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29th April 2021

Partner Blog: What does environmental taxation look like?

The weekly shop has become something of a chore over the past year, what with mask wearing and tap dancing down the aisles to keep away from the pandemic deniers meandering about the place. But a recent trip became a little more interesting when I reached the checkout. I say ‘checkout’, I mean a bank of machines where you point your bar code reading device at a screen and it tells you how much you have thrown into your trolley during your game of Pacman. Except this time, it didn’t.

This time it insisted on calling over a real human to rescan my whole trolley – part of it anyway – to make sure I hadn’t cheated. Nothing particularly interesting in that, but when the polite lady checked for contraband her every movement and her every word were completely familiar … I had been there before! Déjà vu.

I can’t remember the last time I had déjà vu (sorry) but when it strikes it can be quite startling. I managed to avoid blurting out to the shop assistant; “you’ve already said that”, “and that”, and it faded away. I paid extra for single malt that must have had a creased label and left.

Repetition also seems to be rife in HM Treasury and throughout the government these days. When it comes to climate change it seems to be much easier to restate objectives – with as much passion as possible – than actually take action, and I can’t help feeling that its really getting late now.

I am sure I don’t need to rehearse the statistics, but just one stark figure is enough to trigger panic in me.

In order to get to net carbon zero by 2050, our plans in the UK require us to cut emissions by 45% by 2030. We are on track to manage just 0.5% after years of trying – including Covid lockdowns. Therefore the task facing us is massive.

Taxation has long been seen as one of the key levers in driving behaviours that will help us reach our targets, and it’s been encouraging to listen to and take part in numerous discussions and events over recent months in particular, where ministers, government advisors, economists and business leaders point with increasing enthusiasm, at environmental tax as a key weapon in this fight.

And they are right of course … nothing changes behaviour quite as promptly as the threat of a large tax bill.

But these conversations have taken place before so many times. I have worked in environmental taxes for over 20 years and each consecutive government has failed to tilt the tax system in the direction of climate rescue in a way that, if you listened to the rhetoric, was promised.

Sure, there has been tinkering around the edges to the taxes that we have:

  • rates have changed;
  • exemptions have been reduced;
  • loopholes closed,

but much more is needed. We are, after all, in a government declared Climate Emergency, but as an environmental tax specialist it doesn’t feel like it. Budget 2021 did little other than minor rate changes and announce further consultations into very industry specific areas – it was a missed opportunity in my view and we now have only 8 Budgets before our target of 45% emissions cut. And we host COP26 this year!

What might a proportionate shift to environmental taxation look like?

One of the primary tenets of environmental taxation is that the ‘polluter pays’ i.e. the person, business, sector that is responsible for the pollution or the emissions should be taxed to reflect those emissions.

For a long time now, emissions have been measured with reference to production activities so when we pat ourselves on the back because we have apparently reduced our emissions in the UK substantially, we fail to take into account the emissions created overseas in the manufacture and transport of the goods that we buy into the UK, the rationale being that the country of manufacture has to address those emissions rather than us.

The disparity is demonstrated by the fact that, while many countries (including the UK) point to successfully reducing emissions domestically, the rate of emissions globally has continued to rise since the Paris Agreement in 1990, and it’s on a near linear trend upwards.

Who is ‘the polluter’ in these situations? If I order goods to be delivered to me in the UK which are manufactured in China for me, am I not responsible for the resulting emissions? At least to a substantial point?

Finally, there is some realism coming into this situation. Both the EU and Canada are looking at a Carbon Border Pricing mechanism to address these concerns and to make a step change toward bringing a truer price of carbon into business through taxation.

It would operate using existing border tariff infrastructure and would ensure that the carbon lifecycle of imported products is properly represented in their cost. Prices would go up I hear you say, and you would be correct, but where overseas manufacture is shown to be carbon neutral or better, the border price would be relieved, thereby incentivising producers globally to take the necessary steps to reduce emissions.

A Carbon Border Pricing mechanism would put carbon tax at the centre of world commerce, and it is this kind of radical evolution of the tax regime that is long overdue.

The tax landscape of the future will need to take bold steps like this to give us any chance of avoiding catastrophic climate change. The government needs to act upon these initiatives now, and business should be prepared for some seismic changes to tax … I hope.

Mike Trotman is an Environmental Taxes specialist within the Centurion team and advises organisations across the UK on matters relating to both policy and the application of taxes including Aggregates Levy, Climate Change Levy and Landfill Tax.

For the avoidance of doubt, the content recorded in this news article does not constitute formal advice and we do not guarantee the accuracy of any information provided at the time of reading. It is always recommended that you seek professional advice before acting on any of the news articles or information included.

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