On 16th July 2012 the Treasury published a long awaited definition of an ‘environmental tax’. This follows uncertainty and criticism by stakeholders including Parliament’s Environmental Audit Committee about the absence of a definition.

Why bother with a definition?

For some time, several nations have been mulling over the concept of moving some of the tax burden from traditional sources (for instance income), to activities which damage the environment or which need a stimulus to improve behaviour. If movement is to be made in this direction, Governments will need to be able to demonstrate this and a definition of environmental taxes will help to provide this demonstration.

The UK Government has stated that as part of its mission to be the greenest government “The Coalition Agreement pledged to increase the proportion of revenue raised from environmental taxation by the end of this Parliament. This definition will provide a baseline against which to measure delivery”. It is forecasted by the Office of Budget Responsibility that the proportion of revenue from these taxes is expected to double by 2015-16.

At EU level there have been calls for better application of environmental taxation. The European Commission’s Roadmap to a Resource Efficient Europe (COM(2011) 571/3) in 2011 advocated "green tax reforms", increasing the share of environmental taxes. The proposed milestone is “By 2020 a major shift from taxation of labour towards environmental taxation, including through regular adjustments in real rates, will lead to a substantial increase in the share of environmental taxes in public revenues, in line with the best practice of Member States.”

Criteria to meet the UK definition

To be an environmental tax, the tax must meet all of the following three criteria:-

  1. The tax must be explicitly linked to the Government’s environmental objective” (an example being the CRC Energy Efficiency Scheme because the primary objective of the Scheme is to help the UK meet its binding target of reducing greenhouse gas emissions by at least 34% by 2020 and at least 80% by 2050)
  2. The primary objective of the tax is to encourage positive behaviour change” (an example being the Landfill Tax which is currently £64 per tonne and set to increase by £8 per tonne to £72 per tonne from 1st April 2013 and to £80 per tonne in 2014. There is considerable evidence to suggest that this tax has been instrumental in encouraging the objective of diversion of waste from landfill.
  3. The tax is structured in relation to environmental objectives and the more polluting the behaviour the greater the tax levied” (an example being, in theory, the EU Emissions Trading System (EU ETS)).

Current Environmental taxes

The following have been identified by Treasury as environmental taxes:

CRC Energy Efficiency Scheme,

Aggregates Levy,

Landfill Tax,

EU ETS,

Climate Change Levy, and

Carbon Price Support

The following are not regarded by HM Treasury as Environmental taxes, because whilst they have some environmental benefits they are primarily revenue raising:

Vehicle Excise Duty,

Fuel Duty, and

Air Passenger Duty

Of course there are other views

Before this definition was formally announced by HM Treasury, in the Environmental Audit Committee’s Sixth Report (Budget 2011 and Environmental Taxes) the absence of a single definition of an environmental tax was considered a hindrance to identifying progress in the increase of such taxes. The Committee highlighted the difference between “a narrow definition based on the primary intention behind the introduction of a particular tax” and the Office for National Statistics’ (ONS) definition which “looks more to the effect of a particular tax.” The ONS's 2010 Environmental Accounts included Fuel Duty, Vehicle Excise Duty, Air Passenger Duty and the Renewable Energy Obligation, in its definition.

The Committee recommended that the Treasury should set out its detailed plans for increasing the proportion of environmental taxes along with how these taxes are defined. The Committee expressly favoured the ONS’s definition, “which considers the effects of a particular tax, because the most important characteristic of an environmental tax is that it promotes more sustainable and less environmentally damaging behaviours regardless of why it was introduced.”

Clearly HM Treasury adopted a much narrower approach.

Please click here for the Treasury’s announcement 

Click here to view the Environmental Audit Committee Sixth Report Budget 2011