Solving a taxing puzzle. making environmental taxes work for business

Transcription

1 Solving a taxing puzzle making environmental taxes work for business

2 2 Contents Executive Summary 3 Environmental taxes are playing an increasingly prominent role in the UK 5 The existing landscape does not deliver the full potential of environmental taxes 8 Business needs a more strategic environmental tax framework 13 Making environmental taxes work for business 19 References 22

3 3 Executive summary Environmental taxes have the potential to play an important role in unlocking business investment, which is needed to drive private sector growth and tackle environmental impacts. This is the headline message from the CBI s research for this report, based on over 100 hours of one-to-one interviews with over 70 member companies operating in the UK. But interviewees are equally clear that this will only happen if these taxes are well designed and correctly administered. With the coalition government committed to increasing the proportion of revenue raised by environmental taxes in the coming years, this report provides a stocktake by the business community of the current landscape looking at what taxes are and aren t working for business as well as a view on how the system can be improved in the future. From our research, it is clear that business supports the use of well designed environmental taxation. However, the rapid growth of environmental tax measures in the UK has not been accompanied by a clear strategy, and as a result, the environmental tax framework does not provide a coherent landscape in which businesses can invest with confidence. There is also not enough consideration across government departments of the impact of environmental taxes on different sectors of the economy, with some at risk of having their competitiveness undermined by ill-considered taxes. When asked about individual environmental taxes, the picture was mixed. There are some definite success stories Landfill Tax and Vehicle Excise Duty drive environmental change whilst unlocking business investment. Other taxes particularly the Carbon Reduction Commitment and Air Passenger Duty are viewed negatively, with some companies reporting that they are acting as a drag on, rather than a driver of, investment. The large majority of businesses interviewed believed that there is considerable scope to improve the effectiveness of environmental taxes, and that the government should pursue a two-pronged approach to achieve this. As an immediate action, it should commission an independent review of the existing landscape, with the intention of addressing poorly performing taxes that are currently deterring investment. Over the longer-term, it needs to ensure a more strategic approach to environmental taxation, which takes into account business guidance on how future taxes should be designed and implemented. Only by doing this, can we ensure that environmental taxes fulfil their potential to unlock private sector investment and drive UK growth. This report argues that: Environmental taxes are playing an increasingly prominent role in the UK The existing tax landscape does not deliver the full potential of environmental taxes Business needs a more strategic environmental tax framework

4 4 Improving the design and implementation of environmental taxes Urgent action must be taken The government should commission an independent body such as the Committee on Climate Change (CCC) or the Office for Tax Simplification to carry out a full assessment of environmental taxation in the UK. The government should also apply CBI business guidelines and recommendations to improve the design and implementation of environmental taxes Guidelines Have a clear purpose and definition: The government must be clear and precise about the environmental objective of a tax and how this relates to its role in raising revenue Take strategic fit into account: The tax must be carefully designed to complement existing policy instruments. Policy overlap should be avoided Be designed with simplicity at their core: Environmental taxes must be sufficiently simple to understand and implement. Visibility is required but not at the expense of burdensome compliance Offer comprehensive communication and advice: Government should consult thoroughly on all environmental tax changes Environmental Tax Recommendations 1 For any new tax, publish a statement of intent setting out the general purpose and aim of the tax 2 Create and publish an Environmental Tax Impact Assessment containing a full assessment of the impact the tax will have on all other policies that target this area 3 The Environmental Tax Impact Assessment must also contain a section totalling the cumulative compliance costs of all the policy measures that target the same environmental impact 4 Ensure that consultations contain the right questions to allow businesses to explain how they manage environmental policies including taxes, which may have important implications for tax design. Also include formal stakeholder meetings in all consultation processes, from an early stage Provide certainty to businesses: New taxes, and changes to existing taxes, must be introduced with sufficient lead-in times. Rates should be set as far in advance as possible, or an end outcome should be specified Ensure a strong on-going justification: Monitoring taxes post-introduction is important to confirm that a tax is still having the originally intended effect 5 Make clear the end goal of each tax and the key milestones along the way, including information about future rates as far as possible. Publish a tax roadmap where possible 6 Publish an environmental tax snapshot in the Budget report each year to group together and show changes from the previous year and the projected forecast 7 Additionally to the snapshot, establish and publish a periodic evaluation process for each tax to review success both according to revenue and environmental objectives and to capture the impact other recent policy changes might have had

5 5 Environmental taxes are playing an increasingly prominent role in the UK The use of environmental taxes has increased in the UK since the mid-1990s, and this trend looks set to continue following the coalition s commitment that it will increase their contribution to total tax revenue. The top level message coming from the 70 businesses interviewed for this report (see Exhibit 1) is that environmental taxes, if well designed, can help the economy, the exchequer, and the environment. However, if they are not, they can damage business competitiveness, discourage investment and growth, and fail to achieve environmental objectives. Exhibit 1 CBI research business views on environmental taxation The CBI conducted more than 100 hours of in-depth interviews with over 70 CBI members to establish an overall impression of the current set of environmental taxes, and to gather views on how they would like to see the landscape improved. Our respondents covered a broad range of industry sectors from energy-intensive industries (EIIs), energy suppliers and waste management businesses to retailers, financial institutions and manufacturers. Respondents ranged in size from SMEs to multinationals and had a range of different business models, some of which are related to certain environmental taxes. Our feedback also covered all regions of the UK, giving us a comprehensive picture of business opinion on environmental taxation. Environmental taxes have grown in use over the past 20 years The number of environmental taxes in operation has trebled in recent years depending on definitions (see Exhibit 2); from just four in 1989 to 12 revenue-generating policies today, with the Carbon Price Floor starting in 2013 (see Exhibit 3). The scope of environmental taxation has expanded in turn, from an exclusive focus on transport and fossil fuels to cover waste disposal, quarrying and energy efficiency among others. The nature of these taxes now ranges from broad based revenue-raising instruments to specifically targeted taxes. Including transport taxes, the total revenue raised from environmental taxation in was 43.4bn or 7.9% of total tax revenue. 1 and this looks set to continue The government s published aim, set out in the Coalition Agreement, is to increase the proportion of tax revenue accounted for by environmental taxation. 2 The government plans to achieve this through the introduction of the Carbon Reduction Commitment (CRC) and the Carbon Price Floor (CPF), and through increasing the auctioning (rather than free allocation) of EU Emissions Trading System (ETS) permits. 3 The Office for Budget Responsibility has already factored revenue from these sources into its fiscal forecast. At the EU level, the EU ETS has the potential to expand in the future the most recent addition having been aviation as of January 1 st Alongside the EU ETS, there are a range of other EU policy measures including the Energy Efficiency Directive and the Energy Taxation Directive, plus a wide range of EU-wide regulations that UK businesses must comply with. Environmental taxes are also increasingly used in other countries, particularly in Northern Europe. Across the OECD, 25 of the 33 members levied charges on waste in Sweden, Denmark and the Netherlands have often led the way through the introduction of environmental taxes aimed at changing different behaviours. For example, Denmark uses a Carbon Tax and Sweden levies a CO2 tax on fossil fuels as well as taxes targeted at Sulphur and Nitrous Oxide. 5 The Netherlands also uses water charges and introduced a packaging tax in 2008.

6 6 Exhibit 2 When is a tax an environmental tax? Defining an environmental tax is an on-going problem and has led to a confusing split within government. For HM Treasury, an environmental tax has to be one in which the primary intent is to change environmental behaviour. However, the Office for National Statistics places more emphasis on the effect of the tax, and as a result includes a wider number of taxes. Environmental tax definitions Office for National Statistics HM Treasury Definition Current ONS definition Proposed HMT definition in its current stage Taxes which fall into the definition Landfill Tax Aggregates Levy Climate Change Levy EU Emissions Trading System Fuel Duty VAT on Fuel Duty Vehicle Excise Duty Air Passenger Duty Renewable Energy Obligations Landfill Tax Aggregates Levy Climate Change Levy EU Emissions Trading System Carbon Reduction Commitment Carbon Price Floor Source: Budget 2011 and Environmental Taxes (Environmental Audit Committee, June 2011) Environmental levies 6 In addition, several green fiscal measures are classified as environmental levies rather than environmental taxes, including the Renewables Obligation, Feed-in tariffs and Social Tariffs (replaced by the Warm Home Discount from March 2011). The revenue from environmental levies is hypothecated, meaning that it is reserved for expenditure within the scheme which generated it. This means that the net revenue from environmental levies is zero. But, because the levies are still accounted for as tax-and-spend by HMT, it is likely that the government considers levy revenues to be part of the overall revenue from green fiscal measures for the purposes of meeting its environmental tax objective. Well designed taxes can unlock investment and deliver environmental objectives The overwhelming view from businesses interviewed as part of this project was that well designed and implemented environmental taxes bring multiple benefits. They can encourage business investment, drive environmental behaviour change and generate government revenues. They work by stimulating investment in particular directions. If a tax sets a price on a specific activity, and is applied carefully to avoid market distortions, there is then an incentive for businesses to invest in methods to change their behaviour, reducing the amount they pay in tax and potentially establishing a point of competitive advantage. If they are structured well, environmental taxes can be innovation drivers Business services firm

7 7 Exhibit 3 The environmental tax landscape Carbon Price Floor Feed-in Tariffs Carbon Reduction Commitment EU ETS Social Tariffs / Warm Home Discount Aggregates Levy Renewable Energy Obligations Climate Change Levy Landfill Tax Air Passenger Duty Fossil Fuel Duty Gas Levy Vehicle Excise Duty Vat On Fuel Duty Fuel Duty However, businesses are equally clear that if an environmental tax is badly designed, it can have the opposite effect. Poorly designed taxes can damage business competitiveness by creating distortions in the market, or by applying arduous financial and compliance costs that in turn reduce the amount businesses can invest in changing their behaviour. Similarly, responsibility for a tax is often split between environmental/sustainability and tax teams in businesses. If it is not clear what the tax is targeted at, environmental impacts will not be tackled effectively, and the tax revenue that is received will come at the cost of damage to business growth and competitiveness. Poorly designed environmental taxes also reduce the competitiveness of the UK tax system as a whole. While the CBI welcomes progress on reducing the headline rate of corporation tax, the attractiveness of the tax system to mobile international capital depends on more than just tax rates. If the government s objective to create the most competitive tax system in the G20 is to be reached, then taxes including environmental taxes must be well designed. As the following chapter makes clear, business believes that the UK environmental tax system currently falls short of the mark.

8 8 The existing landscape does not deliver the full potential of environmental taxes Overall, business has concerns about the current environmental tax landscape From our research, it is clear that business supports the use of well designed environmental taxes. However, the rapid growth of environmental taxation in the UK has not been accompanied by a clear strategy, a problem that the Coalition Agreement aim does not resolve. As we have seen in the previous section (Exhibit 2), there is even disagreement within government as to what an environmental tax is. As a result, the environmental tax framework cannot always deliver on the full potential of environmental taxes. Certain elements work well together and other parts are effective in isolation, but there is no united strategy. Government doesn t understand how taxes impact our business Land developer There is no coherent system for environmental taxes and most of the taxes don t work together International delivery firm Members also highlighted a lack of appreciation across government departments of the impacts of environmental taxes across different sectors of the economy. While some instruments are designed to target a very specific behaviour or sector, others are broader and encompass a range of sectors, each facing particular challenges. For example, energy-intensive industries (EIIs) are extremely vulnerable to energy taxation that can leave them at a competitive disadvantage against EU and international competitors. Although some UK taxes have built in specific support for such industries from the outset (e.g. Climate Change Agreements offering exemptions from the Climate Change Levy) others have not, leading to a difficult process to implement support retrospectively. The 2011 Autumn Statement signalled a compensation package to mitigate the impact of the Carbon Price Floor, but ideally this would have been included from the start.

9 9 Exhibit 4 Business environmental tax barometer +1.5x +1.5x Do all ETs work well together? Are ETs straight forward to implement? Are ETs well designed? Do ETs fit with other environmental regulation? Do ETs fit with other taxes? Do ETs affect your competitiveness? Do ETs appear to have a clear purpose? Have you been well consulted on ETs? Have ETs succeeded in changing business behaviour? Are ETs straightforward to manage once implemented? -3.0x -2.5x -2.5x -2.0x -1.5x ETs = environmental taxes. Chart represents the number of negative answers to each positive answer (and vice versa) from the interviews carried out with businesses -4.5x -5.5x -x no positive responses The overall impression is that environmental taxes do manage to influence changes in business behaviour, but businesses are generally negative about other aspects of environmental tax design and implementation. In particular, the companies we spoke to are clear that the existing environmental landscape: Is poorly designed has no clear overall purpose or direction, lacks on-going justification and comprises an ad-hoc set of measures that do not fit together coherently Is poorly implemented lacks certainty and is susceptible to change at short notice, is not simple to comply with, and is often poorly communicated to business

10 10 Landfill Tax has driven us to reduce the amount we send to landfill Insurance company Exhibit 5 Individual environmental taxes Design Landfill Tax Vehicle Excise Duty Climate Change Levy Renewables Obligation Fuel Duty Aggregates Levy Air Passenger Duty Carbon Reduction Commitment Implementation Taxes included in the chart are drawn from the Environmenal Audit Committee list of measures that would be counted as an environmental tax under either ONS or HMT s definitions (see Exhibit 2). EU ETS is excluded as the UK government does not have jurisdiction over it and Carbon Price Floor does not come into force until Some individual taxes have proven successful but others do not deliver Our detailed analysis of business views reveals a mixed picture. Exhibit 5 rates the included taxes against the key criteria that emerged from our interviews the way taxes are designed and the way they are implemented. Some environmental taxes receive strong support from business Both Landfill Tax and Vehicle Excise Duty (VED) are rated highly by the majority of businesses we interviewed. They have a clear purpose and function well alongside other policy measures aimed at waste and vehicle efficiency respectively. They are also designed in line with the way the industries they target operate which means the behavioural drivers hit the right mark. Both succeed on implementation as well. The Landfill Tax escalator provides certainty when making long-term investment decisions and is perhaps the best example of an environmental tax mechanism that has delivered for government and business. VED is also set out clearly, though over a shorter period, which concerns manufacturers that short-notice changes could force them to change development plans. The payment mechanism for both taxes is simple to manage and there are few compliance concerns. but others are less well regarded Two taxes - the Carbon Reduction Commitment (CRC) and Air Passenger Duty (APD) - are viewed very negatively by businesses and are in need of the most immediate attention.

11 11 CRC creates uncertainty and adds to the cost of manufacturing making it hard for our UK subsidiary to compete for internal company investment International advanced manufacturer The CRC lacks a clear purpose and has undergone frequent, unexpected changes such as the removal of the revenue recycling scheme. This has been damaging to business confidence by reducing the certainty businesses need to make investment decisions. It also contains perverse incentives, for example to stretch out improvement in energy-efficiency for as long as possible in order to keep improving on the performance league table. CRC is not designed in light of key business processes and businesses have had to create new organisational groupings to complete CRC registration. The administrative burden required to comply with the policy is also arduous and expensive. This has led to costly changes for businesses. The changes to CRC have meant that the policy no longer retains visibility at the right levels, as board members no longer have the added incentive of revenue recycling which had initially been designed to engage business interest. As a result of its poor design and implementation, the overwhelming business view is that it is damaging, rather than driving, business investment and has switched from an energy efficiency scheme to a revenue raising instrument. APD also lacks a clear purpose. The justification for the tax has switched several times since its introduction from being an environmental tax to a revenue-raiser and vice-versa. Tax increases have often been justified by government on the basis of environmental impacts but HM Treasury has still maintained that the tax is for revenue raising purposes. The tax is the highest such measure in the EU and it targets a sector that is already affected by regulations and is now coming under the EU Emissions Trading System (ETS). APD lacks certainty as it is at the mercy of annual Budget changes. It also targets a highly inelastic service meaning that its environmental impact is small proportionate to its cost.

12 12 The rest paint a mixed picture Several taxes fall into a middle category, combining both encouraging and negative features of design and implementation. In terms of design, the Renewables Obligation (RO) has a clear purpose, but the mechanism itself is fairly complex. The intended purpose of the Climate Change Levy (CCL) is less clear as is the Aggregates Levy, though the secondary aim to increase the use of recycled aggregates has been successful. Fuel Duty, on the other hand, suffers because its role in tackling environmental impacts is not clearly delineated from its role as a revenue-raiser. As with APD, the government has often suggested that rates rises are for environmental reasons whilst still considering the tax to be a revenue raiser. In terms of the way taxes fit alongside other instruments, RO and CCL form part of a confusing number of carbon measures with multiple overlaps both domestically and when evaluated alongside European measures such as the EU ETS. The vast majority of members interviewed reported a genuine lack of appreciation of how these various measures are intended to work together. The middle group of taxes generally fare better regarding their implementation. CCL, Fuel Duty and Aggregates Levy are very simple to manage. However, the ease with which CCL is complied with (as an addition to energy bills) can mean that it is not visible enough to key decision-makers in a business, in some cases reducing some of its behaviour-changing impetus. Climate Change Agreements (CCA) available to specific businesses and sectors have helped to provide more visibility for these businesses, albeit with an increased administrative cost. The RO is more complex given its structure it forms part of DECC s levy funded spending and is paid through energy bills and is not as visible or clearly understood. Fuel Duty in particular is subject to yearly alterations at the Budget, providing little certainty over rates. Even fuels which are incentivised as less polluting alternatives, such as Natural Gas, do not have the long-term rate certainty needed to encourage a shift in usage. Other taxes also have this problem with each Budget. In particular, RO has been changed repeatedly which has reduced its impact. Business as usual is not an option government must take action to make environmental taxes work Our analysis makes clear that if the current ad-hoc expansion in the use of environmental tax measures continues without a clear strategy, businesses will struggle increasingly under the additional tax and administrative burden. While the government s new approach to tax policy making launched in June is a step in the right direction, the development of the environmental tax system requires specific attention it must provide a coherent and predictable landscape in which business can plan. Otherwise, environmental taxes will increasingly become a drag on business and an ineffective policy instrument for government. The uncoordinated increase in environmental taxes raises serious concerns over our future competitiveness Scottish manufacturer

13 13 Business needs a more strategic environmental tax framework The large majority of businesses interviewed as part of this project believe that there is considerable scope to improve the effectiveness of environmental taxes. However, in order to deliver on their potential, government needs to take a two-pronged approach. Firstly, immediate action should be taken to commission an urgent review of the environmental tax landscape by an independent body. Secondly, the government should look to ensure a more strategic approach to environmental taxation in the future. An urgent review of environmental taxes is needed We have seen that the number and scope of environmental taxes continues to grow in the UK. While business backs the use of environmental taxation, our research demonstrates that the current environmental tax landscape as a whole does not deliver for business. Not all taxes are meeting their potential as drivers of behaviour change and are not effectively stimulating investment. However, it is also clear that the business will to make environmental taxes work is there. Our research shows that business supports well designed and implemented environmental taxes. They can help to unlock investment by encouraging businesses to consider environmental and carbon reduction measures that will reduce the amount they pay in tax. The government s commitment to environmental taxation, set out in the Coalition Agreement, is a welcome sign but more needs to be done.

14 14 An environmental tax needs a clear case to win legitimacy and support its use Electronics firm Our review of environmental taxation from a business perspective makes it clear that a more strategic approach is needed. However, this alone is not enough to inform a new approach there is a strong need for a formal investigation commissioned by government into the current environmental landscape and ways that it could be improved. The CBI is calling for an urgent review of environmental taxes to be carried out by an independent body such as the Committee on Climate Change (CCC) or the Office for Tax Simplification. Over the longer term, a more strategic approach to environmental taxation must be ensured Underpinning business concerns about the shortcomings of existing environmental taxes are six key guidelines, relating to the design and implementation of taxes. To ensure a strategic approach in the future, these business-drafted guidelines are accompanied by recommendations that create a formal and chronological process for environmental tax development and implementation that we urge the government to apply to all new environmental taxes, and changes to existing measures under the control of the UK government. Environmental taxes must: Have a clear purpose and definition Take strategic fit into account Be designed with simplicity at their core Offer comprehensive communication and advice Provide certainty to businesses Ensure a strong, on-going justification Have a clear purpose and definition The government must be clear and precise about the environmental objective of a tax. If this cannot be established the tax should not be classified or justified as an environmental tax. If it is unclear what a tax is meant to achieve, it can be hard for a business to identify the action they are meant to be taking in response. It also becomes increasingly difficult to plan over the longer term as a weak or poorly explained purpose can lead to confusion about the likely direction of a policy. A properly assessed and carefully articulated purpose will have multiple benefits. It will ensure that the tax proposed is the correct policy instrument to use, by explaining how the tax will effectively achieve the intended objective. It will also provide clarity on the distributional burden of the tax on various parts of the economy, including different business sectors and can help to counter the perception that environmental taxes are used as stealth taxes. It is also important that the relationship between the revenue-raising element of a tax and its role in addressing an environmental impact are clearly defined (see Exhibit 6). If preserving the revenue generated takes clear priority over achieving behaviour change then this must be made clear at the outset to help businesses understand the likely future direction of tax rates. Recommendation 1 For any new tax, publish a statement of intent setting out the general purpose and aim of the tax. This must also explain why the proposed tax is the best instrument to achieve the aim, include details on the likely distributional burden of the tax and set out the relationship between the revenue raising and environmental elements of the tax

15 15 Coherency in the landscape is needed for us to make the business case for more investment Car manufacturer Exhibit 6 The impact of environmental taxes on the business tax burden The growing environmental tax burden is part of the overall business tax burden, which directly affects the competitiveness of businesses and the wider UK economy as a location for investment. Whilst revenue neutrality might not be possible for every change to the environmental tax system, the contribution to the wider business tax burden should be closely monitored. A variant of revenue neutrality is hypothecation, whereby the government ring-fences all the revenue from an environmental tax to be spent specifically in that area. This can be popular as it backs up the purpose for the tax and ensures the revenue is spent on environmental measures. However, it also limits the flexibility the government has to adapt to changing fiscal circumstances and provides an inflexible link between tax revenue and spending. It is more important that the government sets a clear purpose and designs environmental taxes well. Take strategic fit into account The tax must be carefully designed to complement existing policy instruments, including taxes, regulations, incentives (see Exhibit 7), procurement processes and EU measures. Policy overlap should be avoided, and where it occurs the government must be able to explain why it is necessary to achieve the stated environmental aim. One of the concerns of the businesses interviewed with the current environmental tax landscape is the proliferation of individual policy instruments, including but not limited to taxes, that do not work together as part of a wider framework. While individual measures may appear to be appropriate in their own right, in the context of a broader system they may not function well alongside other pre-existing instruments - for example the numerous and sometimes overlapping set of carbon-related measures. Indeed, there was unanimous agreement from the businesses we spoke to that the environmental tax framework is not joined up and was not designed to be so. In particular, policy overlap was seen to be a problem which must be avoided as far as possible in future. Recommendation 2 Create and publish an Environmental Tax Impact Assessment to be applied to all taxes regardless of departmental responsibility. It must contain a full assessment of the impact the tax will have on all other policies that target this area and vice-versa, including consideration of the effect the proposed tax may have on individual sectors Exhibit 7 Using incentives When designing and introducing environmental tax changes, the government should look to see if incentives can be built into the policy mechanism. In a constrained fiscal environment, providing incentives alongside taxes may not always be possible, but should be considered where appropriate. This will allow stronger business cases to be constructed for the investment the tax is intended to drive but it also has another positive effect. Taxes, and the cost they impose, are a way of changing behaviour by making a certain activity more expensive. By offering some form of incentive to businesses that change or improve their behaviour, an important degree of trust can be built up in government policies. The tax is also more likely to gain board level attention if it is coupled with incentives. An example might be the Carbon Reduction Commitment (CRC) revenue recycling scheme which has now been removed, undermining business trust in the CRC and in wider tax policy-making. A more positive example is the CCL, which couples the stick of a tax with the carrot of Climate Change Agreements (CCAs), which work together to change business behaviour.

16 16 The tax has to be visible for us to realise what is required but if visibility comes at increased cost, competitiveness suffers Financial services firm Be designed with simplicity at their core Environmental taxes must be sufficiently simple to understand and implement, both individually and as a group. The tax must remain visible at the right levels within a business but this must not come at the expense of undue complexity or compliance cost. There can sometimes be a tension between the need to make a tax visible at the right level to drive behaviour change without adding burdensome levels of compliance. If a tax is supposed to incentivise behaviour change through the signals it sends to a business, those signals have to reach key decision-makers within businesses. However, if a tax is badly designed, this visibility can come at a significant compliance cost that acts to reduce the impact of a tax proportionate to the cost it places on business. Each element visibility and a low compliance burden need to work together to provide a policy lever that is simple to manage and respond to. Recommendation 3 The Environmental Tax Impact Assessment must also contain a section totalling the cumulative compliance costs of all the policy measures that target the same environmental impact Better consultation is needed for us to get across our business needs to government Chemicals firm Offer comprehensive communication and advice Government should consult thoroughly on all environmental tax changes to ensure that policy captures the way in which taxes are managed by businesses. Tax changes which often have significant consequences for the viability of investments must be communicated as soon as possible, using clear, unambiguous language which refers to the stated objective of the tax. There was an overall perception among businesses interviewed that the quality of communication has been varied in the past, particularly when taxes are at consultation stage. Taxes need to take into account the different challenges faced by small, medium and large businesses and must be designed with a good understanding of the way the sector(s) targeted actually function to ensure that the right drivers are presented to businesses. Responsibility for environmental taxation is often split between the sustainability/environment and tax functions of a business, so government should attempt to engage and communicate with both sets of stakeholders. The environmental tax consultation process needs to allow feedback and steering at a much earlier stage from those the policy is meant to be influencing. Businesses also require better advice and guidance on developments in environmental taxation. Clear advice should be available to explain the mitigating actions businesses can take and when taxes have to be changed. This must be explained as soon as possible and in an explicit way to give businesses the maximum amount of time to react and make changes. In addition, changes or additions to tax legislation must be clear, precise and make use of purpose clauses to set out the governing rationale for more technical aspects of legislation.

17 17 Signposting and consistency can drive behaviour change successfully Environmental services company Recommendation 4 Ensure that consultations are conducted for changes to current environmental taxes as well as the introduction of any new measures at an early stage. Consultations must contain the right questions to allow businesses to explain how they manage environmental policies including taxes, which may have important implications for tax design. Also include formal stakeholder meetings in all consultation processes, from an early stage Provide certainty to businesses New taxes, and changes to existing taxes, must be introduced with sufficient lead-in times to avoid disruption to business investment plans. Rates should be set as far in advance as possible and an end outcome should be specified to provide the certainty needed to underpin new business investment. Certainty is a necessity for business investment. When rates are clearly signposted and the end goal of a tax is clear, businesses have the forewarning required to plan and implement investment projects. The Landfill Tax escalator was repeatedly mentioned by business as a prime example of how certainty about future rates can be secured, allowing businesses to plan and invest with confidence. Predictability about the structure of taxes also needs to be prioritised if they are to successfully change behaviour. Constant alterations to design and rates cause confusion and raise concerns that the policy on which a business is expected to base investments will not remain in its current form. Business investment lead-times vary by sector and investment type but for significant capital projects it can be longer than the term of parliament (for example, major infrastructure projects). Businesses recognise that little can be done to mitigate this form of political risk, which is why it is vital that certainty is established as far as possible within the lifetime of each parliament. However, politicians of all parties should also take the impact on business confidence and investment decisions across multiple parliaments into account when considering environmental tax changes. Recommendation 5 Make clear the end goal of each tax and the key milestones along the way, including information about future rates. Publish a tax roadmap where possible

18 18 It is a big problem if you can t measure the impact the tax has Energy supplier Ensure a strong, on-going justification Monitoring taxes post-introduction is important to confirm that a tax is still having the originally intended effect. A tax can be an effective policy instrument to drive specific behaviour change, but it might not always remain the right option. The government needs to be able to demonstrate clearly why an environmental tax is still the correct policy instrument to use. If a tax no longer generates a clear environmental impact and risks damaging UK competitiveness, alternatives should be sought. Changes in the market and the introduction or removal of other government policies may alter the impact the tax has. Government needs to be fully aware of any changes and remain in a position to fix policies if they no longer function as intended. Recommendation 6 Publish an environmental tax snapshot in the Budget report each year to group together and show changes from the previous year and the projected forecast Recommendation 7 Additionally to the snapshot, establish and publish a periodic evaluation process for each tax to review success both according to revenue and environmental objectives and to capture the impact other recent policy changes might have had

19 19 Making environmental taxes work for business When judged against our guidelines (see Exhibit 8), it becomes increasingly apparent that individual environmental taxes in the UK are widely variable in performance and do not represent a coherent and effective framework. Whilst some taxes stand out for the quality of their design and implementation, others need improvement to function more effectively. Exhibit 8 Individual environmental taxes copy Landfill Tax Design purpose» justification» fit scrap improve Carbon Reduction Commitment Renewables Obligation Fuel Duty Aggregates Levy Air Passenger Duty Vehicle Excise Duty Climate Change Levy Implementation certainty» simplicity» comms CRC is viewed very negatively by business and given that it fails against nearly all the criteria above, and doesn t effectively deliver energy efficiency savings, it should be scrapped. We recognise that the revenue collected through CRC is needed to help repair the public finances so a simple method of maintaining this revenue is needed in the short-term. To replace the CRC, a strategic assessment is needed of the barriers to business energy efficiency and the policy proposals that could unlock them. As a first step towards this framework, mandatory carbon reporting under the Climate Change Act should be implemented immediately after the CRC is scrapped. However, the CBI is not proposing in this report the specific changes that might need to be made either for the long-term replacement for the CRC or individually to any of the poorer performing environmental taxes. Instead, our findings highlight the need for the government to start a strategic conversation to consider the environmental tax landscape as a whole and not just how individual taxes might be improved in isolation. This conversation must look to apply the CBI s environmental tax guidelines and recommendations to the future use of environmental taxation but it should be started with an urgent review of environmental taxes to be carried out by an independent body such as the Committee on Climate Change (CCC) or the Office for Tax Simplification. Only by doing this, can we ensure that environmental taxes fulfil their potential to unlock private sector investment and drive UK growth.

20 20 21 Environmental tax policy development process process design consult implement monitor Carry out an enviromental tax impact assessment recommendations 1 Publish statement of intent 2 Conduct an assessment of how tax fits with other policies 3 Examine how tax adds to compliance burden 4 Consultations must allow business to explain how they manage taxes 5 Set key milestones 6 Include an annual environmental tax snapshot in budget 7 Conduct periodic evaluations guidelines Have a clear purpose and definition Take strategic fit into account Be designed with simplicity at their core Offer comprehensive communication and advice Provide certainty to businesses Ensure a strong, on-going justification

21 22 References 1 ONS National Accounts (Blue Book 2011) 2 HM Government The Coalition: Our Programme for Government 3 EAC Budget 2011 and Environmental Taxes 4 OECD Taxation, Innovation and the Environment 5 Swedish Tax Agency Taxes in Sweden DECC Control Framework for DECC levy-funded spending 7 HMT Tax Policy Making: a new approach Acknowledgements This report was prepared by Stephen Mayne, Leo Ringer, Michelle Hubert and Matthew Brown with thanks to the contributions from CBI members

22 For further information or a copy in large text format, contact: Stephen Mayne Policy adviser, energy and climate change T: +44 (0) E: stephen.mayne@cbi.org.uk Leo Ringer Senior policy adviser, tax and fiscal policy T: +44 (0) E: leo.ringer@cbi.org.uk June 2012 Copyright CBI 2012 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI. CBI Our mission is to promote the conditions in which businesses of all sizes and sectors in the UK can compete and prosper for the benefit of all. To achieve this, we campaign in the UK, the EU and internationally for a competitive business landscape. Product code: BUS_CCB_263