Environment taxation should be a practical issue, not a political one

We have to have taxes, of course, but few people would argue that they were in themselves desirable. So if someone comes along and declares that he or she has hit on a wonderful form of tax that will increase employment, raise revenues, and help clean up the environment, the idea deserves both attention and a certain scepticism: if this is such a great idea, why has no-one done it before?

The idea is environmental taxation, and it is promoted in two papers just published: one by the left-of-centre think-tank, the Institute for Public Policy Research*; the other by the European Environment Agency** in Copenhagen. The IPPR paper is a political tract, calling for a series of measures increasing taxation on energy and on activities which do damage to the environment. There is an action plan to bring in a commercial and industrial energy tax, higher petrol and diesel duty, higher waste disposal taxation, a quarrying tax, office parking tax and an end of company car tax perks. The EEA paper, on the other hand, is a study of what European countries have done with environmental taxation and how well these measures have worked in practice. It provides a good starting point, a bench-mark, for the ideas set out by the IPPR.

The first point to be clear about is Britain tends to raise a rather higher proportion of taxation from environment and energy taxes than most European countries. As the graph shows, we raise more from environmental taxation than France, Germany or Italy and more from energy than France or Germany. Countries such as Sweden, which one might imagine are very environmentally concerned, do not raise very much revenue from these taxes, and while the environmentally-conscious Netherlands is top of the league on the environment side, it is second from the bottom on energy taxation.

It is worth looking at the figures, because anyone delving into this area tends to get a rather different, and highly political, view of the world. Party political statements are trotted out as facts. The IPPR is sadly guilty of this. For example its press release asserts: "Countries with high energy prices, like Germany, Japan and Italy, have been more successful innovators than countries with lower energy prices." Leaving aside the fact that the US is surely the most innovative country in the world, this statement ignores the fact that Germany does not have particularly high energy prices, that Japan's new car fleet is less energy-efficient than it was 20 years ago, or that Italy's energy and environmental taxation is lower than the UK's. As a result, IPPR headlines such as "Tax shift could create half a million new jobs at no cost to the Treasury" do not carry much credibility.

IPPR's pamphlet has a strong anti-government tone. Thus the Conservative extension of VAT to fuel used in the home is "a blatant breach of faith with the electorate", which was "rightly condemned as pernicious". Where British figures seem to compare badly with that of other EU countries, the government is castigated. On the one instance where our experience is much better (or rather much less dreadful) than the rest of Europe, road deaths, this is dismissed as "bland official assurances that accident statistics are improving".

The EEA conclusions, on the other hand, are presented in a much less overtly political manner and therefore inspire more trust. Take the tough question of whether environment taxes work. Instead of saying "yes, of course", the EEA acknowledges that the answers are a best guess rather than a certainty. A lot of work has been done in monitoring whether environmental taxation improves the environment, and the results seem to be encouraging.

On the other hand, while some incentive charges seem to work quite well, the evidence is less clear. In any case, as the EEA admits, these environmental taxes are small in relation to regulation and very small in relation to the total tax take.

When it comes to policy, the EEA is orderly and apolitical. It argues, unsurprisingly, that more environmental taxes should be introduced, but they need to be based on better evaluation of existing ones. It believes that it is worth looking further at the idea of broadening the tax base by increasing environmental taxes. It suggests that environmental taxes will be more acceptable if the money they raise is earmarked for environmental spending.

What should the non-political but environmentally-concerned person make of all this?

For a start, it would be much better if the question of environmental taxation were discussed in a more practical and less politicised way. Whether a particular environment tax should be introduced should be a separate question from discussions about wider economic policy. If revenue from new environmental taxes were used to cut other taxes, that would be much more acceptable than if the money simply went into the black hole of general taxation.

There is a powerful practical case for higher taxation both on energy use and on other activities which damage the environment. Several of the ideas of the IPPR make sense, including a target to get a further 10 per cent of government revenues from these sources. But the IPPR is its own worst enemy. It does no good to over-sell the idea as a job-creation scheme. And environmental taxes will not get political support unless it is clear that they are not part of a plan to raise more revenue for Big Government.

* "Green Tax Reform", Stephen Tindale and Gerald Holtham, IPPR, pounds 7.50

** "Environmental Taxes", European Environment Agency, ECU10