6

Protecting the Environment

WHY THE ENVIRONMENT MATTERS TO OUR QUALITY OF LIFE

6.1 Too often in the past, economic growth has taken place at the expense of increased pollution and the wasteful use of natural resources. Our quality of life is threatened by climate change, poor air quality and environmental degradation in both urban areas and the countryside.

6.2 Many of the sustainable development indicators published in 'Quality of life counts' in December 1999 gave clear warnings that action is needed if our quality of life is not to be compromised. Climate change remains a serious global threat. The amount of waste produced is growing while recycling rates remain low. There has been a loss of species, habitats and landscape features, especially in farmland areas.

6.3 Global temperatures have been rising steadily over the last 20 to 30 years. There is increasing scientific agreement that a significant part of this is the result of human activity. Some further climate change is inevitable over the course of the next century. This may mean significant rises in sea levels, leading to an increased risk of flooding in some areas but water shortages in others. In many cases, the world's poorest countries are among those that are most vulnerable to the effects of climate change but the potential economic, social and environmental costs for the UK cannot be ignored.

Chart 6.1: Observed and projected global temperature change¹

6.4 Poor air quality degrades the environment and poses risks for human health. The air quality levels at which experts consider there could be harm to human health are, on average, breached on more than 20 days a year. Although everyone suffers on days when air quality is poor, the elderly and those with chronic heart and lung diseases are particularly vulnerable. Poor air quality can bring on asthma attacks among the UK's 3 million sufferers.

6.5 Pressures on land in the UK are growing, with household projections for England indicating that an extra 3.8 million households could form between 1996 and 2021. The rate of new household formation and the geographical distribution of these households will have major environmental impacts. Unrestrained greenfield development can lead to unnecessary loss of countryside, damage biodiversity, detract from quality of life and deplete natural resources.

6.6 The urban and rural environment can be harmed by a number of activities, including aggregates extraction and pesticides use. Household waste is increasing at around 3 per cent a year, and the UK has one of the highest rates of disposing this waste into landfill in the EU. Biodegradable waste emits the powerful greenhouse gas methane as it decomposes, which, unless captured, contributes to climate change. Landfilled waste can also pollute water by leachate, creating a hazard to human health.

THE GOVERNMENT'S APPROACH TO ENVIRONMENTAL TAXATION

6.7 The Pre-Budget Report restated the principles underlying the Government's approach to environmental taxation. Economic instruments, such as taxes, charges and trading can offer scope for delivering environmental improvements in a cost effective way. By making use of the price mechanism, economic instruments allow those involved in environmentally-damaging activities to respond according to their own circumstances. Those facing the lowest costs of abatement have the incentive to make largest reductions. Pricing-in the wider economic costs not only provides a short-term incentive to reduce pollution, but also provides a permanent incentive for innovation and investment in less polluting processes, and encourages the consumption of cleaner products. But, in line with the Government's Statement of Intent on Environmental Taxation, published in July 1997, environmental taxes should meet the tests of good taxation:

• polluters should face the true costs which their actions impose on society;
• the social consequences of environmental taxation must be acceptable;
• economic instruments must deliver real environmental gains cost-effectively;
• environmental policies must be based on sound evidence but uncertainty cannot necessarily justify inaction; and
• environmental policies must not threaten the competitiveness of UK business.

Where environmental taxes meet these tests, the Government will consider introducing them.

Delivering on the Government's commitments

6.8 The Government has developed its environmental tax agenda within this policy framework. This strategy is already delivering real environmental benefits in ways which protect the competitiveness of UK firms and are socially equitable.

Tackling climate change

6.9 At the Earth Summit in Rio in 1992, developed countries agreed a voluntary target to return their emissions of greenhouse gases to 1990 levels by 2000. The UK is one of the few OECD countries which will achieve that target. The Government has already announced a package of measures which will put the UK on track to meet its Kyoto target including:

• the climate change levy and its associated negotiated agreements;
• electricity suppliers will be obliged to provide 10 per cent of electricity from renewable sources from 2010, subject to the cost to consumers being acceptable;
• a new energy efficiency standard of performance, placing an obligation on electricity and gas suppliers to help their domestic consumers save energy and cut fuel bills;
• the Home Energy Efficiency Scheme which improves energy efficiency in the domestic sector, tackling fuel poverty but also reducing energy wastage;
• fuel duties;
• reforms to Vehicle Excise Duty and company car taxation to encourage the use of low emission vehicles;
• European level agreements with car manufacturers to improve the average fuel efficiency of new cars by at least 25 per cent by 2008-09; and
• new targets for improving energy management in public buildings.

These measures mean the Government is now broadly on track to meet its Kyoto target as shown in Chart 6.2.

Chart 6.2: UK greenhouse gas emissions

Improving air quality

6.10 Improvements in fuel quality and vehicle emission technology have meant that total road transport emissions of local air pollutants have fallen by around 50 per cent over the last decade. The Government has played an important part in encouraging these changes through setting duty differentials in favour of cleaner fuels:

• favourable tax treatment of unleaded petrol has smoothed the phasing out of leaded fuel from 1 January 2000 in line with EU directives;
• favourable tax treatment of Ultra Low Sulphur Diesel has encouraged almost the whole diesel market to switch over to this less environmentally damaging fuel; and
• favourable tax treatment of road fuel gases has led to a large increase in the purchase and use of vehicles which use these fuels.

Regenerating our cities/protecting our countryside

6.11 The Government is also committed to regenerating our cities and protecting our countryside. As well as measures to improve air quality in both urban and rural areas, the Government has:

• revised planning guidance to help deliver the Government's target that at least 60 per cent of new housing developments should be on brownfield sites; and
• pre-announced a five year programme of increases in landfill tax to give waste producers a clear signal to reduce waste going to landfill and consider recycling.

6.12 Budget 2000 represents the next steps in implementing this strategy and delivering on the Government's commitment to improve the quality of life for all by ensuring that development occurs in a sustainable way, balancing economic, social and environmental considerations.

TACKLING CLIMATE CHANGE

6.13 The UK played a leading role in negotiating the 1997 Kyoto Protocol, in which the developed countries demonstrated their commitment to combat the global problem of climate change by agreeing to reduce greenhouse gas emissions by 5.2 per cent below 1990 levels over the period 2008-12. The EU agreed a joint target of an 8 per cent reduction at Kyoto, with the UK's contribution to this target later set at a 12¹/₂ per cent reduction on 1990 levels. The Government has also set itself a more challenging domestic long-term aim to reduce emissions of carbon dioxide by 20 per cent on 1990 levels by 2010.

6.14 The draft UK climate change programme issued for consultation on 9 March 2000 outlined a package of measures designed to ensure that the UK moves towards a sustainable low carbon economy. It shows that the UK is well on course to reduce its greenhouse gas emissions in line with the Kyoto target, and to move beyond that towards the Government's more ambitious domestic goal. A final programme will be published later this year, so that the UK will be ready to ratify the Kyoto Protocol.

Climate change levy

The aim of the levy

6.15 The climate change levy will be an important part of the Government's climate change programme. The levy will not only reduce the UK's emissions of carbon dioxide, but will also help to stimulate energy efficiency across the business and public sectors. In addition, recycling all the revenues back to business through a cut in employers' National Insurance Contributions (NICs) and providing additional support for energy efficiency measures will help to promote employment opportunities and stimulate new technologies.

6.16 There will be no net financial gain to the public finances from the introduction of the climate change levy. The levy package is expected to be revenue neutral not only for the private sector, but also broadly neutral between the manufacturing and service sectors.

Developing the levy

6.17 The Government has developed the levy proposals in an open and consultative way, first through the work of Lord Marshall's Task Force and then through the extensive consultation exercises that followed the announcement of the levy in Budget 99. The views expressed by business and other interested parties have helped refine the design of the levy.

6.18 The Government's aim in designing the levy has been to maximise its environmental effectiveness while safeguarding the competitiveness of UK business, and the announcements made on the design of the levy in the Pre-Budget Report have been widely welcomed.

Energy efficiency measures

6.19 The Government announced in the Pre-Budget Report that it was minded to introduce a system of 100 per cent first year capital allowances for energy saving investments, and that it would be consulting business and others on the possible design of such a scheme. The consultation paper on the support for energy efficiency measures under the climate change levy package was published in December 1999 and around 150 responses were received from a wide range of interested parties.

6.20 The responses to the proposed scheme set out in the consultation paper were broadly supportive. Subject to obtaining EU State Aids clearance, the Government will therefore introduce a system of 100 per cent first year capital allowances from April 2001. In the light of representations received to the consultation paper, the Government plans to extend the list of eligible technologies to include refrigeration equipment, pipe insulation materials and thermal screens in addition to the five technologies (CHP, boilers, motors, variable speed drives and lighting systems) proposed in the consultation document.

6.21 The Government will now begin detailed discussions with the relevant trade sectors and expects that the full list of individual products and systems will be published at around the time of the Pre-Budget Report later this year. In order to avoid distorting the timing of investment decisions, the Government intends to allow investments in approved products and systems made after the publication of the list to qualify for the enhanced allowances, rather than only those made after the start of the next financial year (April 2001) as originally proposed. Formal claims, however, can only be made after April 2001, in line with the legislation for these enhanced capital allowances being included in Finance Bill 2001.

6.22 The Government will update the list of qualifying technologies regularly to take account of and act as a stimulant for new and developing energy saving technologies, subject to cost constraints. In particular, the list could be expanded over time to include investment in developing renewable technologies such as solar and wind power.

6.23 The exact cost to the Exchequer of the enhanced capital allowances scheme will depend on the final list of qualifying technologies and on take-up, but it is estimated to be around £100 million in 2001-02, rising to an estimated £140 million in 2002-03. The cost thereafter will depend on the evolution of the list in terms of which additional technologies could be brought within its scope. The enhanced capital allowances scheme will be an integral component of the climate change levy package and will bring considerable benefits for both the environment and for business, contributing to meeting the UK's Kyoto target while simultaneously rewarding businesses who invest to improve their energy efficiency.

6.24 Views were also sought in the consultation paper on the Government's detailed proposals for using the £50 million "energy efficiency" fund, which is intended to:

• provide energy efficiency advice/audits to small and medium-sized enterprises;
• promote the development of "new" sources of renewable energy; and
• encourage the research, development and take up of low carbon technologies and energy saving measures through a "Carbon Trust".

The responses received are currently being assessed and final decisions on the use of the "energy efficiency" fund will be made in the 2000 Spending Review.

Energy intensive sectors

6.25 The Government recognises the case for giving special treatment to energy intensive sectors because of their high energy costs and their exposure to international competition. Those energy intensive sectors which enter into agreements to implement all cost-effective energy saving measures and achieve carbon or emissions targets which meet the Government's criteria will qualify for an 80 per cent discount from the levy rates.

6.26 The Government proposed in Budget 99 that the basis for defining eligibility to enter a negotiated agreement should be those sites covered by the EU's Integrated Pollution Prevention and Control (IPPC) Directive, defined legally in the UK as sites with processes listed in Parts A1 and A2 of the Pollution Prevention and Control (PPC) Regulations.

6.27 This criterion has a clear rationale. Sites covered by Parts A1 and A2 of the PPC regulations will be subject to a regulatory requirement, in terms of having to operate in an energy-efficient manner, that other non-IPPC sites are not subject to. The Government has said that small sites in sectors covered by Parts A1 and A2 of the PPC regulations, but which fall beneath the size threshold set out in the regulations, will be eligible to be covered by a negotiated agreement. This definition covers the main energy intensive sectors and around 60 per cent of the energy used in manufacturing.

6.28 In the Pre-Budget Report, the Government announced that it remained willing to consider alternative definitions for eligibility which would target relief at energy intensive sectors exposed to international competition. But any alternative definition would have to have a clear rationale, provide legal certainty, administrative simplicity and be consistent with EU State Aids rules.

6.29 A number of proposals have been received since the Pre-Budget Report and the Government has assessed them carefully against the criteria listed in it. The Government takes the view that none submitted to date satisfies all of the criteria set out in the Pre-Budget Report. Eligibility for the negotiated agreements will therefore continue to be defined as installations with processes covered by Parts A1 and A2 of the PPC regulations.

6.30 A final consultation paper on the PPC Regulations will be issued shortly by DETR, with the objective of laying the Regulations in Parliament before the summer recess. As part of these wider consultations on the PPC Regulations, and as will be set out in the forthcoming consultation paper, the Government will consider which processes currently covered by Part B of the PPC Regulations should, given their environmental effects, be more appropriately regulated under Part A2.

Horticulture

6.31 The horticulture sector is a relatively energy intensive sector with a very large number of (often small) businesses and is directly exposed to significant international competition. It is not, however, eligible for a negotiated agreement since it is not covered by the EU's IPPC Directive. Most countries that have introduced energy taxes have afforded special treatment to their horticulture sectors in the form of lower rates or tax exemptions.

6.32 In the light of these considerations - and the scope for energy efficiency improvements in the horticulture sector - the Government intends to introduce a package of measures to help improve energy efficiency in the horticulture sector while protecting its competitiveness. Subject to State Aids clearance from the European Commission, the Government therefore intends to offer:

• a special package of support for horticulture allocated from the £50 million energy efficiency fund. This package will aim to improve energy efficiency across the sector and will include activities such as site-specific advice for individual businesses;
• an extension to the list of investments qualifying for enhanced capital allowances to include thermal screens. This will provide a further fiscal incentive for horticulture firms to invest in energy saving technologies; and
• a temporary 50 per cent discount on the levy for a period of up to five years to the horticulture sector while the energy efficiency measures targeted at the sector take effect.

Liquefied Petroleum Gas

6.33 One of the Government's aims in designing the levy has been to avoid providing incentives for the take up of more environmentally damaging fuels. The Government believes that, in the light of representations made since the Pre-Budget Report, applying the full rate of the levy to Liquefied Petroleum Gas (LPG) could result in fuel switching to kerosene, which is currently zero rated. In order to avoid such effects, the Government proposes to halve the rate of levy applying to LPG to the equivalent of 0.07 per kilowatt hour (p/kWh).

Northern Ireland

6.34 The energy market in Northern Ireland differs markedly from that in Great Britain. In particular, natural gas is not widely available to firms and households in Northern Ireland. To help the fledgling gas market to develop, the Government intends to explore with the European Commission the scope for allowing a temporary exemption from the levy for natural gas in Northern Ireland for a period of up to five years. Such an exemption - which will require EU State Aids clearance - will help reduce carbon emissions by encouraging businesses to switch to natural gas from more polluting fuels.

Design of the levy

6.35 The rates of the levy will be based upon the energy content of the different energy products, and will in 2001-02 be equivalent to:

• 0.07 pence p/kWh for LPG;
• 0.15 p/kWh for gas and coal; and
• 0.43 p/kWh for electricity.

6.36 The Government will continue to monitor and evaluate the contribution that the levy makes to the UK's targets for reducing greenhouse gas emissions. As with excise duties, the Government expects that the rates of the levy will keep pace with inflation over time.

Environmental benefits

6.37 The climate change levy and its negotiated agreements combined are estimated to save at least 5 million tonnes of carbon (MtC) a year by 2010 and therefore form an important part of the UK's draft climate change programme. Full details on the breakdown of these estimated carbon savings are given in Table 6.2, but, in summary, the 5 MtC is comprised of:

• at least 2¹/₂ MtC arising from the levy package itself, including the additional support for energy efficiency measures and the levy exemptions for electricity generated from renewable sources of energy (excluding large-scale hydro plant with generating capacity more than 10MW) and in "good quality" combined heat and power plant; and
• at least 2¹/₂ MtC arising from the levy's negotiated agreements.

6.38 The positive responses to the Government's proposals for using the additional support for energy efficiency measures, and the further announcements in Budget 2000 on the intended list of technologies that will qualify for the enhanced capital allowances, mean that the energy efficiency measures are now forecast to save at least ¹/₂ MtC a year by 2010. When combined with the estimated carbon savings from the price effect of the levy and its associated exemptions (which, following the Pre-Budget Report, were estimated to be around 2 MtC), the estimated carbon savings arising from the levy package itself are estimated to be at least 2¹/₂ MtC a year by 2010.

6.39 The estimated carbon savings of at least 2¹/₂ MtC arising from the negotiated agreements are derived from the indicative energy efficiency targets set out in the Memoranda of Understanding signed by the main ten energy intensive sectors on 20 December 1999. These estimated carbon savings are higher than estimated in the Pre-Budget Report, since more complete estimates can be made in the light of the progress on the negotiated agreements. Further carbon savings are expected from the agreements with the smaller energy intensive sectors.

Affordable Warmth

6.40 The Government is committed to ensuring that all sectors play their part in tackling climate change. The Government's "Affordable Warmth" programme tackles fuel poverty, improves the housing stock and reduces wasteful emissions of greenhouse gases by supporting the installation of energy efficient central heating systems in up to one million low income homes. Budget 2000 announces the introduction of capital allowances to underpin this programme. Further details are given in Chapter 5.

Transport

6.41 The transport sector has a key role to play in helping to reduce carbon emissions. Over time, rising incomes, demographic shifts and changes in land use have led to rising car ownership and car use. This long-term trend towards increasing car use increases personal mobility, choice and independence but can also lead to increased congestion and pollution.

Providing alternatives to the car

6.42 Reducing emissions depends on tackling congestion and providing people with real alternatives to the car - alternatives which are safe, reliable and accessible to all. This is particularly important for the 28 per cent of households who have no regular use of a car. The Government has already achieved some success in promoting alternatives to car use. For example:

• there has been a 15 per cent increase in rail passenger journeys since May 1997 with an extra 1,100 trains running each day to meet rising demand. Rail investment is now running at £1.7 billion a year, up 34 per cent in the last two years;
• the Rural Transport Fund has already led to the introduction of over 1,800 new or improved rural bus services in England alone, providing longer running times, extended routes, greater frequency and better integration with other bus and rail services;
• bus quality partnerships in 130 towns and cities across the UK have increased bus usage by 10 to 20 per cent. Bus industry investment has doubled to £380 million per year; and
• local authorities have been working with major employers and schools in their areas on developing travel plans which encourage the use of alternatives to the car in getting to work and school.

Transport Strategy

6.43 The publication of the Integrated Transport White Paper "A new deal for transport- better for everyone" in July 1998 set out a policy framework for integrated transport. Since then, the Government has introduced the most wide-ranging Transport Bill for a generation to tackle congestion, improve rail and bus services and strengthen air safety. The Government's aim is to publish a ten year transport plan in summer 2000, involving both the public and private sectors and drawing upon the best that technology has to offer.

The ACEA agreement

6.44 Road transport must continue to play its part in helping to achieve the UK's environmental commitments. In October 1998, ACEA, the EU car manufacturers group, agreed to reduce average carbon dioxide emission levels from their new cars from 186g per kilometre to 140g per kilometre by 2008. The agreement has recently been extended to Korean and Japanese car makers.

Green commuting

6.45 Budget 99 introduced a package of tax exemptions to encourage the use of environmentally-friendly modes of transport in travelling to work - notably the removal of the employee benefits charge on employer-provided works buses and on public bus subsidies, and new reliefs for commuter and business cycling. This was widely welcomed as a helpful initiative towards reducing the number of private cars on the road at peak traffic times.

Fuel duties

6.46 Increases in fuel duties in recent years have given motorists and manufacturers clear incentives to design more fuel efficient vehicles, to limit unnecessary journeys and consider alternatives to the car. These increases have played a significant part in putting the UK on track to meet its Kyoto commitments. Real terms increases in fuel duties between 1996 and 1999 are estimated to produce carbon savings of 1 to 2.5 million tonnes of carbon per year by 2010.

6.47 As the Chancellor announced in the Pre-Budget Report, the appropriate level of fuel duties will now be determined on a Budget by Budget basis, taking account of the Government's economic, social and environmental objectives. The price of oil has more than doubled since Budget 99. In the light of this, the Government has decided not to increase fuel duties in real terms in Budget 2000.

Transport spending

6.48 A key part of the Government's transport strategy is to continue to improve Britain's transport infrastructure. To help achieve this, the Chancellor has decided to allocate £280 million to tackle congestion hot-spots and modernise public transport.

Scale charges for employer provided fuel

6.49 Employees who receive free fuel from their employers do not face the full costs of the fuel they use for private motoring, leading to additional congestion and higher emissions. Budget 98 announced a 5 year programme to increase the scale charges for fuel provided for private motoring in company cars by 20 per cent per annum over and above the usual increases in line with pump prices including fuel duty. This reform will discourage employers from providing, and employees from accepting, free fuel so that more company car drivers face the full costs of the fuel they use for private motoring. This should result in fewer private miles being driven, less congestion and lower emissions.

IMPROVING AIR QUALITY

6.50 The Government has set challenging new objectives to improve ambient air quality in order to protect people's health and the environment without imposing unacceptable economic or social costs.

Fuel duty differentials

6.51 The transport sector remains a major cause of poor air quality although improvements in fuel quality and vehicle emission technology have led to a 50 per cent fall in transport related emissions over the last decade. The Government has played an important part in encouraging these changes through setting duty differentials to encourage the manufacture and take up of cleaner fuels.

Unleaded petrol

6.52 A favourable differential for unleaded petrol since 1987 has significantly reduced the use of leaded petrol - which was the major source of lead in the atmosphere - over the last decade. The success of this policy helped facilitate the phasing out of leaded petrol on 1 January 2000, in line with EU directives. As a result of these measures, lead emissions from traffic have been cut to almost zero, with older cars which are unable to use unleaded petrol switching to lead replacement petrol.

Chart 6.3: Market share of leaded petrol

6.53 The Government has taken steps to encourage the manufacture and use of Ultra-Low Sulphur Diesel (ULSD) which reduces particulate emissions from existing diesel vehicles and allows the introduction of the latest diesel after-treatment devices, such as particulate traps.
A 1 pence per litre duty differential in favour of ULSD was introduced in 1997. This was increased to 2 pence per litre in Budget 98 and 3 pence per litre in Budget 99. This policy has led to almost the entire diesel market converting to ULSD, way ahead of most other European countries.

Ultra-Low Sulphur Petrol

6.54 The use of duty incentives to move the diesel and petrol markets to ULSD and unleaded petrol can be counted as major successes in achieving better local air quality. A similar opportunity now exists for Ultra-Low Sulphur Petrol (ULSP). This reduces emissions compared to ordinary petrol and enables the introduction of cleaner vehicle technologies. The Government therefore intends to introduce a differential of 1 pence per litre in favour of ULSP relative to unleaded petrol from October 2000.

Road fuel gases

6.55 The Government has recognised that road fuel gases can offer reductions in particulates and nitrogen oxide emissions compared with conventionally fuelled vehicles. The duty rate on road fuel gases had been frozen since 1996, and Budget 99 reduced the duty by 29 per cent.

6.56 The differential in favour of road fuel gases has already led to increased take up of this fuel, with deliveries in the first nine months of 1999-2000 exceeding the total for the preceding year. The number of bi-fuel (petrol and LPG) light vehicles has increased by 10,000 since Budget 99 and the number of refuelling facilities offering road fuel gas has increased from around 150 at the end of 1998 to around 350 today. To encourage greater use of road fuel gas, Budget 2000 freezes its duty rate, further increasing the differential between road fuel gas and conventional fuels.

Encouraging cleaner vehicles

6.57 Over time, the Government is committed to targeting the environmental consequences of road use by shifting the burden of vehicle taxation from ownership to use. The Government has also introduced a number of reforms which have sought to provide motorists with a powerful signal to choose more environmentally-friendly vehicles. These measures reinforce the message that the less motorists pollute, the less tax they pay.

Chart 6.4: Market share of Ultra-Low Sulphur Diesel

VED rates for existing cars

6.58 In Budget 98, the Government announced its intention to reform VED to encourage cleaner cars. A consultation document issued with the 1998 Pre-Budget Report set out options for graduating VED rates by the environmental performance of different cars, looking at factors such as their engine size, carbon dioxide emissions and fuel type.

6.59 Budget 99 cut the VED rate for smaller cars, introducing a reduced annual VED rate of £100 for cars with engines up to 1,100 cc. This delivered a £55 reduction in the VED bill for drivers of 1.8 million smaller cars at a cost of £85 million a year

6.60 From March 2001, this reduced rate will be extended to apply to all existing cars with engines up to 1,200cc - making a further 2.2 million smaller cars eligible for the lower rate. This will provide an incentive for motorists to make their next second-hand car purchase a smaller, more environmentally-friendly model.

Graduated VED for new cars

6.61 Budget 99 announced that, for new cars, a system of graduated VED would be introduced based primarily on their carbon dioxide emissions. Budget 2000 announces details of this new system, which will be introduced from 1 March 2001.

6.62 Newly-registered cars will be placed in one of four VED bands according to their rate of carbon dioxide emissions - the best indicator of their fuel efficiency. Within each band, there will also be a discount for cars using cleaner fuels and technology and a small supplement on diesel cars to reflect their higher emissions of particulates and other local air pollutants. 95 per cent of new cars will pay up to £70 a year less VED under this new system than under the rates for existing cars. The graduated VED system will therefore encourage the purchase of:

• new cars as opposed to older cars;
• cars with lower carbon dioxide emissions and better fuel efficiency; and
• cars using fuels and technology which are better for local air quality.

6.63 The reforms to car VED announced in Budget 99 and Budget 2000 were to have been introduced on a revenue-neutral basis. However, the Government has decided to freeze VED rates for cars until the extension of the reduced rate in March 2001.

Company car taxation

6.64 Budget 99 announced a major revenue neutral reform of the taxation of company cars to help protect the environment. Existing incentives to keep older, more polluting cars and to drive extra business miles will be removed and drivers and their employers will face an incentive to choose cars with lower emissions both of carbon dioxide and local air pollutants.

6.65 From April 2002, the tax charge will be based on a percentage of the car's price graduated according to the level of the car's carbon dioxide emissions measured in grams per kilometre (g/km). The rates have been set to ensure broad revenue neutrality in 2002-03 and will cost the exchequer £100 million over the first three years. The charge will build up from a minimum charge on 15 per cent of the car's price, in 1 per cent steps for every 5g/km CO₂ over a specified level of emissions, up to a maximum charge on 35 per cent of the car's price, the same as the current maximum percentage. The level of CO₂ emissions qualifying for the minimum charge will be:

• 165 g/km in 2002/03;
• 155 g/km in 2003/04; and
• 145 g/km in 2004/05.

6.66 Diesel cars will pay a supplement of 3 per cent of the car's price compared to petrol vehicles with similar carbon dioxide emissions to take account of their higher emissions of particulates and pollutants which have adverse impacts on local air quality. Provisions will be put in place so that the supplement can be waived in the future for very low emission diesel cars and discounts can be given to cars using cleaner fuels and technology. This is consistent with the Budget 98 announcement that the extra cost of enabling a company car to run on cleaner road fuel gases would be disregarded when calculating the tax due. In the absence of reliable and complete emissions data, cars registered before 1998 will be charged according to three engine-size bands.

6.67 By encouraging the use of cleaner vehicles, it is estimated that, in the medium to long term, the reform will produce a saving of 0.5 to 1 million tonnes of carbon on a full year basis, making a substantial contribution to meeting the UK's targets for reducing greenhouse gas emissions. The supplement on diesel cars will contribute towards achieving the Government's air quality targets.

The haulage industry

6.68 Budget 2000 demonstrates the Government's commitment to maintaining the competitiveness of the UK haulage industry while recognising the damage which some lorries can do to the environment and the road network.

VED rates for lorries

6.69 The Government has decided to allow 44-tonne lorries meeting Euro II emissions standards onto UK roads from a target date of 1 January 2001, as recommended by the Commission for Integrated Transport. This will be good for the UK haulage industry and the environment. This will increase the fuel-efficiency of haulage operations, reduce congestion and give UK hauliers an advantage over foreign hauliers only permitted to run at 40-tonnes. To encourage their use, a VED rate of £2,950 will apply to this type of lorry.

6.70 The VED rate of £5,750 set for the new, road-damaging 40-tonne lorry on 5 axles in Budget 99 has successfully discouraged its use by domestic hauliers. However, now that domestic hauliers who need the highest weight limits have the option to use the less damaging 44-tonne lorry, the only UK hauliers who still need to use the 40-tonne lorry are international operators using continental roads with 40-tonne weight limits.

6.71 To boost the competitiveness of these international hauliers, the Government will cut the VED rate for the 40-tonne lorry on 5 axles from £5,750 to £3,950. The rate for the less road-damaging 38-tonne lorry on 5 axles will be reduced by £500 to encourage its continued use, and there will also be a reduction of £500 for the lorry typically used to collect freight from UK ports to boost the competitiveness of hauliers in this sector.

6.72 The rates for almost all other lorry types will remain frozen for the third year running, a cut in real terms. In total, the reforms to lorry VED announced in this Budget will cost £45 million.

Enforcement measures to protect legitimate hauliers

6.73 In order to protect the competitiveness of legitimate hauliers, the Government is taking forward a tough package of enforcement measures designed to impose more stringent checks and penalties on hauliers who operate illegally and to reduce the compliance costs of legitimate operators. These include:

• legislation in the Finance Bill to allow impounding of illegally operated lorries;
• reviewing the effectiveness and targeting of current enforcement measures as part of the ongoing work of the Road Haulage Forum; and
• tighter rules on the use of rebated "red diesel" and tougher penalties for its misuse.

6.74 A sub-group of the Road Haulage Forum will continue to review the costs which different lorry types impose on the environment and the roads, with a view to informing future decisions on the VED rates for these vehicles.

REGENERATING OUR CITIES / PROTECTING OUR COUNTRYSIDE

Urban regeneration

6.75 The Government is determined to reverse the physical, social and economic neglect that has scarred some parts of our towns and cities. It will seek a lasting urban renaissance by enhancing the quality of life and competitiveness of all Britain's towns and cities, making them places where people want to live and work. This will, at the same time, relieve pressure on the countryside.

6.76 Last summer the Urban Task Force, chaired by Lord Rogers of Riverside, published its report Towards an Urban Renaissance. The Task Force made 105 recommendations aimed at reversing urban decline and attracting people back into cities, towns and urban neighbourhoods. In particular the Task Force considered ways to:

• promote greater efficiency in the use of land by building at higher densities;
• reduce the proportion of new housing built on greenfield land by encouraging more development on brownfield sites;
• improve the balance of urban communities, including achieving a greater mix of housing tenures; and
• physically regenerate deprived urban areas.

Progress in responding to Lord Rogers' report

6.77 The Government has welcomed Lord Rogers' report as making an important contribution to the debate on revitalising our cities. The Government announced new planning policy guidance for housing on 7 March 2000 which responds to a wide range of Lord Rogers' recommendations by:

• promoting greater efficiency in the use of land;
• giving preference to the development of recycled land and buildings before developing greenfield sites - helping to deliver the Government's target that at least 60 per cent of new housing should be built on brownfield sites;
• encouraging higher quality housing development; and
• modernising and streamlining the planning process.

6.78 The Government has also announced that plans to develop the Thames Gateway - the largest tract of brownfield land in the South East - will be given new impetus, and that the area will be extended. This is all part of the Government's commitment to regenerate run-down areas and make our towns and cities more vibrant.

6.79 Since Lord Rogers' report was published the Government has also:

• introduced Urban Regeneration Companies in Liverpool, East Manchester and Sheffield to lead and co-ordinate the regeneration of run-down urban neighbourhoods;
• piloted nine "home zones". These traffic schemes in residential areas will give residents more control over traffic movements in their areas and ensure that the needs of people, rather than traffic, come first;
• invited proposals for a further five millennium villages, building on the experience of the first two at Greenwich and Allerton Bywater in Yorkshire; and
• piloted eight private finance deals for housing pathfinders, helping fulfil the need to attract private investment in local communities.

6.80 The Government is exploring whether fiscal measures - both taxation (national and local) and public spending - including those recommended in Lord Rogers' report, could help meet a number of objectives. For example:

• to encourage the clean up and re-development of brownfield land;
• to help make the private rented sector work better and make investment in rented housing a more attractive proposition;
• to provide an added incentive to local authorities to facilitate development;
• to encourage partnerships with local authorities to promote regeneration;
• to help business to be part of the regeneration of deprived areas; and
• to modernise and streamline the planning system.

Stamp Duty on brownfield

6.81 The Government has already recognised the importance of achieving an appropriate balance between greenfield development and improving the use of brownfield land. This is reflected in its national target to place at least 60 per cent of new homes on previously developed land, and its changes to planning guidance. In light of the recommendations made by Lord Rogers, the Government is attracted to the idea of offering relief from stamp duty for new developments on brownfield land. The Government will consult with interested parties on how this measure might be best targeted to help meet the Government's objectives and how it could work in practice.

6.82 The Government also recognises the importance of the provision of good quality housing. Budget 2000 extends the current stamp duty relief for Registered Social Landlords, and announces an extension of the reduced rate of VAT for the installation of energy saving materials to all homes to help tackle fuel poverty and improve energy efficiency in the domestic sector.

6.83 Together these measures contribute to the Government's commitment to generate an urban renaissance by encouraging better use of brownfield land and improvements in the quality of existing housing stock, while at the same time encouraging greater energy efficiency.

6.84 Later this year, the Government will publish an Urban White Paper which will take forward its programme for achieving an urban renaissance. This will tackle the three key elements of the Government's strategy - physical, social and economic development - in a comprehensive and co-ordinated way.

Waste

Limiting the environmental impact of waste

6.85 Industry and commerce in England and Wales produce around 70 to 100 million tonnes of waste per year. Local authorities collect a further 30 million tonnes, principally from households, and this is growing by around 3 per cent a year. Disposing of all this waste places further pressure on scarce land, since the UK has one of the highest rates of landfill in the EU. Landfill has other environmental costs, most notably in the emission of methane, a powerful greenhouse gas, from deposits of biodegradable waste.

Landfill tax

6.86 Landfill tax rates for active waste were increased from £7 to £10 per tonne from April 1999 and will rise by £1 per tonne each year until at least 2004, when the policy will be reviewed. The lower rate of tax that applies to inert waste (£2 per tonne) has remained unchanged. To ensure a sufficient supply of suitable waste materials to restore landfill sites, Budget 99 introduced an exemption for inert waste used for this purpose.

6.87 By making waste producers take account of the environmental costs they impose on the rest of society, the landfill tax encourages efforts to minimise the amount of waste generated and to develop more sustainable forms of waste management such as recycling, composting and recovery. Raising recycling rates requires a change in our attitude to waste. The Government is giving careful consideration to how it can best promote recycling.

Aggregates

6.88 The extraction and transport of aggregates imposes real costs on local communities in terms of noise and vibration, dust, loss of biodiversity and amenity and visual intrusion. But it is not just local communities which suffer. There is also evidence of wider public concern over the environmental impact of quarrying in protected areas such as national parks.

6.89 In the Pre-Budget Report, the Government welcomed a revised package of voluntary measures brought forward by the Quarry Products Association in July 1999 but said that it continued to fall short of what was necessary to match the overall environmental and economic effects of a tax on primary aggregates. The Government announced it was minded to introduce an aggregates levy in the Budget unless the industry could further improve on the package.

Aggregates levy

6.90 Since the Pre-Budget Report, there have been further discussions about the content of the industry's voluntary package. But the industry has made delivery of the voluntary package conditional on undertakings from the Government on procurement policy which were unacceptable. The Government has therefore decided to introduce an aggregates levy which will come in to effect from April 2002.

6.91 An aggregates levy will ensure that the environmental impacts of aggregates production not already addressed by regulation are more fully reflected in prices, encouraging a shift in demand away from virgin aggregate towards alternative materials such as recycled aggregate.

6.92 The levy will apply to virgin sand, gravel and crushed rock which is subject to commercial exploitation in the UK - including that dredged from the seabed within UK territorial waters. It will be charged at £1.60 per tonne. The levy will not apply to recycled aggregates, or to certain secondary aggregates such as those derived from reworking old spoil heaps. To protect competitiveness, exports will be relieved and imported aggregates will be subject to the levy when they are first sold or used in the UK.

6.93 There will be a range of exemptions/reliefs for certain rocks (coal, lignite, slate, shale) and industrial minerals (such as metal ores, gypsum, fluorspar); for the production of lime or cement from limestone and for silica sand or limestone used in certain agricultural and industrial processes (such as glass-making and fertiliser production).

6.94 To further the Government's aim of shifting the burden of taxation from "goods" to "bads", the revenues from the levy will be fully recycled to the business community through a 0.1 percentage point reduction in employers' NICS and a new Sustainability Fund. The Government will be consulting shortly on how this fund can best be used to deliver local environmental improvements.

Pesticides

6.95 There is increasing evidence that pesticides use is associated with significant environmental impacts on biodiversity and water quality. The Government is committed to minimising the environmental impact of pesticides, consistent with adequate crop protection.

6.96 The agrochemical and farming industries have made good progress in adopting measures which seek to minimise pesticide usage in recent years but there is scope for further action. A considerable body of research has aimed at identifying additional measures that could be taken to minimise pesticide use¹. In March 1999, DETR published the most recent research report - Design of a tax or charge scheme for pesticides, undertaken by Ecotec Research and Consulting Ltd. This showed that a carefully designed tax or charge scheme could be used to address the environmental impacts of pesticides use.

Voluntary package

6.97 While the Government believes that a tax could, in conjunction with other measures, be a useful tool in addressing the environmental impacts of pesticides, it has been exploring with the agrochemical industry whether its objectives could be better achieved through a partnership approach. Proposals to minimise the environmental impact of pesticides through voluntary action were brought forward by the British Agrochemicals Association (BAA) in January. The Government recognised that these proposals were a useful basis for discussing with the industry and other interested parties what form a partnership approach might take. The Government also stated that subject to further detailed discussions, it would not proceed with the introduction of a pesticides tax in Budget 2000.

6.98 Following recent discussions with the BAA, the Government has decided not to introduce a tax on the use of pesticides in Budget 2000. Instead, taking the BAA's initial proposals as a starting point, the Government will undertake further discussions with the industry on the form of a possible voluntary package, and the contribution it could make to the Government's objective to minimise the environmental impacts of pesticides use.

6.99 The Government has therefore asked the BAA to further develop their initial voluntary proposals and submit a formal package of measures by mid April. There will then be an opportunity for all interested parties to express their views on the proposed measures and their effectiveness in tackling the environmental impacts of pesticides use. Progress will be considered in Pre-Budget Report 2000.

Water

6.100 As part of the 1998 review of the water abstraction licensing system in England and Wales, the Government outlined the potential for economic instruments to be used alongside regulation to deliver more efficient use of water resources while ensuring adequate protection of the water environment. Subsequently, the Government commissioned research to consider that potential in detail. In the light of that research, the Government will publish a consultation paper later this spring, setting out proposals on how trading in abstraction licences might be facilitated.

ENVIRONMENTAL APPRAISAL OF POLICY MEASURES

6.101 The Government is committed to appraising the environmental impact of all Budget measures and has refined its appraisal techniques in the light of suggestions from the Environmental Audit Committee (EAC) and others. Table 6.1 shows how the Government's environmental tax measures fit in to the overall framework of the Government's environmental policy. An environmental assessment of each of these measures is detailed in Table 6.2.

6.102 It is not always easy to quantify the individual environmental effects of Government policy. Many measures overlap and there are large uncertainties involved in trying to estimate behavioural responses. Wherever possible, an attempt has been made to separate out the effects of individual measures, as in the case of company car tax, or the savings from the climate change levy, but it should be noted that these estimates are subject to large margins of error. Estimates are not included where the precise details of the measure are not yet finalised.

6.103 The Government has made available documentation about the environmental appraisal methodology underlying its estimates including those set out in the draft climate change programme, the associated paper on the derivation of carbon savings, the DTI working paper on emissions projections, the memorandum to the EAC on the environmental appraisal of the fuel duty escalator and an Inland Revenue paper providing an "Integrated Impact Assessment" of the company car tax reform.

Table 6.1: The Government's environmental tax measures and policy objectives

¹Draft climate change programme: published on 9 March 2000 by DETR.

²A new deal for Transport: Better for everyone, DETR, July 1998; and Breaking the logjam, DETR, December 1998.

³Consultation document Report on the Air Quality Strategy, DETR, August 1999.

⁴Quality of Life Counts, DETR, December 1999.

⁵Consultation document, Less waste: More value, DETR, June 1998.

⁶Consultation document, Limiting Landfill, DETR, October 1999.

⁷A draft Waste Strategy for England and Wales, A Way With Waste, DETR June 1999.

Table 6.2: The impact of the Government's environmental tax measures

¹ These estimates are subject to significant margins of error.

²There are a number of difficulties involved in estimating the emission savings from the individual components of the climate change levy, including the need to avoid double counting. The figures are calculated using cautious assumptions and are shown for illustrative purposes only.

³ Based on the DTI energy model.

⁴Based on DETR estimates from the draft climate change programme.

⁵This measure is part of a package of measures, including the changes to VED and the ACEA voluntary agreements.
There are a number of difficulties involved in estimating the emission savings from the individual components of this package, including the need to avoid double counting.

⁶ Using the NETCEN emissions model - further detail on the methodology used in the model is provided in "NETCEN's January 2000 report UK Road Transport Emissions Projections.

¹ RPA (1997) Private Costs and Benefits of Pesticides Minimisation;

ECOTEC (1997) Economic Instruments for Pesticide Minimisation;

ECOTEC (1998) Review and Assessment of Other Countries' Experience with Pesticide
Taxes - Lessons for a Possible UK Pesticide/Charge;

DETR (1999), Design of a tax or charge scheme for pesticides. [back]