MPs call for lower VAT on green measures and a cross-economy carbon tax; spending watchdog wants green tax strategy

The government should begin scoping work on a carbon tax to incentivise low-carbon changes across the whole economy, according to a new report from the Environmental Audit Committee,  and investigate the merits of carbon border adjustments as one way of addressing carbon leakage. And the EAC called on the Chancellor to take early action in the upcoming budget by

  • Reducing VAT on green home upgrades to incentivise more people to install low -carbon technologies and improve the energy efficiency.
  • Using more tax incentives to make ultra-low emission cars more affordable.
  • Fine tune current environmental taxes, to reward and incentivise investment in cleaner, more efficient, low-emission technology.

The measures are part of a call from the EAC, in its report Growing back better: putting nature and net zero at the heart of the economic recovery,  for the government to front-load investment in areas including energy efficiency, the circular economy, climate adaptation and nature recovery as we come out of Covid, providing a green jobs boost to counter unemployment.

The EAC wants the Bank of England’s monetary policy remit to include climate and nature  and says the Green Finance Strategy should be updated with an explicit objective to reduce the carbon intensity of the UK corporate sector and financial markets, such as the London Stock Exchange.

It says clear strategies are needed for carbon, capture, usage and storage (CCUS) and for hydrogen. To improve the built environment new homes should have embodied carbon targets and the Government should support the capital cost of upgrading the energy efficiency of schools, hospitals and social housing stock.

NAO: more assessment and overarching tax strategy needed

The EAC report follows an assessment by the National Audit Office which gave a mixed review to the government’s current use of environmental taxes. Exchequer departments provide taxpayers with several years’ advance warning of measures so that they can prepare, but found it hard to estimate the cost burden new measures placed on affected industries. The effect of the measures are not well quantified.

Importantly, measures that are not defined as having an explicit environmental objective set by ministers are not managed as environmental taxes by the exchequer departments. That means the environmental effect of measures such as Fuel Duty has little consideration.

Exchequer departments “work with the departments who lead on environmental strategies, but do not plot the role of the tax system in helping government achieve each of its environmental objectives” 

Key to the government’s Net Zero ambition, there is no centrally oversight on how the tax system affects environmental goals. NAO said there were some good examples, but the different routes for announcing tax, regulation and spending decisions make government-wide approaches challenging and “there is a need for coherence across the tax system as a whole”. It said, exchequer departments work with the departments who lead on environmental strategies, but do not plot the role of the tax system in helping government achieve each of its environmental objectives or set out the interaction between the tax system and other policy tools.

Download the NAO report here

Download the EAC report here

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