Beyond Stern: the environmental challenge for the comprehensive spending review

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beyond Stern: the environmental challenge for the comprehensive spending review

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beyond Stern: the environmental challenge for the comprehensive spending review

by Hannah Hislop

Published by Green Alliance, November 2006 Artwork and print by Seacourt Printed on Revive Uncoated 100 per cent post-consumer waste ISBN 1-905869-00-2 and 9781-905869-00-8 Š Copyright Green Alliance 2006

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Green Alliance. Within the UK, exceptions are allowed in respect of any fair dealing for the purposes of private research or study, or criticism or review, as permitted under the Copyright, Design and Patents Act, 1988, or in the case of reprographic reproduction in accordance with the terms of the licences issued by the Copyright Licensing Agency.

This report is sold subject to condition that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than in which it was published and without a similar condition including the condition being imposed on a subsequent purchaser.

Green Alliance Green Alliance is an independent charity with a central role in the UK environment movement. We work closely with decision-makers in government and business, and with other environment groups, to make environmental solutions a priority in British politics.

Green Alliance is a registered charity number 1045395 Company limited by guarantee, registered number 3037633

Acknowledgements Many thanks to the following people, who have helped considerably with this report: Clive Bates, Rob Cunningham, Ian Dickie, Stephen Hale, Julian Harlow, Julie Hill, Paul Hinds, Alistair Keddie, Jacob Hayler, Russell Marsh and Guy Thompson. Thanks in particular to Derek Smith who did much of the original analysis and Rebekah Philips who wrote the section on transport. We are also very grateful to the East of England Development Agency, the Environmental Services Training and Education Trust and RSPB for their support of this work.

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Contents foreword

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1. executive summary

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2. introduction

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3. climate change and natural resources: getting the framework right

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4. developing an effective policy response

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5. recommendations

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energy

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transport

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waste

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water

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biodiversity

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6. conclusions

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The recommendations presented in this report are put forward by Green Alliance and do not necessarily represent the position of funders, project partners or steering group members.

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beyond Stern: the environmental challenge for the comprehensive spending review Foreword by Stephen Hale, director of Green Alliance The Treasury has long been first among equals, the most powerful institution in Whitehall. Since 1997 it has become even more so, as Gordon Brown has extended the reach and influence of the Treasury to new levels across government. His uniquely powerful position within the Labour Party before and since 1997 is the primary cause of that. But it has also been made possible by new mechanisms that bind other departments to the Treasury’s will. The spending review process has been the most important such mechanism.

But the Treasury’s power has too rarely been used to further environmental objectives. Its tremendous drive and intellect has been used more negatively than positively, finding fault with initiatives born elsewhere in Whitehall rather than developing home grown solutions. The chancellor has focused primarily on economic and social justice issues, and devoted almost all of his power, energy and resources to further those ends at home and abroad.

The climate change levy remains the single totemic environmental policy with which the chancellor is personally associated. There are of course many others for which he has been responsible. But they have not been driven with the ambition or urgency that that they deserved, and important environmental connections to other agendas have too often been neglected.

“the review can and should be the springboard for a step change in the Treasury’s commitment and action on the environment”

But there have been clear indications of his growing interest since the runup to the Gleneagles Summit in July 2005, in part driven by a recognition of the connections between poverty and climate change that were the focus of that meeting. The chancellor addressed energy and environment ministers in the run-up to Gleneagles. He continues to work hard to persuade the World Bank and others to meet the commitments made there. Crucially, he chose as one of five crosscutting themes for the 2007 comprehensive spending review a theme encompassing both natural resources and climate change.

But most importantly, he initiated and launched the Stern review of the economics of climate change. The review provides a compelling platform for a shift in attitudes to climate change in the UK and internationally. The chancellor’s speech at the launch was the most passionate he has made on the issue, and contained some important commitments – in particular to emissions reductions targets for the EU emissions trading scheme in 2020 and 2050. He used it to explicitly commit to make ‘environmental care’ a third over-riding objective, alongside his historic passions of employment and growth.

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So Green Alliance and its partners believe that the review can and should be the springboard for a step change in the Treasury’s commitment and action on the environment. We offer in this report an intellectual approach that we believe is compelling, and prescriptions to follow it in relation to taxes, charges and spending.

The brightest minds in Treasury may develop something better. But above all they must respond positively. For too long the powerful connections between the environmental agenda and other causes have been ignored or downgraded. It is time for that to change.

This approach does pose real challenges to current Treasury thinking. A failure to tackle climate change will have devastating economic and social consequences, as the chancellor and the Stern Review have acknowledged.

So action is rational and cost-effective. But it will require significant changes in taxation, additional spending, and changes to the regulatory framework. A narrow productivity and efficiency agenda, and an emphasis on deregulation, cannot deliver. A new approach is needed. But it need not breach the tight spending constraints of the round. We offer a menu of both revenue opportunities and spending pressures.

The 2007 spending review has consistently been billed as the most thorough and far ranging of the reviews held so far. We hope that it meets those expectations, and will presage a step change in the focus and policy commitment of the Treasury, in the 2007 budget and through the remainder of this parliament.

The chancellor may soon be changing jobs of course. But irrespective of where he works, he is certain to be the driving force behind this government’s approach to environmental issues for the remainder of Labour’s third term. David Cameron will no doubt make climate change and the environment an important battleground at the next election. Labour will need a record to be proud of. There is much to do. Work must start now.

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1. executive summary The comprehensive spending review (CSR) 2007 is a pivotal event in this parliament. It will make spending decisions for the next three years, and, by reference to the key challenges facing Britain, set the direction for a Labour government for ten years or more.

We welcome the fact that climate change and the environment have been recognised as one of the five critical challenges facing Britain. We believe that the review should be the springboard for a major shift in the Treasury’s approach to policy-making on the environment.

This report suggests a framework for recognising the value of the environment and enshrining its protection in the structure of the UK economy, based on the concept of natural capital. The CSR process is an opportunity, despite the tight fiscal context, to use a new intellectual framework to deliver both environmental and economic objectives through a smart mixture of revenue-raising and spending. The report puts forward proposals for doing this in five key areas: energy, transport, waste, water and biodiversity.

Environmental limits should form the heart of this new approach. The government’s 2005 sustainable development strategy puts an explicit emphasis on environmental limits, beyond which change accelerates and degradation is irreversible, such as the collapse of fish stocks or a climatic tipping point. Many trends are still heading in the wrong direction. This is demonstrated by a number of authoritative international reports such as the Millennium Ecosystem Assessment, the OECD State of the Environment reports, and regional and local assessments.

An approach centered on these limits is urgently needed. Despite some welcome achievements, the Treasury has been neither sufficiently bold nor systematic in confronting environmental challenges. The CSR is an opportunity to demonstrate that the government’s approach is strategic and comprehensive, and to challenge opposition parties by presenting a package of ambitious policies that would deliver real improvements in environmental quality.

The policy response The government has committed itself to a zero-based review of policy and spending. Government spending on the environment is inadequate, and the proportion of government revenue from environmental taxation has been declining since 1999. We believe the government should be guided by five principles: adding resource productivity to the Treasury’s view of productivity; applying the ‘degrader’ pays principle consistently; using taxes 5

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alongside information and advice to incentivise public behaviour change; spending to provide valued public goods and to address market failures for low carbon technologies; and developing smart regulation that raises standards and creates new markets for environmental goods and services.

Government can intervene through economic instruments such as taxation and cap and trade systems, spending, regulation and planning and softer measures such as communications initiatives that assist with a wider behaviour change approach. All should be backed by clear objectives for government departments and the Treasury. We see a compelling case for further action on all fronts. The following list of measures is not exhaustive.

But it does embody, for us, a step change in the Treasury’s contribution to environmental goals that would be consistent with the urgency and scale of the fifth challenge for the comprehensive spending review.

Our recommendations spending: • use all the money from the auctioning of permits under the EU Emissions Trading Scheme to support the development of low-carbon technologies and hasten their penetration of the mass market; • lead a dramatic increase in European funding to kick-start a global shift to low carbon technologies, and dedicating funds to enable developing countries to adapt to the damaging impacts of climate change; • give local authorities incentives to go beyond basic targets on waste management and financial support for them to invest in the most sustainable technologies; • transfer £300 million from agricultural production support payments to agri-environment schemes to tackle declines in biodiversity and secure landscape quality; • fund advisory and assistance programmes to persuade farmers to adopt catchment sensitive farming practices, reducing the need for expensive, energy and chemical intensive, water treatment. revenue raising: • introduce an economic incentive based on absolute demand reduction to the commercial buildings sector; • put in place a package of instruments, embodying the polluter pays principle, to tackle rising emissions from the transport sector. This should include road charging, duty increases for high carbon fuels, and escalating vehicle excise duty;

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•

•

•

increase the landfill tax escalator by £5 a year, and continue to escalate the tax past the £35/tonne target until a large-scale shift away from landfill is achieved; give power to local authorities to charge for unrecycled household waste, and to implement other fiscal incentives such as council tax rebates for energy efficiency measures; place a levy on agricultural chemicals that cause water pollution in order to raise funds that are used to help the agricultural sector mitigate its impacts on water.

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2. introduction The 2007 comprehensive spending review is being driven by five challenges identified by the Treasury as issues which Britain will need to address in order to safeguard the creation of a sound economy, with sound public finances and sustained and substantial growth in investment in public services for the decade to come.

The five challenges are: 1. a rapid increase in the old age dependency ratio as the ‘baby boom’ generation reaches retirement age; 2. the intensification of cross-border economic competition as the balance of international economic activity shifts toward rapidly growing emerging markets such as China and India; 3. an acceleration in the pace of innovation and technological diffusion and a continued increase in the knowledge-intensity of goods and services; 4. continued global uncertainty with ongoing threats of international terrorism and global conflict; and 5. increasing pressures on our natural resources and global climate from rapid economic and population growth in the developing world and sustained demand for fossil fuels in advanced economies.

As the government’s statement announcing the CSR makes clear,1 these challenges will have fundamental and far-reaching implications for public services, requiring innovative policy responses, co-ordination of activity across departmental boundaries and sustained investment in key areas. The re-examination of public spending allocations, fiscal instruments and regulation required in response to these challenges must be far-reaching.

Green Alliance and its partners believe that the CSR is an opportunity to recalibrate and modernise the Treasury’s approach to the environment.

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3. climate change and natural resources: getting the framework right We have serious environmental problems, both nationally and globally It is of course right that one of the Treasury’s five challenges focuses on the natural environment. The problems of climate change and natural resource depletion are among the starkest and most serious long-term problems that we face. Climate change has been described by the prime minister as the ‘world’s greatest environmental challenge’ and by the government’s chief scientific advisor as ‘the most severe problem we are facing today’.

“The threat to natural resources is less clearly defined - but no less real”

The Treasury’s fifth challenge suggests two principal problems: increasing pressure on natural resources and global climate change. The precise nature of the challenge presented by global climate change, albeit with continuing scientific examination, is well-known and articulated: progressive increases in global temperatures are occurring, created in part by human activity, leading to irreversible damage to the world’s natural environment. Growing fossil fuel demand, as highlighted in the challenge, is widely held to be the major factor causing global climate change.

The threat to natural resources is less clearly defined - but no less real.

Several comprehensive and authoritative assessments have been carried out which point to similar trends and indicators about the state of natural resource depletion and degradation: the UN Millennium Ecosystem Assessment found that 60 per cent of the world’s ecosystem services have been degraded, with species extinction now 100 to 1000 times the normal background rate.2 An equivalent picture is provided by more region-specific state of nature reports such as the European Environment Agency’s State of the Environment reports. The overriding message is that despite some important successes and improvements over the past thirty years,3 major challenges remain and more progress needs to be made if we are to protect, preserve and enhance the world’s natural resources.

Environmental challenges are cross-cutting, requiring a co-ordinated response The fifth challenge - ‘increasing pressures on our natural resources and global climate from rapid economic and population growth in the developing world and sustained demand for fossil fuels in advanced economies’ - suggests that economic growth in the developing world is the most important factor in creating pressure on our stock of natural capital.

This implies, by contrast, that economic growth in the developed world does not pose such a risk and is now occurring on a less resource intensive footing. Green Alliance sees this differently. While the most rapid environmental degradation is not occurring in the UK, globalisation and the 9

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decline of our manufacturing industries now mean that many environmental impacts derived from our economic needs, such as carbon dioxide emissions as well as other impacts such as logging, occur abroad. Domestic statistics do not show these global impacts of the UK’s economic growth.

Furthermore, the UK’s service economy brings its own environmental pressures through information technology, transport, retail and packaging.

We are continuing to degrade much of our natural resources: clean air, water, soil, biodiversity and landscapes.

The pressures on our natural environment are influenced by economic and social trends such as those set out in the other key challenges, each of which has significant environmental implications. The environment cannot be considered as a challenge in itself, but as a cross-cutting theme, which needs to be considered in determining the policy response to the other four challenges and the spending review as a whole.

The Treasury needs a broader framework for addressing the environmental challenge The CSR is an opportunity for the Treasury to frame a new approach to the environment: to see it as a critical base of valuable natural assets (water resources, biodiversity, clean air, soils, the carbon cycle, landscapes) that provide services that people value highly and have strong and complex preferences for.

Natural assets and the services they provide are often non-marketed, usually impossible to substitute with man-made capital and have public-goods characteristics, requiring and justifying government intervention. As the economy grows, the value placed on these services by citizens typically rises and they expect collective action to secure them. Many non-marketed services contribute to quality of life, and as such are likely to become an important underpinning of a knowledge-economy as globally mobile, highly skilled workers seek more than high pay. If the Treasury’s role is to maximise long-term ‘utility’ (rather than the subset of it counted in GDP) then it must develop a stronger policy framework for the management of national and global natural assets and the value that flows from them.

There is a distinction to be made between stocks of goods flowing from natural capital that are finite, and those that are potentially sustainable.

Potentially sustainable stocks of natural capital, such as water, can be degraded through its exploitation (over-abstraction), or to other factors (diffuse pollution from agriculture). Such stocks can also suffer catastrophic collapse, such as fisheries. If the natural capital that generates these stocks is 10

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sustained, for example by protecting watersheds and aquifers, then stock can recover and potentially increase. Finite global stocks of natural capital such as oil, natural gas and minerals are being depleted on an increasing scale.

Similarly, human activities can degrade the services flowing from natural capital. These services have different characteristics: they can be regulating, such as the climatic system (temperature, precipitation, carbon storage); cultural, providing a range of market (recreation, tourism) and non-market (aesthetic value, well-being) services; and supporting, essential for all other stocks and services (soil formation, photosynthesis, nutrient cycling).4 Like stocks, services can recover from human degradation - but they can also be pushed beyond recovery, hence the recent scientific warnings over a climatic tipping point.

Viewing natural systems as capital goes beyond conventional economic analysis in which natural resources, or more precisely, land, is typically viewed as one factor of production. The natural capital framework recognises the capacity of stocks and services to be improved or degraded by the actions of man over time: their productive capacity is not static or fixed by nature alone. But there is scientific consensus that current levels of exploitation and degradation of natural capital will have a major impact on our future capacity to provide social, manufactured and infrastructural capital. Growing human populations, and increasing demand of those populations, have increased our use of provisioning services of food, fresh water, fibre, oil, coal and natural gas. This has brought a higher standard of living to many, but at the expense of regulating, cultural and supporting services such as the purification of air and water, protection from disasters (for example the loss of mangrove swamps and inter-tidal salt marsh that mitigate against storm waters) and productive soils.

“the broader issue for the CSR is the development and application of the economics of natural capital�

The flow of benefits from natural capital is limited by sustainability criteria: maximum water abstraction rates, carbon sink capacity, and sustainable fish catch. To benefit from this capital without irretrievably breaching environmental limits requires a growth in resource productivity: through energy and water efficiency, resource reuse and recycling, a harnessing of renewable sources of energy, and substantial changes in physical infrastructure, awareness and behaviour. Such resource efficiency must lead to absolute reductions in demand for both primary resources and ecosystem services.

Natural capital, and the related concept of ecosystem services, is a useful approach because it puts an explicit emphasis on environmental limits and the diverse benefits humans derive from the environment. We are encouraged by the Treasury’s interest in it. It does, however, come with some caveats, such as the importance of keeping the approach broad and not 11

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narrowing it down to a focus on physical benefits and neglecting the social and cultural services provided by the natural environment. It also does not fully answer the question of who should pay for restoring ecosystems that have been degraded in the past. We believe that the broader issue for the CSR is the development and application of the economics of natural capital.

Drivers of natural capital depletion and degradation Tackling natural capital depletion requires an understanding of what is driving resource degradation. Much work has been done on the key drivers, both in terms of international and national trends. In the UK, Natural England identifies the following as the most significant drivers: • • • •

• •

climate change, which is fast becoming one of the major drivers of change and poses the biggest long-term risk to the natural environment; the intensification of agricultural practices; development pressures, particularly in the south east, that are putting water resources under strain and sealing soils; transport, both through carbon dioxide emissions and other atmospheric pollutants and through infrastructure causing further habitat loss and fragmenting remaining ecosystems; sea level rise and inappropriate coastal development, leading to a ‘squeeze’ on coastal habitats and their wildlife; over-exploitation of key resource stocks in the marine environment, primarily through over-fishing, by-catch and the continued use of destructive fishing techniques.

We have taken significant steps to reducing pollution caused by the byproducts of economic activity, such as point source discharges to water.

However, where the environmental impact is an inherent part of economic activity, such as waste or energy and water use, it has been more difficult to achieve environmental improvements in the context of economic growth, and gains in efficiency are being outstripped by growth in overall demand.

Furthermore, there is nothing inevitable about decoupling in terms of a stage in a country’s development. Resource productivity has to be positively engineered by policy mechanisms and incentive structures, as the following section sets out.

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4. developing an effective policy response As is evident from this brief discussion of the fifth challenge, natural resource depletion creates moral, practical and political challenges for governments worldwide. Framing a policy response requires the right mix of spending, taxes and charges, and regulation; and co-ordinated responses at domestic and international level. The right policies will achieve environmental protection and improvement and secure economic and social benefits: the CSR, along with the budget, offers the Treasury an excellent opportunity to implement them.

Five guidelines for action We propose five guidelines for action, to inform debate on the CSR, both inside the Treasury as the CSR process plays out, and outside in the national debate promised by the chancellor. These apply in equal measure to future budgets.

1. Add resource productivity to the Treasury’s view of productivity The growth of the global economy is such that the stock of natural resources we rely upon is becoming scarcer, and the balance of our natural systems more precarious. As a result, the UK must make the transition to a resource efficient economy, decoupling economic growth from environmental degradation and resource use. However, we also need to recognise that resource efficiency will only get us part of the way. Given the scale of the challenge, resource efficiency must lead to absolute reductions in demand for primary resources and ecosystem services. This will require a transformation in attitudes and behaviour as well as the physical infrastructure of our society.5 2. Follow the ‘degrader pays’ principle The government’s role with regards to taxation is threefold: to gather revenue to fund public spending, to internalise externalities to create efficient prices and to create an incentive structure that achieves the government’s environmental policy objectives. These approaches should become part of the government’s productivity agenda, with the aim of developing the productivity of natural capital, whilst reducing the tax burden on employment and investment.

The market puts price signals on provisioning services flowing from natural capital such as food and fuel, and the polluter pays for cleaning up point source discharges. However, the government must act to correct systemic market failure when it comes to regulating services (climate regulation, air quality maintenance, water regulation) and supporting services (nutrient cycling, soil formation), ensuring that the degrader of natural capital pays.

We believe that the scale of environmental taxation should reflect the scale of the challenge facing us.

“the scale of environmental taxation should reflect the scale of the challenge facing us”

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3. Use taxes alongside information and advice to change public behaviour Tax strategy should be about more than just balancing the books and ‘rational economic man’. There is a powerful role for using taxes as a tool to change behaviour. Linking communications initiatives to fiscal measures can give people and households incentives to think through their impacts and take action. As well as providing more ‘carrots’, the Treasury need to communicate much more clearly their links to the ‘sticks’, to demonstrate both the undesirability of certain choices and the existence of alternatives.

When a tax starts to bite, such as the fuel duty did in 2000, good communication is crucial to overcome public perceptions that the measure is solely about revenue raising.

4. Spend to transform outcomes for the environment The government should as far as possible ensure that polluters or beneficiaries pay directly for maintaining natural assets or environmental services. This ensures the call on general taxation is kept to a minimum and that price signals are appropriately aligned. However, the government should have a clear understanding of where public spending from general taxation is justified. Notably, this is where the polluters or beneficiaries are not easily identified or charged, in addressing market failure in R&D for low carbon technologies, and in securing landscape and biodiversity. Consideration should also be given to the long-term impact of spending decisions, in particular to avoiding ‘lock-in’ to unsustainable infrastructure and its affect on behaviour.

5. Develop smart regulation The concept of regulation deserves rehabilitation. It is a reflection of the value society places on non-market goods and services and is a fundamental part of the policy response: to ensure a level playing field for business, to phase out the most damaging products and activities, to drive up standards by promoting innovation, and to avoid information and transaction costs.

Standards for appliances, vehicles and buildings are obvious places where regulation can overcome numerous and well-documented market failures.

Furthermore, environmental regulation, together with spending and economic instruments, can actually create markets for environmental goods and services. The clarity with which the market is established will determine investors’ willingness to commit long-term investment and R&D. We call for regulation to be ambitious, forward-looking and consistent, and created in a way that allows business to innovate. It must not be prescriptive and lock industry into particular technologies or responses, but must set clear and demanding regulatory standards and allow business the freedom to go beyond them, and the capacity to adapt to requirements at least cost. We 14

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urge the Treasury not to view businesses that consistently cry wolf over costs as representative of the whole business community, and to remember that business consistently overstate the costs (unintentionally or otherwise) of adapting to environmental policies.

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5. recommendations “the Stern review is a challenge not just to the international community, but also to the UK government that commissioned it”

a) energy Britain’s energy infrastructure urgently needs a wave of new investment. The existing ageing plant is representative of an era of low energy prices, little or no carbon externality, and limited environmental constraints, with end-ofpipe measures dominating the environmental response. The challenge over the coming decade is to rapidly overhaul this infrastructure, both on the supply and the demand side, to reflect the new conditions and priorities of the future.

The Stern review has powerfully reinforced the urgency of this challenge.

His conclusions bear repetition. He found that a failure to tackle climate change will have devastating effects on our economies and society, with unabated climate change reducing global GDP by perhaps five per cent a year. He confirms that the costs of averting these impacts are far lower, but require decisive action now.

The review made three broad policy recommendations: the introduction of a global carbon trading regime, technology policy and action to tackle other market failures - removing the barriers to energy efficiency and personal action. While internationally focused, they build on the approach outlined in the UK energy review.

But the Stern review is a challenge not just to the international community, but also to the UK government that commissioned it. It was encouraging to hear the chancellor’s declaration at the launch that Europe should set a new emissions reduction target of 30 per cent by 2020 and at least 60 per cent by 2050. But the Stern review also has implications for both spending and taxation that the government must address. This section sets out our view of the policies needed to deliver demand-side reductions in carbon dioxide emissions at UK level and to enable the UK to play the leadership role internationally to which the chancellor committed. Our recommendations below are focused on: • • • •

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establishing a reliable price for carbon; overcoming market failures; supporting innovation; bringing new technologies and processes to the market.

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Spending More investment and support is needed to reduce emissions from existing building stock Six months after it was established, the government’s fund to support household microgeneration has run out after paying out or allocating £3.6 million. Grants at this limited level are unlikely to deliver the cost reductions needed to stimulate much more widespread uptake of microgeneration technologies. Microgeneration has huge potential for contributing to energy supply and carbon reduction. For this potential to be fulfilled, the government needs to give serious financial support to these technologies to give them the boost they need in a marketplace used to dealing with centralised, remote and capital intensive power plants. Furthermore, successful penetration of the mass market will need further government support in the form of supportive policy measures: simplifying standards for micro-generators to connect to the distribution network and to access Renewable Obligation Certificates, and ensuring a fair price for suppliers selling surplus energy back to the grid.

The UK also needs to urgently improve its poor record on energy efficiency. A review of our European neighbours’ expenditure on energy efficiency demonstrates the disparity in spending on similar measures in the UK. In Germany each year, approximately £1.1 billion in grants is available to householders to save energy in the home. In France, householders have tax incentives to spend money on energy-saving devices and services. In contrast, the UK’s energy efficiency policies are limited in scope, resources and ambition.

We urge the government to increase both investment and support for energy efficiency and microgeneration.

The government has binding legal obligations to eradicate fuel poverty amongst the most vulnerable households by 2010 and by all households by 2016. The CSR must drive make significant progress on the both targets. The Fuel Poverty Advisory Group has estimated that it will be necessary to increase resources by at least 25-30 per cent over the period 2006-2010, as well as bringing in other measures. There is a strong case for a measure that is more focused on eliminating fuel poverty and delivering physical measures that have the most beneficial impact on social welfare, while the Energy Efficiency Commitment (EEC) focuses specifically on energy efficiency to achieve carbon dioxide reductions. Until the UK succeeds in tackling fuel poverty there will continue to be a distorting effect on public policy, whereby tax on the residential sector is avoided while energy use in the productive sector is taxed.

We recommend that the government increase financial support to efforts to reduce fuel poverty by at least 30 per cent.

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Key to success is ensuring that national policy is implemented effectively at a local level: national initiatives must have traction on the ground. For example, Defra-funded pilots of three Energy Saving Trust sustainable energy centres have proved successful in delivering cost effective emissions savings but their futures are uncertain. We recommend that funding for such effective initiatives is sustained over the long term so that national policies achieve their potential and actually deliver the carbon savings intended.

Low-carbon technologies need more support in the UK market The money raised by auctioning seven per cent of the UK’s allowances under the EU Emissions Trading Scheme (ETS) is a big opportunity to add significant value to the development of low carbon technologies. We urge the Treasury to ring-fence all of this money and dedicate it to developing low carbon technologies, to increase the impact of the ETS on carbon emissions.

Government procurement is valuable because it can give critical mass to fledgling technologies which otherwise cannot achieve market breakthrough without the support of a single large buyer. It also sends out an important leadership signal to suppliers and other purchasers. We urge the government to become an exemplar purchaser in every aspect of its operations.

Both mitigation and adaptation spending must be increased internationally The Stern review emphasised the importance of early expenditure to drive the transition required to a low carbon economy. This expenditure will come from both public and private sources. Government tax and regulation policy is critical to incentivise that private investment. But increased government expenditure is also vital. Governments need to back up their language on urgency in spending decisions.

No one country can provide this. But Europe is the critical actor in this cause. A dramatic increase in European funding is necessary to drive emissions reductions within Europe, to provide the resources needed to underpin new strategic alliances on climate and energy with the key emerging economies, and to enable developing countries to adapt to the damaging impacts of climate change.

The European budget review of 2008 provides an opportunity to make this shift. Green Alliance is the host organisation for the Green Globe Network, advising the UK government on international environmental issues. We will be publishing proposals on this in early 2007. But the spending review is an opportunity for the UK to lead by example, that could help persuade our European allies to follow our lead.

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We call on the government to lead a dramatic increase in European funding to kick-start a global shift to low carbon technologies, and dedicate funds to enable developing countries to adapt to the damaging impacts of climate change.

Fiscal instruments Build on the EU ETS Launching the Stern review, the chancellor announced proposals for new EU emissions reduction targets, expanding the scheme to cover more emissions and other greenhouse gases, and extending it across the world. We welcome these proposals. The government is right to see the trading scheme as a central plank in a future global framework to drive emissions reductions.

The government should also extend the use of auctioning, building on its welcome allocation of seven per cent allowances through auctioning, as well as pressing for limits on this to be removed and left to member state discretion. The ETS also needs tighter caps, visible over a longer horizon and allocated centrally.

Householders need financial incentives to install energy-efficiency measures Green Alliance has consistently argued for expansion of a scheme successfully pioneered by Braintree Council and British Gas, whereby households receive a rebate on their council tax in exchange for implementing energy efficient measures. It works at a local level, engaging and incentivising householders to reduce their energy use. Analysis suggests that the conversion rate for this activity is 50 per cent, which at five to ten times the usual rate for incentive schemes is almost unheard of. Pilot schemes in a further 16 local authorities show good replication of these results.

However, local authorities wanting to replicate this scheme face a long, drawn out process. For this scheme to make a real difference to carbon dioxide emissions it needs more support from central government. It also crucially needs funding to be rolled out at a national level: this could be provided through VAT charges on inefficient products, linked to a labelling scheme. Assuming a take-up rate amongst eligible households of eight per cent, this would cost the government approximately ÂŁ100 million a year, and would save 9.8 million tonnes of carbon over the lifetime of the measures.6 We recommend that council tax rebates be provided for households implementing energy saving measures.

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The Treasury could help make a further significant step forward for energy efficiency by cutting the rate of VAT charged on energy efficient products in the home from 17.5 per cent to five per cent, the same rate charged on energy consumption in the home.

The climate change levy needs reform to drive emissions reductions across more of industry Where opportunities for financial savings differ, such as business energy use, economic instruments are more effective than regulation, hence we agree with the basic rationale behind the climate change levy (CCL). However, a recent Carbon Trust report has said that the current package of climate policies is not providing sufficient incentive for change across the less energy intensive sectors where energy costs are less material and where, in particular, the CCL does little to drive change. Given the predicted rise in energy use in the business and public sectors of 20 per cent by 2020, there is clearly a need for a more suitable mechanism to halt and reverse the predicted increase in emissions from this sector than the blunt instrument that is the CCL. We support the proposals for an energy performance commitment, recently consulted on by Defra, to implement an absolute cap on emissions from this sector and bring more businesses into cap-and-trade schemes. The scheme

should include electricity-related emissions, which make up 70 per cent of the carbon dioxide emissions generated by such sectors, and should be based on an auctioning system that recycles revenues back to participating sectors.

More broadly, a mechanism to give a ‘long, loud and legal’ carbon price signal should be developed, to give businesses the confidence they need to make long-term investments. This will need to be more than the energy review’s vague statement of intent about the EU emissions trading scheme.

We believe that the climate change levy should be reformulated as a carbon tax and raised steadily towards the social cost of carbon.

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b) transport Carbon dioxide emissions from transport are rising faster than from any other sector7 and are likely to become the largest source of emissions in the UK in the near future. This is unsurprising: it is the sector where the ‘polluter pays’ principle has been applied weakly and inconsistently, together with a lack of sustained investment in environmentally-preferable forms of travel.

Transport is both the most technically difficult sector in which to reduce carbon emissions and the most politically difficult. Significant cuts in emissions require a fundamental change in behaviour and one that challenges one of the keystones of modern society: the ever-expanding sense of personal freedom and mobility that has followed the increasing affordability of both driving and flying compared to the costs of public transport.

“Carbon dioxide emissions from transport are rising faster than from any other sector”

Lack of progress in emissions reductions shows that current mechanisms are clearly failing and there seems to be little urgency at the Department for Transport to alter this, despite its joint responsibility for the PSA target on climate change. Government should establish a sector-specific target for carbon emissions from transport against which the department should be required to report annually.

The VIBAT (Visioning and Backcasting for UK Transport Policy) report, which DfT commissioned, showed how a target of a 60 per cent reduction in emissions by 2030 could be reached. We urge the government to examine this study carefully to construct an ambitious and well thought out target and package of policies. Targeted spending, taxation and smart measures should be used to curb the demand for travel, as well as the carbon intensity of journeys taken. The government needs to set out its strategy for reducing emissions from transport and all transport policies should be geared towards this. It should also develop a more robust and transparent approach to monitoring the carbon effects of its policies and proposals.

Spending We are not calling for more spending on transport, simply smarter spending.

Spending needs to be reassessed within the context of a carbon-constrained future and should be aimed to reduce dependence on cars, lorries and air and change travel behaviour to more sustainable means.

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“We are not calling for more spending on transport, simply smarter spending”

Spending on roads should be reduced According to recent government figures, one mile of a new three-lane motorway costs £28.4 million8 and over £10 billion of approved road programme schemes are in the pipeline. Increased road capacity has been shown to increase car use (and therefore emissions), increase car dependence and promote dispersal resulting in locations less capable of being reached by public transport. Spending on roads is poor value for money when compared properly to alternatives and can add to regional disparities in infrastructure. We urge the government to reduce planned spending on roads and reapportion this money to investment in public transport, walking, cycling and promotion of smart measures.

Spending on aviation growth should be reduced Predict and provide is discredited for car travel, but still seems to prevail in aviation. ‘The future of air transport’ white paper plans for a trebling of annual passengers by 2030, spending that will directly undermine the chance of hitting our carbon reduction targets. Any growth of the aviation industry should be limited to the rate at which fuel efficiency is improved, currently around one to two per cent per year. Spending on planned expansion - based on a six per cent increase in passenger numbers per year - should be reallocated to other sectors.

More investment in smarter choices The range of ‘smart choices’ measures available for transport do not require large material infrastructure projects and can deliver significant carbon and congestion reductions rapidly and cost effectively. DfT’s own ‘Making smarter choices work’ estimated that an intensive programme of these measures could cut national traffic volumes by 11 per cent. Programmes such as Individualised Travel Marketing (ITM) demonstrate value for money: for around £38 million - the cost of a third of mile of motorway - ITM could be extended to a city the size of Birmingham, and would be likely to achieve car use reduction of around 9-14 per cent.9 We urge that greater priority be given to changing travel behaviour as a means of reducing congestion and increasing network efficiency.

Support for active travel - walking and cycling Non-motorised forms of transport have suffered decades of underinvestment. Many European countries spend around £5 per head on infrastructure for these modes, whilst the spending is under £1 per capita on average in towns in the UK.10 Consistent spending means that many locations on the continent have over 20 per cent modal share for cycling, whereas in the UK it is around two per cent. For cycling to be quadrupled in the UK Sustrans et al recommend a spend of around £260 million per annum, compared to the £35 million currently spent.11 More active travel 22

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would also help with the UK’s alarming growth in obesity levels. We urge the government to increase spending on promoting walking and cycling and the infrastructure it needs commensurate with funding asked for by the various promotional bodies.

Support for measures that actively enhance social inclusion and a better local transport environment The trend for longer journeys contributes both to social exclusion and the dispersal of facilities, leading to a loss of agglomeration. Dense cities can be more easily served by public transport and reduce both the need to travel and journey lengths, making other forms of transport more attractive.

Spending should support measures that enhance clustering, quality of place and stronger land use planning to reduce the need to travel.

Current levels of spending on rail must be maintained We need an expanding railway to reduce carbon dependence, promote clustering and relieve congestion. However the current system needs to be integrated better with other forms of transport. Local transport integration should be prioritised and any decisions on the future of local rail services should be subject to thorough and transparent assessment, including the full network effect and long-term impact on carbon emissions from having communities directly connected to the rail network. Support should also be given for new high-speed rail links, both for the role they would play in achieving modal shift from rail to air, and for freeing up capacity on the network.

Support for local public transport We welcome the increase in spending on Local Travel Plans, however spending on roads will take up much of the increase. The ‘Integrated Transport Block’, which covers the more sustainable aspects of local transport, should be accorded a greater share of the funding.

The Transport Innovation Fund must fund carbon reductions in transport The Transport Innovation Fund (TIF) is set to become the single largest source of public investment in transport, forecast to grow from £290 million in 2008-09 to £2 billion by 2014-15. The fund currently lacks any environmental criteria, focusing exclusively on tackling congestion and improving productivity. We urge the government to make environmental objectives, specifically emissions reductions, the overriding criterion of this funding.

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Fiscal Instruments Air passenger duty should double Aviation is the fastest growing source of emissions in the UK, with carbon dioxide emissions doubling between 1990 and 2004.12 Emissions are set to double again, at the very least, by 2030. The scale of the increase in aviation emissions has been shown by research for Friends of the Earth carried out by the Tyndall Centre. This concluded that continuing aviation growth at its current level would take up the UK’s entire carbon budget by 2037 (assuming an aim to stabilise global carbon dioxide emissions at 450 parts per million).

The government’s preferred option to address aviation emissions, the inclusion of the sector in the EU Emissions Trading Scheme, is unlikely to happen until 2013 at the earliest and its effectiveness will depend on the detailed design of the scheme. There is a strong likelihood that industry lobbying will result in unambitious allocations.

Estimates suggest that at least 40 per cent of the recent growth in air travel has been generated by fare reductions. A doubling of air passenger duty (APD) would help to counter this trend and provide a consistent and longterm signal to passengers about the environmental damage caused by air travel. APD receipts have declined in recent years despite a large rise in the total volume of passengers: average APD receipts per passenger were only £8.86 in 2005 compared to £13.40 in 2001.13 Recent surveys suggest that the majority of the public (60 per cent) support higher taxes on aviation to reflect environmental damage, even if this means higher airfares.14 We urge the government to discourage an expanding air culture by doubling air passenger duty. We also urge the government to push for the inclusion of international aviation in international emissions inventories.

Reducing emissions must be at the core of a road user charging system Key to rising emissions from transport have been soaring traffic volumes: between 1990 and 2004 total vehicle kilometers traveled by car and taxi rose by 19 per cent whilst light van use increased by over 50 per cent and use of heavy goods vehicles (HGVs) by 18 per cent.15 Behind these figures is a large shift in the relative costs of public and private transport since 1990.

We are aware that an emphasis to shifting the existing tax regime to favour cleaner vehicles and reducing mileage will undermine one of the basic functions of taxation: to generate government revenue. The current transport tax system has been designed to produce a substantial income from internal combustion engine vehicles in an easily administered form. A major restructuring of transport taxation is required to fully address a different 24

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goal: that of stimulating improvements in environmental performance. We therefore support the long-term move to a road user charging-based system as long as reducing emissions is at the core of its design. It is essential that, prior to an introduction of such a scheme, emissions are still addressed through the existing regime.

Incentives for low emission vehicles should be increased Although average emissions of new cars in the UK have reduced by 10.7 per cent since 1997, at the current rate of improvement we are unlikely to be anywhere near the EU target of 140g/km by 200816 and our new car emissions are some 7g/km above the EU average.17 The point of purchase has a major effect on future emissions, and the government deserves praise for being the first in Europe to introduce vehicle taxes specifically based on emissions. Its boldness in company car tax reform has been rewarded with visible progress in that market, but there is an increasing split between the company car market where emissions have continued to fall and private cars where progress has stagnated.

A note of warning: reliance on increasing the carbon efficiency of car travel will not be sufficient to reduce carbon emissions from road transport in absolute terms; more must be done on reducing demand.

Vehicle excise duty (VED) should be reformed As a fixed cost of car ownership, VED does not provide motorists with any incentive to drive less, but it does encourage them to choose more fuel efficient vehicles as the tax is explicitly linked to emissions. The gap between current annual VED rates rose to £210 in 2006-07, but the new band G is ineffective; the £40 rise in VED costs less than the cost of a tank of petrol for the cars affected, and represents very little of the purchase price.18 Although the average emissions rating of new cars purchased has been steadily declining19 these changes started before the banding of VED rates in 2001, so it is hard to disentangle the contribution made by reforms to VED and changes in manufacturing standards for example.

What is clear is that the current differential is a relatively small part of the running cost of a car and has yet to offer sufficient incentive for a marked change in consumer choice. Wider VED differentials are needed. A differential between bands of £50 would be enough for 33 per cent of people about to buy a car to choose a different model. At a differential of £150, 55 per cent of people would choose a greener car.20 We recommend that existing differentials in VED be widened considerably, that the highest VED band, band G, be applied to all cars, not just new cars.

We also recommend an escalator be introduced for each of the bands D to G, increasing by 5 to 20 per cent per annum respectively.

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Car purchase taxes should be reinstated In the longer term we would like to see the reinstating of car purchase taxes, abolished in the UK in 1992, as recently introduced into the Netherlands. Cars in the Netherlands are now ranked according to seven different categories including: fuel consumption; carbon dioxide emissions and an efficiency rating that assesses them relative to vehicles of the same class.

The fuel duty escalator should be reintroduced Duties on road fuels represent the single largest green tax in the UK, and certainly the most controversial, as the protests of 2000 showed. Fuel duty represents a marginal cost, with more payable by those that drive further; its aim should be to send the correct price signal to motorists thereby providing an incentive to choose more efficient vehicles and reduce trip frequency and journey length to the socially optimum level, taking into account the external costs of motoring.

The Environmental Audit Committee (2006) has shown that between 1980 and 2004 the real cost of motoring declined by around 15 per cent, whilst household disposal incomes grew by around 95 per cent. By February 2006, real fuel duty was at its lowest since June 1997. Had the real rates of duty been maintained at their peak values since 1999, we might expect current fuel consumption to be around four to five per cent lower, and revenue to be about ÂŁ4.2 billion per year higher.

We urge the Treasury to reintroduce the fuel duty escalator and to consider the proposal to reform fuel cost to an absolute level whereby fuel duty would be used to offset significant drops in oil prices to maintain pressure on the cost of motoring.

Approved mileage rates for business travel should be reduced As the review of car ownership schemes will probably make clear, the generous threshold of 10,000 miles a year for the 40p per mile rate is a perverse incentive for the use of private cars for employer’s business. We suggest halving the threshold to 5,000 miles, which would cover the business travel needs of the great majority of workers.

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c) waste Waste represents an inefficient use of both natural and financial capital.

Natural capital, not only because of the depletion of finite resources but also because dealing with waste causes damages to other natural resources such as soil, water and air. Waste is also an inefficient use of financial capital, because most resources stay in the economy for less than six months before being discarded.

“most resources stay in the economy for less than six months before being discarded”

The government will publish a new waste strategy for England early in 2007. It should take significant steps towards decoupling waste generation from wealth, recognising that we should no longer see the ability to waste as a sign of prosperity, and that wasteful consumption risks breaching environmental limits. The UK’s approach so far has been characterised by a lack of ambition, too narrow a range of policy instruments to drive real change and a focus on achieving least-cost compliance with EU directives.

Instead, the government should be aiming not only to deliver world-class waste management, but also to change the nature of waste, by transforming the way we make and use products. At the moment, the economic framework provides incentives for inefficient resource use and cheap, disposable products. The Treasury can play a key role in leading the government in a step change from a waste to a resources focus as the waste strategy review is finalised, through the CSR and budget in 2007.

Green Alliance has studied a number of countries, states and regions that have implemented what are, by the UK’s standards, both radical and creative policy packages for waste.21 The instruments used are diverse, but have one thing in common - they employ clear and bold measures. The UK has started to act along these lines but the signals current instruments send out, to local authorities, waste companies, investors and householders, are not strong or consistent enough to change individual and corporate behaviour to the extent that is needed if we are to make real progress on the waste and resources agenda.

Regulation plays an important role alongside taxation and spending, particularly in setting ambitious targets for recycling, and in the future, setting targets for reduction of per capita residual waste generation and banning easily recyclable materials from landfill. Here, however, we set out a programme of taxation and spending that would reduce the amount of material and embodied energy reaching the lowest parts of the waste hierarchy.

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Spending The most pressing short-term issue is meeting the UK’s obligations under the landfill directive. There is going to have to be a significant increase in municipal waste management expenditure: Defra has estimated that £10 billion of capital investment is required. Assuming a constant cost of a diversion, this means that £4 billion of capital investment is required during the next four years, up to the first target date of 2010. It is clear that neither the private sector nor local authorities are on track to deliver this.

There are significant concerns amongst many local authorities about the funding gap facing them as they attempt to avoid fines under the Landfill Allowance Trading Scheme. Local authority expenditure on waste management has risen by over 80 per cent (at current prices) since 1998.

Given the assumption that recycling costs increase as cheaper options are exhausted, further and more significant expenditure by local authorities will be needed.

Local authorities need increased financial support for procuring and operating new recycling technologies, judged on both their carbon benefits and their effectiveness at reclaiming materials It is clear that funding of waste treatment and disposal is becoming one of the major financial threats to local authorities. The Local Government Association reported in June 2006 that Cheshire County Council has an ‘affordability gap’ of £480 million, and North Yorkshire’s £800 million gap cannot be contained within capping limits. Essex County Council faces an affordability gap of approximately £30 million by 2015 even with the most basic bio-treatment of residual waste. The problem is compounded by the high ratio of operating to capital costs. The funding crisis is putting pressure on council tax and threatening cuts to other services. Efficiency savings derived from better ways of working will go some way towards closing the gap but the fundamental problem remains, irrespective of funding route or treatment technology chosen. We urge the government to address the funding crisis in local authority waste management and question whether the Private Finance Initiative (PFI) is the right mechanism to fund waste management.

Local authorities need incentives to go beyond basic waste management targets At the moment measures employed by central government are punitive and do not provide incentives for local authorities to do any more than the minimum required of them - which at the moment is all they can afford.

There are also major concerns that less affluent inner city local authorities will struggle to match the recycling rates of more affluent areas due to lack of space for recycling and composting as well as greater demands on 28

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finances from other sources. Penalties for failing to reach minimum targets could therefore lead to a wealth transfer from poor to rich authorities, while still failing to stretch well-performing areas.

Extra money and support for authorities that commit to going beyond basic targets, such as helping authorities establish re-use and repair centres, is an approach that has worked successfully in the Flanders region of Belgium, which has pioneered: •

•

a strong bottom-up approach: regional waste management plans are prepared and implemented by joint working between central and regional government, and based on experience of both to ensure shared ownership; regional government subsidies for municipalities, including voluntary environmental cooperation agreements (commitment to achieve a series of environmental goals in exchange for subsidies) and subsidies for specific investments concerning prevention and separate collection of municipal solid waste, for example, help with costs of home composting schemes, subsidies for re-usable nappies and help with other recycling infrastructure.

We believe the government should consider negotiated agreements between central and local government to provide local authorities with incentives to go beyond basic waste management targets.

Public procurement must be progressive Government should use its spending power to drive market development for recycled products as part of a wider approach to incorporating sustainability considerations into public procurement. This could include initiatives such as minimum recycled content for construction materials, paper, and other goods used on the government estate. It could also include embedding waste neutral objectives into public bodies, an approach that seeks to balance recyclable materials sent out of the organisation with recycled material brought in, thereby concentrating minds on supply chains and encouraging the identification of more ‘closed loop’ systems. Putting increased resources into specialised training of purchasing professionals and their managers is a crucial part of delivering more sustainable procurement.

We recommend that the government act on all the recommendations made by the Sustainable Procurement Task Force and use its spending power to embed closed loop systems in the wider government estate.

The Business Resource Efficiency and Waste Programme (BREW) accounts for half the £100m research money available for waste, but is currently spending a large proportion of its funding on end of pipe approaches rather

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than more fundamental approaches to resource use such as product, material and supply chain innovation. The focus of public spending must be focused on stimulating transformative approaches to resource use and waste management, in ways that work throughout supply chains. This will yield significant environmental and economic benefits both for large companies and the UK’s large proportion of small and medium enterprises.

Fiscal Instruments Altering the economics of waste management is fundamental to deliver the most environmentally preferable outcomes. This section sets out a number of fiscal instruments that we believe would achieve this aim.

The landfill tax escalator should be increased Green Alliance has consistently advocated a £5 per year increase in the landfill tax escalator, to faster improve the economics of recycling. If adopted in the next budget this would mean the tax would exceed £35 per tonne the rate suggested as providing the tipping point for making landfill uneconomic by taking gate fees22 to £50-£60 per tonne - in 2009/10 instead of 2011/12. While this difference of two years may not seem like much, it is important in terms of signalling the speed with which government wants businesses to act.

However, we question whether the level of £35 is the right final level.

Assumptions about base landfill gate fees (the charge before the tax) made when the tax rate was set may no longer be valid, due to the changing economics and circumstances of the sector and the elasticity of demand for landfill. The tax is currently a cost to business, but not one high enough to stimulate the required scale of investment in new options and changed practice, due to the low capital costs of landfill and the additional risks associated with a processing facility being left dormant. A large-scale move away from landfill will only be seen when landfill stops being the cheapest waste management option, by both industry and the public sector. A recent survey of selected local authorities revealed that landfill is still generally the cheapest option, and that while other treatment options can be slightly cheaper in some areas, the value obtained from the recyclate does not compensate for the large collection costs. Similarly, solutions such as advanced energy-from-waste plants or CHP using food waste from the commercial sector, and supplying a cheaper energy source than gas or electricity, will not be realised until the landfill tax has reached a level sufficient to persuade operators to take long-term decisions to invest in such alternatives.

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Raising landfill tax is particularly important given the absence of targets or other incentives for recycling of industrial and commercial waste. An advantage industrial waste has over household is that the relationship with waste operators is more direct: companies pay for what is taken away. They just don’t currently pay enough to make waste costs a big consideration. So higher landfill tax is the main, and probably only, short-term lever on industrial and commercial waste.

We recommend that the Treasury increases the landfill tax escalator to £5/tonne and continues to escalate the tax until it starts to bite, particularly in commercial and industrial waste.

Markets for recycled materials need support to develop The economics associated with alternatives to landfill could also be radically improved by the development of robust markets for recycled products. These markets could be developed by a resources tax on virgin materials alongside requirements for minimum recycled content. These taxes could be geared to discourage materials giving rise to hazardous and difficult wastes as well as encouraging the use of recycled alternatives. Such an instrument would have to provide a clear, long-term signal to stimulate private sector investment to develop sufficient reprocessing infrastructure. To continue the progress made by the aggregates levy, we believe that it should at least keep pace with inflation; there is a case for raising it to £4/tonne to drive faster improvements in this sector. We recommend the government implements a broader resources tax on virgin materials to drive the development of robust markets for recycled products.

Incineration must not become the preferred option as the cost of landfill increases As the cost of landfill tax increases due to the landfill tax escalator, there is a danger that waste will be diverted to the next cheapest or easiest option in the waste hierarchy, which is likely to be mass-burn incineration. The size and cost of these facilities means that there is a risk of ‘lock-in’ of waste streams i.e. a prolonged need to send waste down that route and a lack of flexibility as new recycling and energy recovery options come on stream.

Although the government stresses the importance of the waste hierarchy and the desirability of prevention and recycling over incineration, there is currently no mechanism in place to ensure that local authorities follow this guidance when deciding how to achieve their targets under the Landfill Allowance Trading Scheme. We recommend that the landfill tax be broadened to cover all disposal options, including incineration.

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delivered by local authorities and business, would send a clear message to those planning incineration facilities about the need to improve recycling first. The tax might also be graduated according to the amount of energy recovery involved in thermal combustion processes (energy-from-waste). If we are not to have a tax, there must be other ways of ensuring that recycling takes precedence over incineration: for instance, by making a strategic case for setting out the relationship between recycling and energy-from-waste as a condition of PFI credits.

Local government should be enabled to charge variably for household waste We welcome the recent findings from the pilots of the household incentive schemes as an excellent first step in encouraging more sustainable behaviour.

However, continuing to reward people for behaviour we wish to see normalised is not a viable long-term strategy. Charging householders for unrecycled waste is a crucial signalling device, and enabling powers would allow local authorities to develop schemes to suit their own circumstances.

Variable charging powers are in place in all European countries that have achieved over 40 per cent recycling, which is the aspiration in Defra’s waste strategy review consultation. We recommend government create enabling powers for local authorities to introduce fiscal mechanisms.

Environmentally damaging and hard-to-recycle products should be discouraged Existing instruments such as the essential requirements of producer responsibility legislation need to be better implemented. The UK also needs to take a proactive position on the energy using products directive and the possibilities it creates for addressing the environmental impacts of products.

More targeted incentives such as a levy on particularly environmentally damaging or hard-to-recycle products should be developed, to send a signal to the market that disposable products should be avoided. The money from such a levy could be used to fund recycling or the charge could be used to persuade consumers to switch to alternative products. High on the list would be disposable, or non-recyclable products such as disposable cameras, non-refillable printer cartridges and non-rechargeable batteries, all of which have less wasteful alternatives readily available.23 We recommend that taxes be levied on environmentally damaging or hard-to-recycle products to encourage a switch to readily available alternatives.

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d) water Water is a crucial but sometimes undervalued contributor to natural capital, used both as a resource vital to life and well being but also as a sink for the disposal of pollutants. There has been massive investment in water industry infrastructure since privatisation and this has reduced gross pollution.

However more must still be done to mitigate the impact of damaging abstractions and diffuse agricultural and urban pollution.

One of the major challenges is managing rising domestic demand. Success will benefit the environment (through reducing the need for new resource development and allowing lower levels of abstraction from sensitive aquifers and rivers) and saving water customers from unnecessary bill increases.

Savings in water use of between 30-50 per cent are possible in new build compared to conventional housing through simple means. Even greater levels of water efficiency can be achieved through the use of technologies such as greywater recycling and rainwater harvesting, which have been widely adopted in many EU countries. If the new housing proposed for the sustainable community growth areas were built to even moderate water efficiency standards (25 per cent lower per household consumption than current building regulations standards) then overall demand would be reduced by 419 million litres a day. This is more than the predicted daily output from Thames Water’s proposed new Oxfordshire reservoir, which could cost more than £1 billion. Significant levels of water saving can also be achieved in existing housing stock through incentivised retrofitting campaigns.

Such action would translate into significant financial savings due to reduced need for supply side investments, and could allow new housing proposals to be water neutral, requiring no additional water resource development or abstraction.

Other sectors, especially farming and spatial planning and development, need to contribute to sustainable water management so that the burden does not fall exclusively on water companies and customers, in line with the degrader pays principle. This will need action on diffuse pollution (see proposals for input levies in section 5e), improved standards of water efficiency in housing (both new and existing stock), and action to tackle urban water drainage and flooding: Defra estimates that ÂŁ250 billion in assets, including two million homes, are at risk from flooding and coastal erosion.24

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Spending Water companies should have incentives to invest in sustainable water infrastructure We believe that there is a case for reforming the current regulatory framework to shift investment from end-of-pipe assets to dealing with problems at their source. This means reducing pesticide use, altering landuse or installing water efficient devices into homes through large-scale retrofit, rather than building energy-intensive treatment plants or large-scale supply infrastructure. Such programmes are currently not attractive to water companies or their investors under the current regulatory regimes as they do not result in tangible assets. Water companies should therefore have incentives to shift investment towards these measures. There are lots of additional public benefits to this approach, such as attractive landscapes, enhanced recreational opportunities and improvements to the condition of wildlife habitats. The government should work with Ofwat to spearhead a move towards such source controls and water efficiency measures, as part of the periodic review process.

More funds are needed for catchment management and restoration £200 million a year of water customers’ money is currently spent removing diffuse pollutant such as nitrates and pesticides from water. This is far more than the funds currently allocated to persuading farmers to reduce damaging inputs and change their land use. This spending could be found from a reallocation under the CAP or funded from input taxes on the agricultural sector. Where the degradation to natural capital is historical, such as the drainage of wetlands, and the degrader pays principle cannot be applied effectively, we believe it is the role of central government to spend public money on restoring that capital. We recommend that the government allocate at least £130 million a year to fund advisory and assistance programmes for farmers, to help them adopt catchment sensitive farming practices. This would reduce the need for expensive, and energy and chemical intensive, treatment.

Effective enforcement relies on sufficient funding More resources are needed to enforce pollution regulation. Fines for serious water pollution incidents are still trivial and need to be increased markedly.

Increased revenue from fines should be recycled back into enforcement or should finance catchment restoration.

The value of water, and the importance of water efficiency, needs widespread promotion Water efficiency needs more effective promotion across business and households. The Treasury should fund advice and promotion of water efficient 34

goods and activities, possibly through a Water Saving Trust or expanding the remit of both the Energy Saving Trust and the Carbon Trust to include water.

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Fiscal instruments Damaging abstraction licences should be amended or revoked Historic over-allocation of abstraction licences and rising demand for water mean that current levels of abstraction are unsustainable in many parts of the country and have the potential to inflict significant damage on the environment. The Environment Agency has spent considerable resources over the last ten years in identifying abstraction licences that could damage internationally and nationally important wildlife sites, through its Restoring Sustainable Abstraction programme and the review of consents. However there is currently no system in place to fund action to amend or revoke them, after the decision was taken to shift the financial burden from water customers to abstractors during the last periodic review. The effectiveness of these changes has been further compromised by the government placing a limit the revenue that can be raised through abstraction charges to compensate licence holders. With insufficient funds available, the government risks breaching the habitats directive. We urge the government to

“current levels of abstraction are unsustainable in many parts of the country”

follow through on its commitment to making the degrader pay for unsustainable water abstraction.

The price signal to consumers must be strengthened There is currently only a very weak price signal to customers about the value and scarcity of water resources. We do not believe that efficiency measures will have sufficient effect on reducing the demand for water in the home in the absence of a clear financial incentive. Universal water metering, proceeding fastest in water stressed areas, would provide a clear price signal to householders. Variable charging structures would provide support to lowincome households, and could actually make water bills more socially progressive by providing a low-cost block for essential use while penalising unnecessary or luxury use such as power showers, spa baths and swimming pools. We recommend the government implement universal water metering and new social ‘rising block’ tariffs alongside careful measures to alleviate impacts on vulnerable groups.

Similar to our call for VAT to be reduced to five per cent for energy efficiency products, consumers should be rewarded for buying water efficient products by VAT reductions on such items, backed up by a labelling scheme, which would inform consumers of the water efficiency of appliances.

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e) biodiversity and countryside The wording of the Treasury’s fifth challenge suggests a focus on energy, water and waste. It is important that biodiversity and landscape quality are not sidelined in this analysis. Both deserve equal status, making an important contribution to natural capital. The quality of the natural environment is tangible to people and provides both public benefits, through contributing to physical and mental health and well-being, and economic benefits, through the conservation sector, tourism and both business and residential desirability: IUCN research suggests that biodiversity accounts for a minimum of £4.8 billion to the UK economy and supports 35,000 jobs.25 Biodiversity is also a vital contributor to the natural environment sector as a whole, which accounts for £18.6 billion of GDP.26

“It is important that biodiversity problems are not seen as being solved”

Although improvements have been made on certain indicators, such as farmland birds, concentrating solely on a few indicators risks obfuscating deeper problems, such as the continued fragmentation of habitats and the decline in species such as moths, butterflies and woodland birds. The results of the most recent UK biodiversity action plan (BAP) reporting round showed that 38 per cent of BAP habitats and 27 per cent of BAP species are still in decline. Internationally, extinction rates are currently 100-1000 times higher than background levels, and UK consumption, for example of unsustainable tropical timber and peat extracted from habitats in Europe, is a driver for this. Internationally, extinction rates are currently 100-1000 times higher than background levels, and UK consumption is a driver for this, through consumption of unsustainable tropical timber, and peat extracted from habitats in Europe. Moreover, the impacts on biodiversity from climate change may further undermine the status of biodiversity in the UK, necessitating new responses. It has been estimated that climate change may commit a third of all species to extinction by 2050. It is therefore important that biodiversity problems are not seen as being solved.

A number of easy wins have been tackled mainly through regulation, such as the birds and habitats directives, but we now face more difficult issues, which require a more sophisticated approach. These need a more creative mix of policy instruments: an effective regulatory framework, smart taxes and incentives, and subsidy. An example of this is in the policy response needed to tackle diffuse pollution. Here, minimum standards, transitional support in the form of public expenditure to help farmers with infrastructure, changes in land management practices, and pesticides and phosphate input taxes are all needed. Our response to the threat of climate change will require a similar flexibility: retaining the protective framework provided by legislation and medium-term targets, investing in habitat creation, and softening the wider countryside to make it ‘permeable’ for

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species seeking refuges, or moving towards new, suitable climate space in response to changing conditions.

Spending Our approach to public spending and biodiversity follows the approach set out in the Defra-Treasury paper on the future of the common agricultural policy (CAP), which is that public spending on land management should aim to secure public goods. Biodiversity is a public good that yields specific benefits, both market and non-market, and now and in the future. As a result, it is also an example of market failure, whereby the market currently provides significantly less than optimum levels of biodiversity conservation.

It is therefore appropriate and right that the government should intervene to conserve it.

Declines in biodiversity should be tackled, and landscape quality secured, through transferring £300 million from farm payments to agrienvironment schemes Figures prepared for Defra27 have illuminated the significant gap in funding required to deliver the UK BAP, central to delivering the EU’s target of halting biodiversity loss by 2010. Current funding stands at £340 million a year, while estimated costs are £677 million a year: an overall funding shortfall of at least £300 million a year in the UK. Much of the shortfall in funding relates to widespread species.

To enable wildlife to withstand and adapt to climate change, it is important that we create much larger areas of contiguous habitat, set within ‘permeable’ countryside. Both of these objectives can be met through the BAP framework, by achieving habitat creation targets and taking action to ensure that the wider countryside is sympathetic to the needs of widespread species.

We therefore believe that a proportion of the UK’s BAP costs could and should be met through agri-environment schemes. Total BAP delivery costs that could be met through agri-environment schemes are approximately £470 million a year, but only £215 million is currently spent on the BAP through these schemes, leaving a funding shortfall of £255 million/year.28 The scale of funding needed here (£255-500 million) is achievable through reallocation of spending within the CAP - currently £2 billion in the UK and over £1.2 billion in England.

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We recommend that the shortfalls in biodiversity and landscape funding be made up through re-allocating funds within the CAP of at least ÂŁ300 million to agri-environment schemes.

The fishing industry will need public support to adjust to lower catching levels A shift in approach is needed to the fishing industry, with greater application of the degrader pays principle, the ecosystem approach to fisheries management and determining sustainable catches. To ease the social and economic impacts, the government should seriously consider how to use transitional support as a tool to help the fishing industry adjust to lower catching levels.

Fiscal instruments The non-market nature of most biodiversity problems restricts to scope of market instruments. However, there are a small number of fiscal mechanisms that should be used as part of an overall package of spending and regulation.

The use of peat, phosphorus and pesticides should be discouraged The continued use of peat degrades natural capital and results in releases of stored carbon into the atmosphere as carbon dioxide. Peat extraction continues despite the presence of alternative sources of growing media, such as other composted materials. A levy at point of sale would increase consumer awareness of damaging peat extraction and encourage the purchase of alternatives, as well as diverting waste away from landfill and developing the markets in alternative composts and composting facilities. We urge the government to reconsider their stance on fiscal measures to tackle the use of peat.

Economic instruments addressing phosphorus and pesticide pollution should help fund support and advice for farmers in lowering the impact of their chemical use on the environment and water customers.

We recommend a levy be placed on agricultural chemicals that cause water pollution in order to raise funds that are used to help the agricultural sector mitigate its impacts on water.

The planning gain supplement should be reformed In considering a planning gain supplement, we call on the government to ensure more broadly that the planning system makes a net positive contribution to the environment, creates the right kind of incentives for developers and raises the necessary funding for investment in green infrastructure.

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6. conclusions This report has set out the case for change by the Treasury, a proposal for a new intellectual approach, and a set of recommendations on spending, taxes and charges. It is not an exhaustive or definitive list. But it does offer a means for the Treasury to make a step change on the environment.

The decision to put together this pamphlet was made in the summer of 2005. At that time, we seemed to have reached an impasse. The Treasury’s ‘Statement of intent on environmental taxation’ provided an excellent framework. However government decisions often appeared to sideline or reject these principles. Similarly, although the government acknowledged the transformative effect of public spending, the levels dedicated to environmental outcomes were simply not of the scale required. Defra and its agencies were already beginning to suffer from spending constraints, which have worsened considerably since then. The use of regulation was under constant attack in the guise of better regulation, for which too often read deregulation.

“The environment has risen dramatically up the political agenda, and the chancellor’s action list”

A lot has happened since then. The environment has risen dramatically up the political agenda, and the chancellor’s action list. Our sense is that many within the Treasury now wish to make the step change needed on the environment. They appear to include the chancellor. His speech at the Stern review opened with a commitment to make environmental care a third overriding objective alongside his historic passions of employment and growth.

There is every reason to do so, from a political and analytical perspective.

The long-term goals of employment and growth cannot be achieved unless sufficient regard is given to the interconnections between these objectives and the environment. There is a wealth of evidence, both in the UK and internationally, about the market and non-market benefits of natural capital and the costs of failing to take action on its depletion and degradation.

This agenda goes beyond climate change. Climate change is the world’s most pressing challenge, and certainly pre-eminent among environmental concerns. But the CSR provides an opportunity to develop a broader approach, and to plan the transition to a sustainable resource efficient UK economy, with associated economic and environmental benefits. We urge the Treasury to grasp it with both hands.

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notes and references 1 2 3

4 5

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Written statement to parliament on the spending review, 19 July 2005: Press Notice 65 See also UNEP’s Environmental Outlook and the OECD’s 2005 Environment Outlook.

These include the virtual elimination of lead emissions from petrol and ozone depleting emissions, and the significant reductions achieved in emissions of sulphur oxides carbon monoxide and some particulate matter.

Millennium Ecosystem Assessment 2005 An example of this thinking is demonstrated by England’s Regional Development Agencies, in their report Smart Productivity: Securing Sustainable Development in the Regions (2006). In his foreword, Richard Ellis, Chairman, East of England Development Agency, writes: “long term gains rather than short term fixes, the flow of resources, and the ability of innovation to get more from less are critical if we are serious about increasing economic growth in line with sustainable development principles… £229 million a year could be added to [the East of England’s] economy through the improved use of resources by our businesses: a sum which would require considerably more effort to achieve through business growth alone”.

A Green Living Initiative: Engaging households to achieve environmental goals, Policy Studies Institute/Green Alliance, January 2006 Transport accounted for 33 per cent of total UK CO2 emissions in 2004, Table 5, UK Climate Change Programme 2006 Hansard, 21 May 2006 Sustrans TravelSmart programme on ITM has achieved average reductions in car use of 9-14% in a variety of urban settings.

Car Sick: Solutions for out car-addicted culture, Lynn Sloman, Green Books 2006 Department for Transport, June 2006 Defra, E-Digest of Environmental Statistics, January 2006 The UK tax system and the environment, The Institute for Fiscal Studies, November 2006, p42 MORI, June 2006 The UK tax system and the environment, The Institute for Fiscal Studies, November 2006, p24 Department for Transport, Transport Trends: 2005 Edition, p86 SMMT, UK New Car Registration by CO2 Performance: Report of the 2005 Market, p27 Reducing Carbon Emissions from Transport, Ninth report of session 2005-06, Environmental Audit Committee, August 2006 Society of Motor Manufacturers and Traders Ltd, 2006 Assessing the impact of graduated Vehicle Excise Duty- Quantitative Research, MORI for the Department of Transport, 2003 Creative Policy Packages for Waste, Green Alliance, October 2002 and An International Survey of Zero Waste Initiatives, Green Alliance, June 2006 Gate fee is the price per tonne charged at the landfill site gate.

A Zero Waste UK, Green Alliance/Institute for Public Policy Research, October 2006 National assessment of defence needs and costs for flood and coastal erosion management (NADNAC) http://www.defra.gov.uk/environ/fcd/policy/nadnac0604.pdf Uses of Wild Living Resources in the UK, IUCN UK Committee, 2002 Wellbeing Through Wildlife, RSPB, http://www.rspb.org.uk/policy/Economic development/wellbeing.asp UK Biodiversity Action Plan - preparing costings for Species and Habitat Action Plans, Report to Defra, GHK Consulting Ltd, April 2006 Analysis of Agri-environment Delivery for UK BAP, RSPB Discussion Paper, September 2006

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