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What Labour Should Do Next

New Ground 63
Summer 2002

Despite what the free marketeers say, economic activity in human society has always been constructed and shaped by punishing some activities and rewarding others. It doesn’t just happen. Labour has started to use taxes to reward businesses that cut pollution, but has been wary of taxing individuals in the same way. Chris Hewett explains how tax reform can promote a liveable society – which means sustainability and social inclusion, not just raising fuel costs. But if Labour is to promote sustainable development, it needs a strategy to sell the idea to its own departments.

Sustainability means changing the economy, but also changing ourselves. Whilst Chancellor Gordon Brown has embraced the use of green taxes to start shaping business behaviour, with the Climate Change Levy and Landfill Tax, the government is far more cautious when it comes to taxing individual pollution.

Are green taxes a legitimate, or politically feasible, tool to use to change people’s consumption patterns? The history of trying to tax people’s consumption of natural resources is not promising. The Tories’ introduction of VAT on fuel was a political own goal that Labour exploited to the full in 1993. Labour’s road fuel duty escalator became the lightning rod for protest by farmers and hauliers in 2000, practically bringing the country to a standstill. Any similar policies are likely to attract vitriol from the press and short shrift from the middle ground of British politics. But the same used to be said of raising taxes to pay for the NHS.

As the political debate on tax and spend is starting to change, we should also re-examine the case for green taxes which directly affect individuals. For SERA, this case must revolve around three questions. Will green taxes actually change people’s behaviour? Would the poor be affected disproportionately? And can their political unpopularity really be turned around?

Before asking these questions, let us be clear about the measures we are considering. The most pressing environmental problems that will require some change in individual behaviour are climate change, transport and waste. The box, left, gives details of measures that should be considered, but essentially we are talking about taxing energy, motoring and aviation and charging for the waste we dispose of.

Green taxes are long-term instruments and we must not expect immediate results. However, evidence is growing of their environmental effectiveness. Many European countries have introduced energy taxes for domestic users and a few have experimented with variable waste charging. The European Environment Agency and the OECD have both produced recent reports providing support for green taxes, after evidence they do promote environmental improvements.

On transport taxation, congestion charging has been in operation in Singapore for decades and has clearly reduced traffic in comparison to that of similar cities in the region. To show that fuel taxes cut petrol use, one only has to look at the type of cars that Europeans and Japanese buy, and compare them with US motorists’ choices. In Europe and Japan, fuel costs are far higher than they are in the gas-guzzler culture of the US, where petrol is cheaper than water.

If green taxes are not designed to take account of the concerns of vulnerable groups, like VAT on fuel, then it is quite likely that they will be regressive, so that poorer people end up paying a disproportionate amount of these taxes. But good tax design can avoid these problems.

Britain does have a serious problem with fuel poverty, and it would be wrong to introduce an energy tax that only achieved emissions reductions by forcing the old and the sick to go without adequate heating. For that reason, the time is still not right to bring in a flat-rate domestic energy tax. More investment must be made in improving insulation for the vulnerable before such a step can be made. Partly because of a SERA campaign, the government has a strategy to end fuel poverty for the vulnerable by 2010. But even before that has been achieved, energy taxes could be designed that give allowances for vulnerable users, encourage renewable electricity contracts and earmark revenues for investment in insulation. The aim should be to tax the energy profligate to help the fuel poor.

Much has been said about the dependency of rural dwellers on their cars for access to essential services. Of course this is true, but a progressive government should only be concerned with compensating the vulnerable, not those who choose to move to rural areas to escape polluted congested cities, only to drive into them every day using cheap fuel. The rural poor do need a car, but statistics show they don’t travel large distances, so the fairest and greenest way to tax motoring is reduced tax on vehicle ownership, particularly for small, efficient cars, and high tax on fuel use. And using some of the revenues to subsidise public transport, particularly buses, makes the system even better for people on low incomes, many of whom don’t have access to a car at all.

No tax is ever popular, but if the government is to take sustainable development seriously, then it has to take the lead in the public debate over the costs of our collective consumption and waste. As a rule, green tax changes should be neutral to the overall tax burden, so increases in fuel duty should be matched by cuts in other taxes, or by spending the money on a related public service such as public transport.The 2002 budget started a more honest debate on taxing and spending. It would be a missed opportunity if green taxes were not also part of this debate, acknowledging that government does have a role helping us to change our behaviour to deliver a sustainable Britain.

Chris Hewett is a member of the SERA Executive Committee, writing in a personal capacity.