Darling's green budget hits gas guzzlers and plastic bags

As widely anticipated chancellor Alistair Darling today delivered arguably the greenest budget in Labour's history, unveiling a far reaching package of measures designed to curb emissions from buildings, cars and the energy sector, and signalling his belief that the government's legally binding emissions targets should be strengthened.

However, the measures received a lukewarm response from green businesses and environmentalists who argued that they failed to deliver the levels of investment required to meet the government's own emission targets.

Reiterating the government's calls for the new Climate Change Committee to investigate whether a target of cutting carbon emissions by 80 per cent by 2050 is required, Darling said it was his belief that "we should go further" than the current 60 per cent target. He also confirmed that the UK's first ever carbon budget would be delivered alongside the budget next year.

Central to this first carbon budget will be cuts in emissions from transport after the Chancellor announced a raft of measures to promote adoption of greener cars and increase the cost of transport.

In a concession to "help businesses and families", Darling said he would postpone the planned two pence rise in fuel duty that was due for next month until October, but he added that it will rise now by 0.5 pence per litre in real terms from 2010.

He also announced an overhaul to the road tax system to incentivise manufacturers and customers to accelerate the trend towards lower emission vehicles. Under the plans, from April 2010 cars that emit less than 130g of CO2 per km will pay no car tax in the first year, while a higher first year rate will be introduced for the most polluting cars.

Darling said that it was right that people choosing to buy a more polluting car "should pay more in the first year to reflect the environmental cost", adding that the changes would "provide a real incentive to manufacturers and motorists" to invest in low carbon cars.

Similar reforms to company car tax rules will also seek to promote the adoption of cleaner cars. Under the changes, which take effect from April next year, expenditure on cars with CO2 emissions above 160g per km will attract a Writing Down Allowance (WDA) of just 10 per cent against corporation tax, while expenditure on cars with CO2 emissions of 160g per km or below will attract a more generous 20 per cent WDA. The existing 100 per cent tax break for the first year for the cleanest cars will also extended from 31 March 2008 to 31 March 2013 and the qualifying CO2 emissions threshold will be reduced to 110g per km.

The cost of flying will also increase after the chancellor confirmed plans to shift aviation taxes from a per person to a per plane levy from 2009 and announced that it will increase revenue from this new tax by 10 per cent in its second full year of operation.

The increased cost of travel is likely to encourage more firms to investigate home and remote working models that cut down on corporate travel, according to George Wareing head of strategy at telco giant ntl:Telewest. "The impact of these rises will make an uncomfortable addition to businesses profit and loss statements," he predicted. "It's only natural therefore that businesses will look to deploy new working models that reduce the amount of time and distance employees have to travel for work."

Retailers, meanwhile, received what amounted to a final warning regarding their plastic bag reduction policies after Darling said that the government will impose a charge on single use bags if voluntary targets to cut the environmental impact of such bags are not met by the end of the year.

The Treasury said it would introduce the legislation through the climate change bill, allowing the charge to come into effect as early as 2009. It added that it will now begin a consultation into how such a charge would work and how the legislation could be structured to ensure all funds raised go towards environmental charities.

The construction sector is also facing fresh targets to cut the carbon footprint of the UK's building stock. In addition to existing targets that all new build homes will be zero carbon by 2016, Darling announced a new goal to ensure all non-domestic buildings are similarly zero carbon by 2019 – a policy he said would cut emissions by 75m tonnes over the next 30 years.

Moves to improve the energy efficiency of existing buildings were also unveiled with £26m of new funding announced for consumer advisory body the Green Homes Service, alongside plans to introduce smart meters for all medium and large businesses, and an increase in the Climate Change Levy in line with inflation from April.

Environmentalists welcomed the measures, but argued that Darling had failed to live up to his promise last year to put sustainability at the heart of his first budget.

Friends of the Earth director Tony Juniper said that the chancellor was guilty of tinkering in the margins when it came to the environment. "Mr Darling should have used this Budget to tackle climate change by making it cheaper and easier for people to go green, including tax breaks for greening the home, and grants for renewable energy," he said. "He did announce a number of welcome green initiatives, such as a car purchase tax and an increase in air passenger duty, but the overall package falls a long way short of what is required."

Tax experts agreed that the reforms would fail to provide the incentives needed to accelerate the shift to the low carbon economy. Frank Sangster, head of KPMG's environmental tax and incentives group, told BusinessGreen's sister publication Accountancy Age that the Budget would only account for a reduction in carbon emissions of "around five per cent by 2015 at the earliest".

"Considering the Chancellor's promise back in December to put sustainability at the heart of the budget his announcements amounted to no more than minor changes, more reviews and a headline grabbing plastic bag tax in 2009," he added.

The renewables industry was left particularly disappointed by a speech that offered little for the alternative energy sector beyond a reiteration of government plans for a review this summer into how it will meet the EU targets for renewable energy and a pledge to support EU proposals to reform the emissions trading scheme to force energy firms to buy 100 per cent of their carbon credits at auction.

"We can only envy the Chancellor who must be living on a planet not threatened by climate change," said Philip Wolfe executive director of the Renewable Energy Association. "A technological revolution including massive expansion of renewable energy is essential – yet the UK is almost the worst performer in Europe [and] headline grabbing targets and consultations have become a dangerous cover for inaction."

Investors also expressed disappointment over a speech that offered little new guidance on the regulatory and investment framework many feel will be required to stimulate low carbon investment. "Investors are crying out for greater clarity on the regulatory structure that will enable the UK to meet its challenging carbon reduction targets over the coming decades," said Seb Beloe, head of SRI research at Henderson Global Investors. "Today's Budget was a golden opportunity to set out more clearly the fiscal framework designed to channel investment and behaviour in support of these objectives. Instead of offering coherence however, the Budget has only created confusion."