Why aren’t we taxing pollution to fund social care?
The UK government should increase tax on things we want less of – such as pollution – and reduce tax on things we want more of – such as jobs – explains Eunomia’s Chris Sherrington
When the government recently announced its intention to increase National Insurance to pay for a £12bn investment in health and social care, I can’t have been alone in thinking about other ways in which they could raise the funds. Fresh from discussions with colleagues about how to use pricing mechanisms to reduce overall road transport energy demand in the context of a shift towards electric vehicles, my thoughts turned to what would have accrued to the Treasury if fuel duty hadn’t been ‘frozen’ back in 2011.
In the 2009 Budget, the then Chancellor Alistair Darling had announced that fuel duty would increase by two pence per litre on 1 September of that year, and by one pence per litre in real terms each year from 2010 to 2013. In the 2010 Budget, it was further announced that fuel duty would rise by one pence per litre above indexation in April 2014.
However, in April 2011, the Coalition Government cancelled the proposed increases, and cut fuel duty by one pence per litre to 57.95 pence per litre for both petrol and diesel. Since then, there has been no increase in the nominal level of fuel duty. The Institute for Fiscal Studies (IFS) reports that as a result of this ‘freeze’: “Fuel duties have fallen by 17 per cent in real terms since 2010-11 (at a cost to the exchequer of £5.5bn in 2019-20), and by 29 per cent relative to the plans that the coalition inherited (at a cost to the exchequer of £11.2bn).”
A continued freeze would mean a loss to the Treasury relative to the plans the Coalition inherited of £13.9bn in 2022/23.
Unsurprisingly, with petrol and diesel cheaper than they otherwise would have been, emissions from road transport are higher than they would have been.
Analysis by CarbonBrief suggests that: “If fuel duty had increased each year as planned in the June budget 2010, then pump prices would have been a fifth higher than they are today. Higher prices would have cut CO2 in 2019 by 2-18 million tonnes of CO2 (MtCO2), some 0.5-5.0% of overall UK carbon emissions.”
Over the last decade, when we should have been making continued efforts to get people out of private vehicles, the cost of using public transport has increased at a faster rate than the cost of motoring, with petrol and diesel costs having fallen in real terms.
The great pity here is that following through on pre-announced increases would have given a clear, steady, long-term incentive for drivers to change their behaviour. Indeed, this was the original stated intention of the Conservative government in the early 1990s when the then-Chancellor Norman Lamont told the House of Commons that:
“The largest contribution to the growth in United Kingdom carbon dioxide emissions in the coming years is expected to come from the transport sector. I therefore propose to make clear today the government’s long-term intention on road fuel duty. We intend to raise road fuel duties on average by at least 3 per cent a year in real terms in future Budgets, in addition to the increase I have already announced for this year…
“…my announcement today will help manufacturers and consumers to plan ahead. It should provide a strong incentive for motorists to buy more fuel-efficient vehicles, and it will raise at least a further £520m in 1994-95 and £950m in 1995-96.”
Such an approach was also applied, albeit more successfully, with the Landfill Tax – which increased from £7 per tonne for (non-inert waste) on introduction in 1996 to its current level of £96.70 – and has played a key role in transforming waste management in the UK.
Giving a clear steer as to the long-term direction of travel is a key principle for policy-makers in effectively using taxes to change behaviour. However, when longer-term goals are subject to (recurring) short-term political expediency in an effort not to upset certain elements of the electorate, such as motorists, the potential for change will be greatly reduced.
In a country whose Parliament has declared a climate emergency, and which is playing host to COP26, we should lead by example and be looking to use the tax system to its full effect. We should increase tax on things we want less of, like pollution, and reduce tax on things we want more of, like jobs – a shift in the burden of taxation known as Environmental Fiscal Reform (EFR).
This is not a new idea, but it is one whose time has come. Eunomia has undertaken a number of studies for the European Commission assessing the potential for EFR across each of the Member States (including the potential in the UK) on a range of environmental issues, including air pollution, climate change, water pollution, water abstraction, and waste management. The potential to bring about change is significant, but the key political stumbling block can often be that such taxes are considered to be regressive, i.e. they hit the poorest hardest – ironically a criticism made of the proposed increase in National Insurance.
This may well be the case – the poorest are always, in general, going to be hardest hit by price increases. But to my mind, this is not an argument for not increasing taxes on polluting activity. Instead, we should be separately addressing the significant wealth inequalities in society, rather than using current levels of inequality – an inequality which is, at its root, a political choice – as a reason for not using the tax system to reduce pollution.
Chris Sherrington is head of environmental policy and economics at Eunomia Research & Consulting.
