Chancellor faces growing calls to deliver green budget

Environmental Audit Committee report blasts Treasury for failing to act with sufficient "scale and urgency" to address climate change

Pressure on the chancellor to deliver a genuinely green budget stepped up a notch today after an influential committee of MPs accused the Treasury of widespread failures in its approach to climate change.

The report from the Environmental Audit Committee on last year's pre-budget report and spending review said that having secured plaudits for commissioning 2006's Stern Review on the economics of climate change, there had since been little sign that the Treasury had listened to any of its recommendations.

The cross-party committee of 16 MPs said that the proportion of green taxes had fallen since the turn of the century, that taxes on aviation remained too low and that investments in clean technologies capable of delivering a low-carbon economy are seriously underfunded.

It concluded that the forthcoming budget represents "a test of the Treasury's environmental credibility".

Committee chairman Tim Yeo accused the Treasury of demonstrating "a lack of ambition and imagination in overseeing a fall in green taxes' proportion of all taxes from 9.7 per cent in 1999 to 7.3 per cent in 2006.

"The Treasury must be bolder in raising green taxes once again," he said, adding that it should attempt to secure public support for such tax increases " by linking them to increased spending on the environment and reductions in other taxes".

Yeo also warned that government spending on low-carbon technologies, such as the recently announced project to develop a demonstration carbon capture and storage plant, "falls painfully short of the scale of investment that is required to decarbonise the economy".

The EAC report also calls for the introduction of a new financial mechanism to ensure carbon capture technologies are fitted to all new fossil fuel power stations in the UK, an increase in aviation tax including a new higher rate for "very long-haul" flights, and an increase in the "shadow price of carbon" which government departments are instructed to use to work out the environmental impact of carbon-intensive projects and policies.

Matthew Farrow, head of environment at the CBI, said the employers' body believed there was scope for "greening" elements of the business tax system and was currently working on a package of tax proposals to encourage greener behaviours. However, he warned that the Treasury had to offset any increases in green levies with tax cuts in other areas. "There is a risk that the Treasury will see green taxes as a money-spinning idea at a time when finances are tight," he said. "If that proves the case, it will seriously undermine appetite for green taxes among businesses."

Patrick King, tax principal of accountants McIntyre Hudson, agreed there was a growing business groundswell in favour of green taxation. "It is inevitable we will see more green taxes, partly because it is the only area Darling can talk about raising taxes without upsetting people," he said. "More businesses appreciate the way things are heading and are realising that if they can develop green policies now it could reduce their future tax spend."

However, he added that while increases in green taxes looked likely, the Treasury remained reluctant to ringfence revenue from green taxes for environmental investments. "Surveys have shown people do not mind green taxes as much if they can see the money going on green issues, but ringfencing is very difficult for the Treasury because it denies it the flexibility it needs," he explained.

Meanwhile, the debate surrounding whether or not to impose a windfall tax on energy companies as part of next week's budget heated up today as several of the UK's leading energy generators warned such a move would undermine their investments in renewables.

Friends of the Earth has called for a windfall tax on energy firms to set up a £5bn climate change super fund to kick start low-carbon investments, and with energy giants facing public criticism for increasing prices while posting record profits experts have argued that a windfall tax could provide Darling with a popular means of raising much-needed revenue.

However, several of the UK's biggest generators have attempted to head off such a move, arguing today that record profits are required to deliver record levels of investment in renewable energy capacity.

Speaking to The Guardian, Dorothy Thompson, chief executive of Drax, the owner of the UK's biggest coal-fired power station, said that a windfall or "shock" tax would prove "very destabilising for the industry when making long-term investments".

A spokesman for British Gas also told the paper that additional taxes could jeopardise investments in low-carbon technologies, many of which cost about three times as much as fossil fuel power stations.