Reading Room

Environmental Taxes

The Government’s stated intention in the Coalition Agreement is to increase the proportion of revenue that comes from environmental taxes.  This position was confirmed in the Natural Environment White Paper and by the Chancellor in the 2011 Budget statement.  As a policy lever, fiscal drivers have the potential to drive environmental sustainability right to the heart of business decision making - gaining the attention of the finance director and catalysing improved environmental performance.  However, if poorly conceived, they act as a cost on business, undermining competitiveness without achieving the full environmental potential. 

Over the summer of 2012, the Treasury defined environmental taxes as those which meet all of the following three principles:

  • the tax is explicitly linked to the government's environmental objectives;

  • the primary objective of the tax is to encourage environmentally positive behaviour change; and

  • the tax is structured in relation to environmental objectives – the more polluting the behaviour, the greater the tax levied.

Environmental taxes within the Treasury’s definition include the climate change levy, the aggregates levy, landfill tax, the EU emissions trading scheme, the carbon reduction commitment and carbon price support: it is against these that the government measures its commitment to increase the proportion of environmental tax revenue.

However, in its report leading up to the autumn statement, the House of Commons environmental audit select committee made clear its preference for the government to use the Office of National Statistics' definition (also used by OECD and Eurostat), which is broader and includes tax receipts from transport, including fuel duty, vehicle excise duty and air passenger duty – all of which completely dwarf all other environmental tax revenues.

Why does all this matter to business? The definition of environmental taxes signal where underlying costs might increase, and provide an important context against which investment decisions on environmental improvement can be made, as well as likely payback periods.


National and International Government
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