Developing and delivering Green Fiscal Reform

Funded by: Esmée Fairbairn Foundation and Ashden Trust

Duration:

May 2010 to May 2010

Research project leader(s) at PSI


Ben Shaw

Background, summary and aims

In October 2009, the final report of the Green Fiscal Commission was published – The Case for Green Fiscal Reform. The headline message from the Commission’s work was that green fiscal reform is a crucial policy to get the UK on a low-carbon trajectory, helping to develop the new industries that will both keep the UK on this trajectory and provide competitive advantage for the UK in the future. Green fiscal reform would also contribute to restoring UK fiscal stability after the recession. Green fiscal reform is therefore key to future environmental sustainability and low-carbon prosperity. Full details of the Commission’s work and findings are available from www.greenfiscalcommission.org.uk.

Policy Studies Institute provided the Secretariat for the Green Fiscal Commission and is now conducting follow-up work in partnership with Green Alliance, the influential environmental think tank, to research, develop and communicate specific packages of green fiscal reform consistent with the Commission’s findings that could be implemented in the short term.

The first area that has been examined is aviation taxation. Aviation as a sector is currently under-taxed, both in comparison to the amount that other sectors contribute to public finances and also given its large and growing environmental impacts. The new coalition government has indicated its desire to introduce an aviation tax based on a per-plane duty. At a time when the two central public policy challenges to be addressed are the state of the public finances and the need to take firm action to meet our climate change targets, changing the basis of aviation taxation could result in greater revenues for government and a clearer environmental signal to aviation operators and passengers.

The briefing ‘A new basis for aviation taxation: A briefing on the introduction of an aviation tax based on a per-plane duty’ was published in June 2010 and gives details of our findings in this area. Green Alliance has also published a parallel briefing, ‘Making Aviation Pay Its Way’, which argues that replacing Air Passenger Duty with a Per Plane Duty would incentivise airlines to increase plane occupancy and reduce the overall number of flights.

Fuel duty

The second area this project has looked at is fuel duty and the design of a fuel-price stabiliser with our analysis and findings being published in February 2011 in a research briefing, Road transport fuel prices, demand and tax revenues: impact of fuel duty escalator and price stabiliser. (see link below)

This research briefing aims to provide some objective analysis to inform the current heated debate on fuel prices and fuel duty. It looks at the trends in crude oil and road-fuel prices and demand over the past 20 years in the UK and the revenues generated from fuel duty. It also considers the design, practical implementation and impact of a fuel price stabiliser.

The retail price of motor fuels has risen steadily over the past 20 years. During the 1990s, the rise in the price was driven by increases in fuel duty. Over the past 10 years, the rise has been driven by the increases in the price of crude oil.

Fuel duty raises significant revenues for the exchequer: in 2009-10, fuel duty (and the associated VAT) amounted to £29 billion, around six per cent of total revenue. These revenues allow other taxes to be lower than they would otherwise need to be were fuel duty lower. Fuel duty also results in reduced fuel demand and hence lower carbon dioxide emissions from the transport sector.

There is a clear upward trend in the underlying price of crude oil – with a fourfold increase over the past 10 years. This trend has remained stable over time and there is no reason to expect that it will not continue in the medium term (i.e. over the next five years). However, there is considerable volatility around the long-term trend price, with deviations up to 60 per cent in either direction.