Green taxation critics have a point

Much of the criticism of green taxes is overblown, but that doesn't mean it is entirely without merit

The concept of green taxes has taken an almighty kicking in recent weeks with three separate studies arguing the model of taxing polluting activities in order to change people's behaviour is not working.

The latest study came from accountants UHY Hacker Young and found that while the government expects to collect £29.3bn in green taxes next year it will dish out less than two percent of them - just £549m - in environmental tax breaks.

The report coincides with the results of a survey carried out for lobby group The Taxpayers' Alliance (TPA) by YouGov, which found that over 60 percent of people believe politicians are using the environment as an excuse to increase taxation.

The survey was accompanied by TPA research claiming that the social cost of Britain's CO2 output was £11.7bn in 2005 while the total net burden of green taxes was £21.9bn. As a result it argues each household is paying £400 more in green taxes than is required to meet the social cost of carbon emissions.

These studies came just a week after research from accountants MacIntyre Hudson suggested that increased green taxes on air travel and fuel were having negligible impact on carbon emissions.

So where do these attacks leave the concept of green taxation at a time when the Lib Dems have just released a major policy document detailing plans to cut income tax in favour of more green taxes, the Tories are poised to release a Quality of Life report that is set to advocate increased green taxes and the government recently doubled Air Passenger Duty and is also broadly in favour of green taxes?

The easiest criticism for advocates of green taxation to dismiss comes from The TPA, which has published research so partisan in its anti-tax stance that it is hard to take too seriously.

As The Treasury has already pointed out the TPA report classifies as green taxes measures such as fuel duty, road tax and air passenger duty which the government does not recognise as purely environmental taxes.

Furthermore, its research offers no clear definition of "social costs". Instead it simply takes an average of four other reports into the social costs of CO2 emissions. These include the Stern Report and research from the Intergovernmental Panel on Climate Change but appear to have been selected based on the undefined criteria that they are "the most widely quoted official and academic estimates of the social cost".

Of course, calculations of social costs are always going to be contentious - how do you quantify the future cost of millions of people dying from drought or the world's financial centres being inundated by rising flood waters - but even if you accept the argument that green taxation should be set at a level to match the annual social costs arising from CO2 there is little consensus amongst economists to work out what these social costs should be.

The highest figure quoted by the TPA research, from the Stern Report, puts the social cost of the UK's CO2 emissions in 2005 at £30.5bn, while the lowest estimate from research by William Nordhaus puts it at just £2.7bn. As such if it had just focused on the Stern Report figure or perhaps added in other figures to reflect the fact that some scientists regard the Stern Report's analysis as too optimistic then the TPA's research would have found itself arguing that green taxes were far too low.

The survey it commissioned from YouGov has more merit, but it is worth noting that finding out that people don't like taxes is hardly a revelation.

There are also question marks around some of the survey's findings. For example, while the TPA's survey found that 77 percent of people disapproved of plans to place "extra charges for bin collection on top of council tax to encourage recycling" a similar survey from the Local Government Association found that two thirds would support so-called pay-as-you-throw schemes.

How to explain the apparently contradictory results? As with so many surveys the answer lies in the framing of the questions. The LGA questions obviously stressed how such schemes would help householders save money, while the TPA implied that charges would come "on top of council tax".

Furthermore, the TPA confines to the bottom of its press release the revelation that public opposition to green taxes is nowhere near as entrenched as its rhetoric suggests. When asked if they approved or disapproved of " additional 'green' taxes on motoring and air travel" 46 percent of respondents disapproved while 45 percent approved.

In short, the TPA's research tells us little beyond the fact that overall opinion on green taxation is divided and that the report's authors really hate taxes.

However, that is not to suggest that all of the recent criticism of green taxation is unjustified. Much harder to dismiss is the research from UHY Hacker Young and MacIntyre Hudson, which together argue that green tax breaks are insufficient and green taxes are largely ineffective.

The government has attempted to brand UHY Hacker Young's findings as " misleading" by pointing out that does not include large swathes of government spending on environmental protection and fails to account for some tax breaks, such as those available to landlords who improve insulation in their properties.

But while these criticisms may be accurate it is hard to dispute the report's central assertion that the government's approach is "all stick and very little carrot".

As Roy Maugham, Tax Partner at UHY observes: "It's surprising just how lopsided the Government's approach to green taxes has been over the last 10 years… but arguably a more balanced approach would be much more effective at hitting Britain's CO2 targets."

The government may counter that there are plenty of green tax breaks out there, but it can hardly argue that they are well publicised. Meanwhile, plenty of green business practices from home working to funding staff use of public transport remain completely unrewarded by the tax system.

Criticism of the lack of green incentives and the ineffectiveness of many green taxes to limit carbon emissions - as revealed by MacIntyre Hudson's research into the negligible reduction in air travel prompted by the increase in air passenger duty – is becoming too vocal for the government and opposition parties to continue to ignore.

Green taxes obviously have a role to play in the transition to a low carbon economy – they are a simpler means of placing a price on carbon emissions than trading schemes and if used properly can provide a equitable and fair means of taxation. But politicians must now act urgently to reassure the business community that they are not simply a revenue-raising exercise.

To do this the government must increase green taxes to a level that is high enough to encourage people to curb carbon emissions - while simultaneously slashing other taxes to head off open revolt - and balance them out with tax cuts on low carbon activities.

Get it right and businesses are likely to support a genuine green taxation system that openly rewards the most environmentally responsible organisations and provides a clear price signal for others to emulate them. Continue with the current unbalanced and ineffective green tax regime and watch support for the concept of green taxes evaporate as fast as the polar ice caps.