Amendment laid at the March States meeting
One of the principal stated aims of this personal tax review is the need to diversify taxation away from its reliance on personal income tax by the substitution of other forms of taxation.
The list of such diversifying taxes is limited and therefore it is perhaps somewhat surprising that the review shies away so readily from any proper consideration of the role of environmental taxes in this task.
In a moment I’d like to examine the reasons given in the report for not proposing environmental taxes, but first it is worth looking at what is meant by the term environmental tax.
Environmental taxes are economic instruments to address environmental issues. They are designed to internalise environmental costs and provide economic incentives to promote environmentally sustainable activities. The point about internalising costs bears further examination. The price we pay for fossil fuels includes the cost of extraction, refining, shipping, delivery and profit, but it does not include the cost of pollution, effects on human health, climate change, acid rain and more. Those costs are externalised: in other words, since the producers and purchasers do not pay for them, then society as a whole has to pick up the tab. This pricing system masks the true cost of fossil fuels and results in damage to human health, the environment, and the economy Measures that promote a move away from carbon-intensive and polluting forms of energy go some way to addressing this market failure. The IMF says that energy prices in many countries are wrong because they are set at levels that do not reflect environmental damage, notably climate change, air pollution, and various side effects of motor vehicle use, such as traffic accidents and congestion.
The IMF goes on to say that energy tax reform doesn’t need to be primarily about raising new revenues, but could focus on restructuring the tax system away from taxes such as income tax, and towards carefully designed taxes on energy.
Often – even in this assembly, sadly – environmental issues are dismissed as somehow unimportant, or irrelevant to us in Guernsey. The word “green” is used in a pejorative sense, and those that voice environmental concerns are also negatively labelled, implicitly or even explicitly. There are plenty of reasons to explain this attitude – environmental problems are seen as too big, and too long-term, for Guernsey to make a difference, for example – but what it generally boils down to is this: there are vested interests in maintaining the status quo, and so maintaining the status quo is often the easiest route to follow, regardless of the consequences. Guernsey is not, despite being small, immune to those consequences, and those consequences include significant social and economic impacts. This is why the States Strategic Plan stipulates that environmental considerations should be on a par with social and economic considerations. Guernsey cannot abdicate its global responsibility: we owe it to our children, to the next generation, not to stick our heads in the sand over environmental concerns, no matter how politically convenient that would be in the short-term.
The good news is that, in tackling environmental concerns, we often reap immediate social and economic benefits. Encouraging a move to cleaner energy, for example, whilst at the same time diversifying the tax base and improving the thermal efficiency of the housing stock should be, to use the technical term, a no-brainer.
So how does our existing strategic policy framework relate to environmental taxation?
The 2008 Energy Policy report was merely noted by the States and thus was largely ineffective. It made no secret of its wish to move the island progressively to a much greater dependence on low carbon electricity with a corresponding reduction in usage of fossil fuels. This policy goal was perceived by some as an attack on their businesses and they ran a successful campaign to discredit the policy.
As a consequence of this, the Energy Resource Plan which followed in 2012 presented a more watered down approach to the use of fossil fuels and was less specific about how carbon targets should be achieved – whilst still acknowledging the need for a lower carbon future. The destination was retained but the map had been torn up.
Notwithstanding that, in adopting the Energy Resource Plan, the States have agreed to a carbon emission target “to reduce Guernsey’s carbon dioxide emissions by 30% on 1990 levels by 2020; and 80% on 1990 levels by 2050”
A 30% reduction by 2020 is going to be challenging and may not be deliverable by simply relying on the undersea cable to achieve it. The Energy Resource Plan acknowledges that a form of carbon tax is likely to be necessary. Even if it were just about deliverable, the journey does not stop there by any measure.
The Plan also says that Guernsey may need to consider fiscal approaches at initial purchase of vehicles with taxes on on-going running costs.
Finally, energy efficiency is a primary strategic objective in terms of using energy wisely and efficiently and not wasting it.
So let’s move on to the PTR’s take on environmental taxation.
Environmental taxes fall into four categories:
- Transport taxes (excluding fuel) such as annual motor tax;
- Energy taxes (including fuel for transport) and including CO2 taxes;
- Pollution taxes, but excluding CO2 which is included in Energy taxes;
- Resource taxes .
It is the first two that would be feasible in Guernsey and those are the two that are mentioned in the PTR together with the reasons as to why they were dismissed.
On vehicle taxation, the PTR acknowledges that it could make a significant contribution to redirecting taxation from direct to indirect taxes. It suggests that such taxes are likely to be regressive – but as the Fiscal Affairs Department of the IMF points out, such a regressive element could be overcome by incorporating elements such as engine size, and by extension, vehicle emissions, into the calculations. It highlights that the strengthening of vehicle taxes to address environmental concerns is consistent with trends in other developed countries.
Well, it’s nice to have support in high places.
Many countries have both first registration duties and annual circulation taxes, which are designed to internalise costs and drive a move to cleaner vehicles.
It is vital to say that this would not represent a war on the motorist; it would be a redistribution of the tax base. And although there remain those who like to claim that there is a war on the motorist when any attempt is made to address the impacts that vehicles have on our society, the fact remains that many of the costs of vehicle use are externalised and are not even nearly covered by the existing tax structure. This may be a deeply inconvenient fact, but regardless of its lack of popularity it remains just that – a fact.
The response to parts of the Transport Strategy from a campaign group with motoring links and from garage owners, and the timing of the Transport Strategy, reportedly caused the joint boards to back away from consideration of motor taxation. However, it’s worth taking careful note of the fact that the consultation undertaken for the PTR shows that there was more support for environmental taxes than there was for GST.
The second possibility is a broad-based carbon tax.
A carbon tax is not complex in principle since it simply taxes the carbon content of various fuels. It is clear that any such intervention must be carefully judged and for it to be successful it would require preconditions. A carbon tax can also offset other taxes, but it would need to address other elements of the Energy Resource Plan, principally energy efficiency.
The argument, such as it is, in the PTR against a carbon tax on the grounds that it could be mildly regressive is somewhat odd. It seems there was no hesitation in proposing a consumption tax with its regressive characteristics. If that regressive tax was, at least in part, to be dealt with by reducing income tax then there is no reason that the same could not be true of a carbon tax, particularly if the taxation is strongly linked to a programme to improve energy efficiency for those at most risk.
Whilst improved energy efficiency is of value to all islanders and island businesses, it is particularly important to those at the lower end of the income scale. Data from the Household Expenditure Survey shows that households with an income of less than £26,120 annually spend £1,704 on home energy requirements, or 6.5% of their total income.
On energy taxes, the PTR states that, despite the aim of the States Strategic Plan to integrate fiscal, social and environmental policies and for them to be afforded equal status, the already large scope of the project and the limited resources devoted to it has meant that this review has not given detailed consideration to the use of any new such taxes, for example a carbon tax.
I don’t underestimate the significant work that has been put into this review at all, but when a primary stated aim is tax diversification, then putting all of one’s eggs in the GST basket was always going to be a little risky. That in itself perhaps should have been enough of an incentive to investigate what is a common plank of many taxation strategies.
As mentioned in the explanatory note to this amendment, the contribution of environmental taxes as a percentage of our total tax and social contributions income is just under 3%, while the EU average is over twice that. To put this into perspective, increasing environmental taxes to the EU average of 6.2% could decrease reliance on personal income tax by replacing some £15m even after set aside for energy efficiency improvements.
You will have heard from the Chief Minister’s statement on Tuesday that the Environmental Policy Group has been working on the establishment of an energy efficiency and advice centre, but that this work has stalled because no source of funding can be found.
While it is definitely something that is needed, the scale to be proposed by the Environmental Policy Group is modest in the extreme and even that is unfunded and in order to make worthwhile inroads into improving the thermal efficiency of the housing stock a more ambitious scheme will ultimately be needed. Ideally, a percentage of the money raised by a carbon tax would be used to fund such a program. It is also worth noting that Social Security pays out around a million pounds a year in winter fuel payments. Some recipients of this payment will live in energy efficient homes. Other recipients will rely on open coal fires for their heating, where up to 90% of the heat goes straight up the chimney. Neither situation can be considered an ideal use of funds. Therefore the amendment includes consultation with SSD to examine how improvements can be made to increase the effectiveness of these funds.
It may be helpful to examine other experiences of environmental taxation in the form of a carbon tax.
In 2008 British Columbia in Canada implemented what they call a Carbon Shift Tax. The evidence from British Columbia is that the policy has been an environmental and an economic success story. The tax, which is payable on all fossil fuels and fossil fuel derived energy, started out low and rose over a period of 5 years. The tax was designed to be revenue neutral and was matched by corresponding decreases in other taxes including personal income tax. It has been very effective in tackling the root cause of carbon pollution: the burning of fossil fuels. A five-year review showed that fossil fuel consumption had dropped by 17% in British Columbia, while in the rest of Canada consumption had risen marginally.
The approach that British Columbia took, that is, giving notice that the tax would be introduced and starting it at a low level with gradual increases was beneficial. It gave people and companies notice that the price of carbon-intensive energy would be increasing and allowed time for efficiencies to be made. The New York Times called the carbon shift tax “the most sensible tax of all” and it has gained support across the political divide from left to right.
As an object lesson in how not to go about things, it’s hard to find a better example than Australia. I don’t intend to relate the whole story, which centred around changing political parties and complex arrangements with mining companies and power stations, but it is nevertheless instructive to note that in the two years the tax was in operation, carbon emissions fell, and when the law was repealed they started to climb back up. This proves categorically that the tax itself was effective.
As the majority of our electricity supply is low carbon, a carbon tax should incentivise a switch from oil, gas and coal to electricity. With longer term aims for macro renewable generation, such a switch is beneficial in terms of energy security.
Of course if a carbon tax is successful in its aim to reduce fossil fuel consumption then the tax take will fall, unless of course the rate is increased or the offset against other taxes is adjusted.
However, there are gains to be had in other areas. For example, poorly insulated and heated homes are detrimental to health in many ways, including poor internal air quality and black mould. A comprehensive scheme to address these issues is vital and will reap benefits in terms of health expenditure.
This is just one example of the many ways the impact of environmental taxes can benefit society in the bigger picture: because good environmental policy focuses on sensible use of resources, there is almost always an economic pay off to both individuals and governments in the long-term, and sometimes the short-term too. In summary, there is no good reason to not investigate such taxes, especially in our current financial situation with our dependence on personal income tax.
I ask members to support this amendment today which directs T&R to return to this assembly before the end of this term with proposals for environmental taxes in order to diversify our tax base, to improve the thermal performance of our housing stock and to benefit the wider environment.
TEXT OF AMENDMENT
STATES OF DELIBERATION 24th March, 2015 Billet d’État No. IV AMENDMENT
Proposed by: Deputy Y Burford
Seconded by: Deputy S J Ogier
Treasury and Resources Department & Social Security Department Planning a Sustainable Future – The Personal Tax, Pensions and Benefits Review
To insert the following proposition between Propositions 38 and 39:
“38A. To direct the Treasury and Resources Department, after consultation with the Environment Department, Social Security Department, Commerce and Employment Department and Policy Council as appropriate, to lay before the States no later than March 2016 proposals to diversify the tax base by introducing or increasing environmental taxes, and to agree that a comprehensive energy efficiency programme to assist in mitigating any possible regressive effects of such taxes on low income households should form an integral part of such diversification.”
Explanatory note Environmental taxes currently make up approximately 2.9% of the total tax and social contributions income. For comparison, the EU average is 6.2% with some countries at 10%. The substitution of environmental taxes for other taxes would assist the stated aim of diversifying the tax base. The mildly regressive impact of a carbon tax or similar could be compensated for by a comprehensive energy efficiency programme which would reduce energy consumption, improve the housing stock and address health issues resulting from poorly insulated and under-heated homes.