Five facts about environmental taxes

The government is preparing to announce measures in the Budget aimed at tackling the problem of plastic pollution. This follows the largest response to a call for evidence in the HM Treasury’s history. We’ve come up with five facts about environmental taxes in the UK. These explore what environmental taxes there already are, who they are paid by and provide examples of how changes to environmental taxation can influence behaviour.

Environmental taxes are those whose base is a physical unit, for example, a litre of petrol or a passenger flight, that has a proven negative impact on the environment. These taxes are designed to promote environmentally positive behaviour, reduce damaging effects on the environment and generate revenue that can potentially be used to promote further environmental protection.

Environmental taxes raised £48.9 billion in revenue in 2017. Revenue from such taxes has remained relatively stable over the last 20 years at between 2.2% and 2.8% of gross domestic product (GDP).

Environmental taxes can be split into four categories: energy; transport; pollution and resource.

Pollution and resource taxes include taxes on the management of waste or extraction of raw materials and accounted for 3% of total environmental tax revenue in 2017. These categories of environmental tax might in future include any new taxes on plastics.

Almost three-quarters (74%) of all revenue from environmental taxes in 2017 were from energy taxes. These include taxes on the production and use of energy products like petrol, diesel, gas and electricity.

By far the largest single contributor to revenue from environmental taxes is hydrocarbon oil duty, also known as fuel duty. This tax covers petrol and diesel fuels despite being classified as an energy tax. Hydrocarbon oil duty accounted for 57% of the revenue from all environmental taxes in 2017.

Over 40% of of all environmental tax revenue was paid by households in 2015, the majority (66%) of this revenue from households related to energy taxes which include fuel duty.

After households, the largest proportion of environmental tax revenue was collected from services (16%) and manufacturing (10%) industries. These industries are likely to have high energy usage and transport fuel needs.

Over the last 20 years, the number of petrol-driven cars registered in Great Britain has fallen by around 10%, whilst diesel car registrations have increased fivefold (406%).

Over a similar period in the UK, petrol consumption has decreased by 46% (11.6 million tonnes of oil equivalent) and diesel use has increased by 62% (10.4 million tonnes of oil equivalent).

These changes can be influenced by taxes, for example, a reduced Vehicle Registration Tax for all cars with low carbon dioxide (CO2) emissions and a tax cut on diesel fuel duty in 2001, encouraged motorists to trade in their petrol cars for diesel vehicles, which tend to produce less CO2.

Fuel duty rates were recently pledged by the UK Prime Minister to be frozen for the ninth year in a row. The government is currently considering response to its consultation on the draft clean air strategy, which examines how air pollution by not just CO2 but other air pollutants such as nitrogen oxides and particulate matter can be reduced. Future changes to environmental taxes might start to discourage the use of both petrol and diesel cars and encourage the use of alternatives, such as electric.

There are now approximately 500,000 hybrid electric or electric cars registered in Great Britain in 2017, compared with close to zero in 1997.

The amount of biodegradable municipal waste sent to landfill in the UK has decreased from 35.7 million tonnes in 1995 to 7.7 million tonnes in 2016 according to the latest available data.

There are likely to be multiple contributors to this trend such as the ease of exporting, recycling or incinerating waste, but the introduction of Landfill Tax in 1996 has likely made a significant contribution.

Revenue from this tax made the largest contribution to pollution and resource tax revenue in 2017, generating £0.9 billion in revenue, that is, 69% of all income from pollution and resource taxes. However, revenue from this tax has fallen as a proportion of gross domestic product (GDP) from a high of 0.07% in 2010 to 0.04% in 2017, due to biodegradable municipal waste sent to landfill decreasing.

Following the introduction of similar charges in Wales, Scotland and Northern Ireland, large retailers in England have been required by law to charge for single-use plastic bags since October 2015.

The seven largest retailers in England issued around 86% (6.6 billion) fewer single-use plastic bags in the year April 2017 to April 2018 (1.0 billion) than they did in 2014 (7.6 billion).

Though not a tax, with retailers instead expected but not required to donate proceeds to good causes, this policy measure has had a clear impact on consumer behaviour across the UK.