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Environmental taxes

What you need to know

A levy that puts protecting the planet above raising revenue – that’s the premise behind environmental taxes.

Different countries have made their own net zero pledges and have their own plans for how to get there. The UK was the first to enshrine its carbon neutrality ambition in law in 2019 and the government’s goal – cutting emissions by 78 percent by 2035 and net zero by 2050 – remains the world’s most ambitious climate change target.

Green taxes are explicitly linked to, and structured around, that target and encourage both consumers and corporates to make more sustainable choices. Charges like the Climate Change Levy, Landfill Tax and the new Plastic Packaging Tax are all examples.

Alongside these, there are other taxes like Vehicle Excise, Fuel and Air passenger Duty that are in place, first and foremost, to raise revenue. But these are also encouraging greener thinking.

Money collected from environmental taxes goes into the country’s overall budget as it is not directly earmarked for funding the UK’s climate goals. However, if we are to realise our ambitions, more government incentives will be needed. This will call for careful balancing given the need to keep household costs down – it’s a difficult time to ask people to pay more, even if it is to fight climate change.

Five things you need to know about
environmental taxes

You are paying green taxes without realising it

Fuel Duty; the green levy on your electricity bill; that rise in council tax to reflect the cost of recycling plastic – environmental taxes are everywhere. And with the window of opportunity to secure a liveable future rapidly closing, you might expect more. But pressures on affordable living have led the government to reconsider some green levies, like the one on energy bills, while in March Fuel Duty was reduced by 5p for 12 months.

Fuel Duty will be phased out…

This isn’t a new concept. Introduced in the early 1900s, Fuel Duty has been a big money-raiser for the public purse, bringing in around £28 billion a year. But, with sales of new petrol and diesel vehicles banned from 2030 and more people going electric, the Treasury needs to come up with an alternative, and fast. Road pricing – a fee that works on a ‘per use’ basis like London’s Congestion Charge – has been widely suggested and supported by the public.

...but new green taxes are being introduced

While the hike in living costs has sparked debate around existing green levies, it hasn’t halted the roll-out of new ones. Announced at the Budget 2018, the Plastic Packaging Tax entered into force this April, to encourage recycling and limit the number of single-use plastics. However, the exchequer impact predicts only £235m revenue in the first two years of the tax with a drop to £210m by 2025/26, as this is a behavioural change type of policy rather than a revenue raising exercise. There’s even been talk of a so-called ‘meat tax’ in an effort to cut the carbon emissions produced by mass farming, but this has been discarded by the government in the latest Food Strategy.

More green incentives are needed – but it’s a balancing act

If environmental taxes are the stick, green incentives are the carrot that’s needed to drive behavioural change, like the switch to electric vehicles. Industry figures have called for the government to introduce more incentives, particularly for small businesses that meet net zero targets and private investors who fund the development of energy efficient technology. The government’s challenge? Striking a balance between funding these measures, easing people’s financial burden and keeping to its own budget.

Success will require an international effort

According to The World Bank, around 65 countries have put a price on carbon, so those emitting it have to pay for it. This acts as a deterrent to prolific greenhouse gas producers and, by giving carbon a monetary value, there’s a financial incentive for businesses to protect the environment.

But the current model isn’t perfect. Polluting firms can outsource their carbon emissions to countries that don’t participate in the carbon market. And not all countries are involved; it’s one of the reasons why imported goods are able to undercut those produced in the UK.

A solution is in the pipeline. The UK government will consult later this year on whether we should adopt a carbon border adjustment mechanism, like the one planned by the European Union to start in 2023. An international effort with the other G20 nations would see all imports to the UK taxed according to how much carbon was involved in their production. It might mean an end to the cheap import – but the planet would be a lot better off.

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