Written evidence submitted by Green Alliance


Environmental tax measures

About Green Alliance

Green Alliance is a charity and independent think tank focused on ambitious
leadership for the environment. Since 1979, we have been working with a growing network
of influential leaders in business, academia, NGOs and politics to stimulate new thinking and dialogue on environmental policy and increase political action and support for environmental solutions in the UK.

This submission draws upon concepts and evidence we are developing for our Transform Tax project, which is looking to embed environmental and social principles at the heart of the tax system, with a focus on helping people make more sustainable choices. It also includes recommendations set out in recent Green Alliance publications, including: Added value: improving the environmental and social impact of UK VAT (2020); and Smart building: how digital technology can help futureproof the UK construction sector (2020).


Green Alliance’s research in this area focuses on ensuring the tax system helps people make the most sustainable choices. Our key points include:




Detailed comments

1. Environmental taxation forms a very small part of the UK’s current tax revenue.

1.1  Currently, only seven per cent of UK tax revenue comes from environmental taxes, which is fairly average for OECD countries but falls well short of potential demonstrated by countries like South Korea or Croatia, where 11 per cent of revenue is generated from environmental taxes.[i]

1.2  UK environmental taxes are dominated by energy taxes, with fuel duty alone accounting for 54 per cent of revenue, even though it – like Air Passenger Duty (APD) – was not created explicitly as an environmental tax.[ii]

1.3  Only 0.5 per cent of total tax revenue generated in 2019 was from the four taxes that HMRC administers that have an explicit environmental objective, according to the National Audit Office (NAO).[iii] Meanwhile, 45 per cent of overall tax revenues come from taxes on labour, through income tax and national insurance contributions.[iv] VAT, which also partially comes from charges on labour, accounts for a further 20 per cent.

1.4  The concept of environmental tax reform (ETR), which is supported by the IMF, the World Bank and the OECD, advocates for an ambitious use of environmental taxes, calling for a dramatic shift from taxing ‘goods’ like labour and investment to taxing ‘bads’, like resources, pollution, waste and consumption.

1.5  For every £1 a British employer pays in labour costs, 69.1p ends up in the worker’s pocket – the rest, known as the labour tax wedge, is spent on income tax and national insurance contributions.[v] A 2006 study of 21 OECD countries found that a 10 percentage point reduction in the labour tax wedge would increase employment rates by 2.8 percentage points.[vi]

1.6  Numerous studies have linked high labour costs (which labour taxes contribute towards) with unemployment. ETR could deliver at least a ‘weak double dividend’ by precipitating environmental improvements and a more efficient, less distortionary tax system. Shifting taxes to natural resources would incentivise more careful use, empowering a circular economy. The cost of human resources (manpower, craftsmanship and ingenuity) would come down, which would bring opportunities in labour intensive sectors like repairs and maintenance, remanufacturing, R&D, healthcare and education. 

1.7  In 2009, the UK Green Fiscal Commission estimated that increasing environmental taxes from 6 to between 15 and 18 per cent of total tax revenue, and reducing income tax from 20 to 17.5 to 18.0 per cent, would result in GHG emissions falling by 16 per cent and employment rising by 1.3-1.7 per cent. Investing 10 per cent of environmental tax revenues into eco-innovation would further reduces greenhouse gas emissions without having an adverse effect on the economy.[vii] Despite these compelling findings, the evidence has not been acted on to the benefit of the environment and economy.

2. The current tax system is driving environmental perversities.

2.1  Taxes affect prices, which in turn affect production and consumption decisions. Currently, there are perversities in the tax system that encourage the over-production and over-consumption of high carbon and environmentally harmful products.

2.2  The NAO identified five large tax reliefs that work against the government’s environmental goals while together costing the state £16.8 billion in lost revenue in 2019-20. This includes the reduced rate of VAT on supply of domestic fuel and power, the zero rate of VAT on domestic passenger transport, including the UK portion of scheduled flights, fuel duty not charged on kerosene used as heating fuel, reduced rate of fuel duty on ‘red diesel’, and accelerated capital allowances on plant and machinery for the oil and gas sector. These all encourage higher GHG emissions by lowering the price of fossil fuels, making the government’s net zero goal harder to achieve.

2.3  Green Alliance’s Adding value: improving the environmental and social impact of UK VAT (2020) identified environmental perversities in the VAT system in particular that are discouraging activities that will lead to more secure jobs and a greener, healthier society, while at the same time encouraging activities that damage our environment, make us unhealthy and suppress job creation. This is the opposite of what the country needs to recover from the coronavirus pandemic. Three major areas where adjusting VAT would have clear social and environmental benefits, while helping the government to revive the economy, are in construction, household energy, and repair.

2.4  In construction: new build is zero-rated for VAT while most renovation and repairs are charged 20 per cent VAT, which favours demolition over restoration. Around 50,000 buildings are knocked down every year, and nearly 226,000 are long-term vacant, because the current system advantages developers who profit from new development, while owners of existing buildings needing repairs are deterred by unfairly high costs.[viii]

2.5  Demolishing buildings, as encouraged by this discrepancy, squanders the carbon emissions generated in their construction. Emissions associated with construction of residential buildings account for over half of their total climate impact over their lifecycle, and the construction phase accounts for more than any other phase in the lifecycle of most buildings.[ix] This share will only get larger as heating and powering homes becomes more efficient over time.

2.6  Zero rating VAT for repair and renovation, in line with new build, could provide an economic stimulus of over £15 billion in its first five years alone. A rise in demand for renovation, maintenance and repair services, and shifting more of this work into the formal economy, would lead to higher income tax and National Insurance revenues, meaning the impact on Treasury would be modest: net losses to the Treasury in the first year would be around £920 million, according to Experian.[x]

2.7  In household energy: reduced VAT on household gas and other heating fuels like oil (currently five per cent) is a considerable fossil fuel subsidy which benefits the wealthy most in cash terms because they use much more energy. Households’ use of gas accounts for ten per cent of carbon emissions in the UK, but rather than being discouraged, it continues to be heavily subsidised. Of the £10.5 billion in UK fossil fuel subsidies, £2.2 billion comes from this source.[xi]

2.8  According to the Energy Systems Catapult, domestic gas is effectively subsidised to the tune of £33 per tonne of carbon, predominately because of the low VAT rate. Other heating fuels, like oil, are subsidised at £19 per tonne of carbon.[xii]

2.9  A 20 per cent VAT rate applied to household gas and domestic heating fuels would stimulate innovation in heating, one of the hardest sectors to decarbonise. Despite this, only £100 million a year is being invested in change, when the Committee on Climate Change estimates that £15 billion is needed.[xiii] It would also provide incentive for those who are able to pay to switch away from wasteful gas heating systems.

2.10                      It is also possible to design the policy to address fuel poverty at the same time as addressing the environmental perversity: research shows that most low income households could be better off overall if such a VAT change was paired with appropriate redistribution.[xiv] This measure would yield an additional £2.2 billion a year in tax revenue, which should be used for both redistribution and targeting lower income households for energy efficiency improvements and low carbon heating systems.[xv] That way, the government could meet both environmental and levelling up ambitions at the same time.

2.11                      In general, government must be careful to ensure that environmental taxes are not regressive, which, in many instances, will require careful design and which, in some instances, may require hypothecation or targeted redistribution. This is an approach that the Treasury has typically resisted.

2.12                      And in repair: VAT is normally charged at the standard rate for repairs which, combined with high labour costs, discourages people from mending broken items.

2.13                      Because VAT is charged on both labour and capital, it disadvantages activities that are labour intensive. A lack of affordable repair services encourages huge amounts of unnecessary waste and expense is a known barrier to getting people to carry out repairs. The problem of electronic waste, for instance, is particularly acute in the UK, which is the second biggest producer of e-waste per capita in the world.[xvi]

2.14                      As the UK will no longer be subject to EU VAT rules, it should zero-rate VAT on all repairs, potentially starting with high impact, frequently wasted products like electronics. Combined with other policies to accelerate the circular economy, repair could create 34,000 new jobs as it would be needed in every locality. And a robust remanufacturing sector could support 312,000 new jobs.

2.15                      This corresponds to recommendations from the Environmental Audit Committee, which has called on government to lower VAT on repair for electrical and electronic products to stimulate the sector.[xvii]

2.16                      Fixing the environmental perversities of the current VAT system should be the first step of much wider reform to put social and environmental principles at the heart of the tax system.


3. Carbon taxes are firmly on the agenda, but there are additional taxes the government should be considering to deliver environmental objectives.

3.1  As the NAO noted, research institutes and government advisory bodies have called for tax to play a more significant role in plans to achieve environmental targets.[xviii] The authoritative Mirrlees Review of 2011 described tax as one of the most important economic instruments to deal with pollution and environmental protection. In 2020, the Climate Change Committee stated that one of the principles for a resilient recovery to COVID-19 was to strengthen incentives to reduce emissions when considering tax changes. Also, in 2020, the Institute for Government criticised the limited link between climate change objectives and tax policy to date.

3.2  The government has recently been exploring options for increasing carbon pricing, and Green Alliance agrees that a consistent and high carbon price will be necessary to put the world on track to net zero. However, carbon pricing is not a panacea and must be used alongside a comprehensive suite of regulatory instruments to deliver environmental objectives. In the area of taxes alone, government should be considering other changes to benefit the environment, including material taxes and road pricing.

3.3  Material taxes aim to reduce the overall use and impact of resource use, often through promotion of secondary (or recycled) content over virgin material. Material use is highly correlated with GHG emissions and associated with potential environmental harm at every stage in a product’s lifecycle. The UN estimates that, globally, extracting and processing resources drives 50 per cent of carbon emissions and 90 per cent of biodiversity loss and water stress.[xix]

3.4  Compared to carbon and energy taxes, though, material taxes are uncommon and relatively understudied: multiple impacts, globally traded materials and complex supply chains add to the complications of tax implementation. There are some successful examples, though, particularly where materials are extracted and used locally, such as aggregates.

3.5  The Aggregates Levy is the UK’s only materials tax and has been credited with driving a relatively high proportion of recycled and secondary aggregate use in this country: 29 per cent, compared to an average of 10 per cent for the EU. [xx] Apart from this, material taxes are completely unused as a tool for improving the environment in the UK, although a tax on plastic packaging that contains less than 30 per cent recycled content is due to come into force in 2022.

3.6  In 2014, the European Commission undertook detailed research into resource efficiency measures with a focus on the built environment. The study modelled several scenarios including two with resource taxes, with specific figures calculated for the UK. One was a scenario with technical improvements combined with a tax of 20 per cent on all primary resource extraction and imports (except food) and taxes on housing and offices; and the second saw a flat tax of 35 per cent levied on all primary resource extraction and imports (except food). Both saw resource use fall by over 10 per cent, while GDP rose by between 0.1 and 0.5 per cent, provided that revenue was recycled by lowering labour taxes. Scenarios involving material taxes achieved greater reductions in material consumption than even the most ambitious technical scenario. This is possibly because they avoided the rebound effect – when savings made on materials are used to fund more consumption, adding to raw material demand. [xxi]

3.7  Motoring, meanwhile, is taxed primarily through Fuel Duty and Vehicle Excise Duty. The value of fuel duty revenues has been falling and will eventually approach zero due to the 2030 ban on sales of petrol and diesel cars.

3.8  This is problematic not only because of the lost revenue but also because the social cost of motoring will not be taxed (externalities such as congestion, noise, and accidents will remain), nor will the continued plastic pollution caused by tyre wear.

3.9  There are at least three potential driving taxes that could address the drop in revenue and continued impact of driving: pay as you drive, congestion charges, or electricity pricing specifically targeted at electricity used to power electric vehicles. As the IFS has recommended, the replacement for fuel duties should be introduced now, before the expectation that electric powered driving is untaxed is entrenched.[xxii]

March 2021


[i] OECD website, 2018 data, ‘Environmental taxes

[ii] ONS, 2020, ‘Environmental accounts 2020’

[iii] National Audit Office, 2021, Environmental tax measures

[iv] Office for Budget Responsibility, March 2020, ‘Economic and fiscal outlook’

[v] OECD, 2020, ‘Taxing wages - The United Kingdom’

[vi] OECD, 2006,  Employment patterns in OECD countries: reassessing the role of policies and institutions

[vii] Green Fiscal Commission, 2009, The case for green fiscal reform: final report of the UK Green Fiscal Commission

[viii] Architects’ Journal, 12 September 2019, ‘Introducing RetroFirst: a new AJ campaign championing reuse in the built environment’ and Ministry of Housing, Communities and Local Government, 21 May 2020, Live tables on dwelling stock (including vacants) table 615, ‘Vacant dwellings by local authority district: England, from 2004’

[ix] Royal Institute of Chartered Surveyors (RICS), 2017, Whole life carbon assessment for the built environment

[x] Experian, 2015, An estimate of the effects of a reduction in the rate of VAT on housing renovation and repair work: 2015 to 2020

[xi] Green Alliance, 2020, Added value: improving the environmental and social impact of UK VAT

[xii] Energy Systems Catapult, 2018, Current economic signals for decarbonisation in the UK: rethinking decarbonisation incentives

[xiii] Committee on Climate Change (CCC), 2019, Net zero: the UK’s contribution to stopping global warming

[xiv] See, for example: Joseph Rowntree Foundation, 2013, Designing carbon taxation to protect low

income households; IFS, 2013, Household energy use in Britain: a distributional analysis; and Arun Advani and George Stoye, June 2017, ‘Cheaper, greener and more efficient: rationalising UK carbon prices’ in Fiscal Studies, volume 38, issue 2

[xv] Green Alliance, 2020, op cit

[xvi] UN, June 2020, Global e-waste monitor

[xvii] EAC, 2021, Electronic waste and the circular economy

[xviii] National Audit Office, 2021, op cit

[xix] UN International Resource Panel, 2019, Global resources outlook 2019: natural resources for the future we want

[xx] European Environment Agency, 2008, Effectiveness of environmental taxes and charges for managing sand, gravel and rock extraction in selected EU countries

[xxi] European Commission, 2014, ‘Assessment of scenarios and options towards a resource efficient Europe - An analysis for the European built environment’

[xxii] IFS, 2019, ‘A road map for motoring taxation’