don’t forget the environment – Inside track

The government needs to raise more money and newspapers are reporting that Rachel Reeves is considering tax reform. This is welcome. The UK’s tax system is a mess, “a precarious assemblage of misdirection and untruth” in the words of the New Statesman’s Will Dunn.  

The chancellor’s focus appears to be on changes to tax thresholds and property taxes to boost productivity, as well as raise revenue. Reform of property taxation would certainly be welcome, and not only to make it easier for people to move to take new jobs. Our tax system stokes property prices and entrenches inequality (there’s a good book that touches on this).   

But if the chancellor is serious about tax reform, she should look beyond property taxes. As our 2022 report, A green tax map for the future points out, the whole tax system is geared to a high carbon economy. It hinders the transition to a modern economy that will “address climate change… increase the country’s energy and resource security, create new industries and… save people and businesses money”. 

This report and our two reports on transport taxation recognise the political difficulties of reform. Polling and a citizens’ jury we commissioned suggest that the public will only support tax changes if they are fair and incentivise beneficial behaviour, rather than just punishing damaging behaviour. Our citizens’ jury wanted the government to “widen public acceptance of environmental tax reforms by ensuring consistent action and creating the long term vision that has so far been lacking”.  

We highlighted the Treasury’s propensity for “ad hoc tinkering and measures that do not cohere with wider goals, including environmental ones”, and proposed instead a roadmap to “explain clearly how the government plans to transform the tax system”.  

We need an honest conversation about tax aims
There is no benefit for environmentalists in having climate policies associated with higher taxes. Many of the tax changes we propose are intended to encourage behaviour change rather than to increase revenue (if the tax succeeds in its aim, it will not raise significant funds). We want an honest conversation about the aims of the tax system, rather than a panicked raid to balance the books.  

Such honesty and transparency seem unlikely in today’s poisonous political climate, but it would be a shame if tax reform ignored the need for a system that nudges behaviour in the direction of “warmer homes, fewer traffic jams, less waste, healthier lifestyles and cleaner air”.    

Here are a few tax changes the chancellor might consider. All should be subject to debate in the run up to the budget. Some will raise revenue, others will reduce it. There are plenty of other suggestions in our reports, many summarised in Securing our future, the programme for government we published shortly before the election.   

Fuel duty will be in the spotlight and raising it will be catnip to the climate change deniers in Reform UK and the right wing media. But freezing it has cost a whopping £130 billion since 2010. Petrol prices are at their lowest since Russia invaded Ukraine and, as The Guardian’s Larry Elliott points out, the freeze benefits better off motorists most, while those who rely on public transport have seen fares rise disproportionately. That is not fair. Politicians hate to appear anti-motorist but motorists too are suffering from years of underinvestment in the public realm (an estimated £17 billion is needed to fix potholes in England and Wales). Even the biggest petrolhead should see the case for raising fuel duty, at least in line with inflation.  

As the economy decarbonises, an irreversible process, some tax revenues will fall. Whether or not fuel duty is raised in the budget, the £24 billion a year it raises will inevitably decline as people move to electric vehicles. The government should establish an independent commission, ideally with cross party support, to design an equitable road pricing system to make up the shortfall.  

Taxing private jets properly would be popular
No one should want to stop families flying off on holiday, but only half of the British population fly every year and it is estimated that 70 per cent of flights are taken by only 15 per cent of the population. Aviation risks busting climate budgets and there is a good case for taxing it properly. A kerosene tax would help address aviation’s unfair tax advantage and would hit long haul flights most heavily. The government should also tax private jets properly (a popular policy) and review the feasibility of a frequent flier levy to see how easy it would be to administer.  

VAT is, in Tim Leunig’s words, “a complex, cost-creating nightmare”. . This goes well beyond environmental considerations but building renovations should be VAT free – otherwise there is an incentive to knock down buildings and rebuild with zero VAT – and VAT on repair services should be removed as part of the circular economy strategy. We have fallen behind EU countries in this respect. 

Unhealthy food now accounts for more than half the average British diet. Following the success of the sugary drinks levy, introduced by George Osborne, the government should introduce a tax on high fat, salt and sugar foods. This will help nudge the food system in a healthier direction, improving people’s life chances and saving the NHS vast sums of money. It will also have environmental benefits as plant-based foods tend to have a much lower carbon footprint.  

Budget day is always a moment of political theatre and chancellors love to spring surprises. But to what end? As many others have said, the government has failed to tell a clear, compelling story about what it is trying to achieve and the sort of country it wants to build. The budget is the chance for a reset.  

I do not know if Rachel Reeves still aspires to be “Britain’s first green chancellor”. Her enthusiasm for new roads and runways, and for bashing bats, newts and snails, certainly calls that into question. But she still regards net zero as the “economic opportunity of the twenty first century” (she is right) and the government remains strongly committed to it as a means of boosting the economy and improving lives, as well as averting catastrophic climate change.  

Not only does our tax system sometimes undermine climate policy, it also does too little to ensure a fair transition (Chris Stark, when he was chief executive of the Climate Change Committee, spoke about this at the launch event for our tax road map). With parties of the right gunning for net zero, it is imperative that the tax system not only supports the transition, but does so in a way that bakes in fairness and maximises the likelihood of public support.