The House of Commons Environmental Audit Select Committee has strongly criticised the Treasury for its failure to increase green taxes and introduce other measures to help reduce carbon emissions and combat climate change.

In its 2007 Pre-Budget Report and Comprehensive Spending Review: An environmental analysis , which is published today, the Committee has highlighted a number of areas where it believes the Treasury has either failed to take sufficient action or has based its decisions on flawed thinking.  The Treasury’s Pre-Budget Report (PBR), which was published on 9 October 2007 together with the latest Comprehensive Spending Review (CSR), highlighted four key announcements on the environment: an increase in funding for Defra, details of a new Environmental Transformation Fund (to fund low carbon investments in the UK and the developing world), a reform of aviation tax, and publication of an interim report on the future development of low carbon vehicles.

According to the Committee, although a decade ago the Treasury made a number of bold announcements on environmental taxes, the abolition of the fuel duty escalator in 1999 and freezing of other green taxes subsequent years has resulted in a peak in environmental taxes as a proportion of all taxation at 9.7% in 1999 which has declined ever since, falling to 7.3% in 2006.

While the Committee’s core focus is on green taxation, the Report has also focused on four other areas: • Government support for Carbon Capture and Storage (CCS);• the Shadow Price of Carbon (SPC);• the new Environmental Transformation Fund;• the transparency of emissions trading;

• the new set of Public Service Agreements.

The Committee has drawn particular attention to the rise in road transport emissions in England (up by 12% between 1997 and 2006) and the 2006 UK Climate Change Programme Review forecast that increased road transport emissions due to traffic growth over the period 1990–2010 would more than outweigh the entire suite of carbon reduction policies aimed at the transport sector. Some motoring organisations have begun calling for the next planned increase in fuel duty to be scrapped, given the rise in petrol prices due to increases in the price of crude oil. The Committee regards the forthcoming Budget as “ a test of the Treasury’s environmental credibility: it must not defer its planned rises in fuel duty.”

With regard to CCS, the Committee comments that overall the Government has not shown enough urgency in its approach to CCS, and it is absolutely imperative that the Treasury provide considerably more assistance for the development of this technology in the UK. In order for CCS to be deployed widely and swiftly in the UK, the Committee has recommended  that the Government introduce some form of financial mechanism for incentivising CCS power plants over conventional power stations.

The Committee has expressed particular concerns over the Shadow Price of Carbon, which is used by the Government to put a cost on the potential impacts on climate change of different policy options, commenting that

“There appear to be serious flaws in the thinking behind the Shadow Price of Carbon.”

The Committee has argued that the Government is wrong in its approach of setting the SPC at a relatively low level based on the assumption that international action will be taken to ensure that the effects of climate change will be relatively mild. In their view there is a high probability that, by setting a relatively low carbon price, the Government will  fail to discourage the approval of carbon-intensive policies and projects and actually make it harder to achieve the global targets that the Government is assuming will be met. The recommendation is that in order to redress this, the Shadow Price of Carbon should be increased, by basing it on the projected costs of following a ‘business as usual’ trajectory of emissions.

With regard to the Treasury’s loss of momentum on green taxes, the Report states that the  Committee

“put it to the Exchequer Secretary that this represented a clear failure on the part of the Treasury to live up to its earlier policy.” With regard to the Secretary’s response that the Government was doing lots of other things beyond taxation to help to change people’s behaviour in more environmentally friendly directions and the very decline in green taxes might be a sign of their success, the Committee said that it found neither argument impressive, commenting that

“The Treasury’s argument that new or higher green taxes are unnecessary, because the Government is doing enough to protect the environment through other policies, is hardly convincing given the Government’s lack of progress in reducing UK carbon emissions over the last decade. Even if it were the case that policy across Government was successfully delivering its environmental objectives in full, it would still not be an excuse for the Treasury’s inaction. “

In the Committee’s view the Treasury needs to do a better job of publicly justifying green taxes by explaining their core environmental purpose, as well as linking them— however strictly—to increased spending on the environment and reductions in other taxes. The Report has recommended that the Treasury consults on, publishes, and follows an explicit strategy to win public support for environmental taxation.