate Change Mitigation Research (4CMR) and colleagues at Cambridge University, suggests that GDP growth might be slightly higher if there were a large switch from income tax and National Insurance contributions to green taxes. That’s because the cut in employment taxes would release funds for spending or investment, says Dr Chris Hope, a senior lecturer at the Judge Business School, Cambridge University, who assisted with the Stern inquiry on climate change.

As an example, a switch of around £30bn could mean a further 10 or 11 pence a litre duty on petrol, while air passenger duty on a typical short-haul European flight could rise to £50.

Even so, Hope argues that the fact taxes are generally unpopular means it’s much better to focus them on things that aren’t wanted, such as pollution, rather than things that are, such as employment and wealth creation.

The problem at the moment is that existing green taxes simply don’t work.

“Overall, small changes for consumers – such as an extra £5 on UK and European standard air fares – will be insufficient to lead to wholesale behavioural change,” says Bill Dodwell, head of tax policy at Deloitte.

Tang believes that both companies and individuals would be more willing to pay green taxes if there was a demonstrable environmental pay-off.

“Unless there are some tangible measurable results,” Tang says, “then they will be criticised as another excuse for bureaucrats and quangos to take money for little benefit to the environment or the businesses paying it.”