Beyond Stern: the environmental challenge for the comprehensive spending review

beyond Stern: the environmentalchallenge for the comprehensivespending review

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beyond Stern: the environmental challenge for thecomprehensive spending review

by Hannah Hislop

Published by Green Alliance, November 2006 Artwork and print by SeacourtPrinted on Revive Uncoated 100 per cent post-consumer wasteISBN 1-905869-00-2 and 9781-905869-00-8© Copyright Green Alliance 2006

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form or by any means, without the prior permission inwriting of Green Alliance. Within the UK, exceptions are allowed in respect of any fairdealing for the purposes of private research or study, or criticism or review, as permittedunder the Copyright, Design and Patents Act, 1988, or in the case of reprographicreproduction in accordance with the terms of the licences issued by the CopyrightLicensing Agency.

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

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

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

AcknowledgementsMany thanks to the following people, who have helped considerably with this report:Clive Bates, Rob Cunningham, Ian Dickie, Stephen Hale, Julian Harlow, Julie Hill, PaulHinds, Alistair Keddie, Jacob Hayler, Russell Marsh and Guy Thompson.Thanks inparticular to Derek Smith who did much of the original analysis and Rebekah Philips whowrote the section on transport. We are also very grateful to the East of EnglandDevelopment Agency, the Environmental Services Training and Education Trust and RSPBfor their support of this work.

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beyond Stern: the environmental challenge for the comprehensive spending review

1

Contents

foreword _3

1. executive summary _5

2. introduction _8

3. climate change and natural resources: getting the framework right _9

4. developing an effective policy response _13

5. recommendations _16

energy _16

transport _21

waste _27

water _33

biodiversity _36

6. conclusions _39

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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The Treasury has long been first among equals, the most powerful institutionin Whitehall. Since 1997 it has become even more so, as Gordon Brown hasextended the reach and influence of the Treasury to new levels acrossgovernment. His uniquely powerful position within the Labour Party beforeand since 1997 is the primary cause of that. But it has also been madepossible by new mechanisms that bind other departments to the Treasury’swill. The spending review process has been the most important suchmechanism.

But the Treasury’s power has too rarely been used to further environmentalobjectives. Its tremendous drive and intellect has been used more negativelythan positively, finding fault with initiatives born elsewhere in Whitehallrather than developing home grown solutions.The chancellor has focusedprimarily on economic and social justice issues, and devoted almost all ofhis power, energy and resources to further those ends at home and abroad.

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

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

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


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beyond Stern: the environmental challengefor the comprehensive spending review

Foreword by Stephen Hale, director of Green Alliance

“the review can andshould be the

springboard for astep change in the

Treasury’scommitment and

action on theenvironment”

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So Green Alliance and its partners believe that the review can and should bethe springboard for a step change in the Treasury’s commitment and actionon the environment. We offer in this report an intellectual approach that webelieve 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 allthey must respond positively. For too long the powerful connectionsbetween the environmental agenda and other causes have been ignored ordowngraded. It is time for that to change.

This approach does pose real challenges to current Treasury thinking. Afailure to tackle climate change will have devastating economic and socialconsequences, as the chancellor and the Stern Review have acknowledged.So action is rational and cost-effective. But it will require significant changesin taxation, additional spending, and changes to the regulatory framework. Anarrow productivity and efficiency agenda, and an emphasis on de-regulation, cannot deliver. A new approach is needed. But it need not breachthe tight spending constraints of the round. We offer a menu of bothrevenue opportunities and spending pressures.

The 2007 spending review has consistently been billed as the most thoroughand far ranging of the reviews held so far. We hope that it meets thoseexpectations, and will presage a step change in the focus and policycommitment of the Treasury, in the 2007 budget and through the remainderof this parliament.

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


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The comprehensive spending review (CSR) 2007 is a pivotal event in thisparliament. It will make spending decisions for the next three years, and, byreference to the key challenges facing Britain, set the direction for a Labourgovernment for ten years or more.

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

This report suggests a framework for recognising the value of theenvironment and enshrining its protection in the structure of the UKeconomy, based on the concept of natural capital. The CSR process is anopportunity, despite the tight fiscal context, to use a new intellectualframework to deliver both environmental and economic objectives througha smart mixture of revenue-raising and spending.The report puts forwardproposals for doing this in five key areas: energy, transport, waste, water andbiodiversity.

Environmental limits should form the heart of this new approach.Thegovernment’s 2005 sustainable development strategy puts an explicitemphasis on environmental limits, beyond which change accelerates anddegradation is irreversible, such as the collapse of fish stocks or a climatictipping point. Many trends are still heading in the wrong direction.This isdemonstrated by a number of authoritative international reports such as theMillennium Ecosystem Assessment, the OECD State of the Environmentreports, and regional and local assessments.

An approach centered on these limits is urgently needed. Despite somewelcome achievements, the Treasury has been neither sufficiently bold norsystematic in confronting environmental challenges.The CSR is anopportunity to demonstrate that the government’s approach is strategic andcomprehensive, and to challenge opposition parties by presenting a packageof ambitious policies that would deliver real improvements in environmentalquality.

The policy response

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


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1. executive summary

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

Government can intervene through economic instruments such as taxationand cap and trade systems, spending, regulation and planning and softermeasures such as communications initiatives that assist with a widerbehaviour change approach. All should be backed by clear objectives forgovernment departments and the Treasury. We see a compelling case forfurther 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 toenvironmental goals that would be consistent with the urgency and scale ofthe 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-carbontechnologies and hasten their penetration of the mass market;

• lead a dramatic increase in European funding to kick-start a global shiftto low carbon technologies, and dedicating funds to enable developingcountries to adapt to the damaging impacts of climate change;

• give local authorities incentives to go beyond basic targets on wastemanagement and financial support for them to invest in the mostsustainable technologies;

• transfer £300 million from agricultural production support payments toagri-environment schemes to tackle declines in biodiversity and securelandscape quality;

• fund advisory and assistance programmes to persuade farmers to adoptcatchment 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 paysprinciple, to tackle rising emissions from the transport sector.Thisshould include road charging, duty increases for high carbon fuels, andescalating vehicle excise duty;


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• increase the landfill tax escalator by £5 a year, and continue to escalatethe tax past the £35/tonne target until a large-scale shift away fromlandfill is achieved;

• give power to local authorities to charge for unrecycled householdwaste, and to implement other fiscal incentives such as council taxrebates for energy efficiency measures;

• place a levy on agricultural chemicals that cause water pollution in orderto raise funds that are used to help the agricultural sector mitigate itsimpacts on water.


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The 2007 comprehensive spending review is being driven by five challengesidentified by the Treasury as issues which Britain will need to address inorder to safeguard the creation of a sound economy, with sound publicfinances and sustained and substantial growth in investment in publicservices 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 balanceof international economic activity shifts toward rapidly growingemerging markets such as China and India;

3. an acceleration in the pace of innovation and technological diffusion anda continued increase in the knowledge-intensity of goods and services;

4. continued global uncertainty with ongoing threats of internationalterrorism and global conflict; and

5. increasing pressures on our natural resources and global climate fromrapid economic and population growth in the developing world andsustained demand for fossil fuels in advanced economies.

As the government’s statement announcing the CSR makes clear,1 thesechallenges will have fundamental and far-reaching implications for publicservices, requiring innovative policy responses, co-ordination of activityacross departmental boundaries and sustained investment in key areas.There-examination of public spending allocations, fiscal instruments andregulation required in response to these challenges must be far-reaching.Green Alliance and its partners believe that the CSR is an opportunity torecalibrate and modernise the Treasury’s approach to the environment.


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2. introduction

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We have serious environmental problems, both nationallyand globally

It is of course right that one of the Treasury’s five challenges focuses on thenatural environment.The problems of climate change and natural resourcedepletion are among the starkest and most serious long-term problems thatwe face. Climate change has been described by the prime minister as the‘world’s greatest environmental challenge’ and by the government’s chiefscientific advisor as ‘the most severe problem we are facing today’.

The Treasury’s fifth challenge suggests two principal problems: increasingpressure on natural resources and global climate change.The precise natureof the challenge presented by global climate change, albeit with continuingscientific examination, is well-known and articulated: progressive increasesin global temperatures are occurring, created in part by human activity,leading to irreversible damage to the world’s natural environment. Growingfossil fuel demand, as highlighted in the challenge, is widely held to be themajor 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 outwhich point to similar trends and indicators about the state of naturalresource depletion and degradation: the UN Millennium Ecosystem Assessmentfound that 60 per cent of the world’s ecosystem services have beendegraded, with species extinction now 100 to 1000 times the normalbackground rate.2 An equivalent picture is provided by more region-specificstate of nature reports such as the European Environment Agency’s State of theEnvironment reports. The overriding message is that despite some importantsuccesses and improvements over the past thirty years,3 major challengesremain and more progress needs to be made if we are to protect, preserveand enhance the world’s natural resources.

Environmental challenges are cross-cutting, requiring aco-ordinated response

The fifth challenge - ‘increasing pressures on our natural resources andglobal climate from rapid economic and population growth in thedeveloping world and sustained demand for fossil fuels in advancedeconomies’ - suggests that economic growth in the developing world is themost important factor in creating pressure on our stock of natural capital.This implies, by contrast, that economic growth in the developed worlddoes not pose such a risk and is now occurring on a less resource intensivefooting. Green Alliance sees this differently. While the most rapidenvironmental degradation is not occurring in the UK, globalisation and the


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

“The threat tonatural resources

is less clearlydefined - but no

less real”

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

Furthermore, the UK’s service economy brings its own environmentalpressures 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 andsocial trends such as those set out in the other key challenges, each of whichhas significant environmental implications.The environment cannot beconsidered as a challenge in itself, but as a cross-cutting theme, which needsto be considered in determining the policy response to the other fourchallenges and the spending review as a whole.

The Treasury needs a broader framework for addressing theenvironmental challenge

The CSR is an opportunity for the Treasury to frame a new approach to theenvironment: to see it as a critical base of valuable natural assets (waterresources, biodiversity, clean air, soils, the carbon cycle, landscapes) thatprovide services that people value highly and have strong and complexpreferences for.

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

There is a distinction to be made between stocks of goods flowing fromnatural capital that are finite, and those that are potentially sustainable.Potentially sustainable stocks of natural capital, such as water, can bedegraded through its exploitation (over-abstraction), or to other factors(diffuse pollution from agriculture). Such stocks can also suffer catastrophiccollapse, such as fisheries. If the natural capital that generates these stocks is


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sustained, for example by protecting watersheds and aquifers, then stock canrecover and potentially increase. Finite global stocks of natural capital suchas oil, natural gas and minerals are being depleted on an increasing scale.Similarly, human activities can degrade the services flowing from naturalcapital. 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 otherstocks and services (soil formation, photosynthesis, nutrient cycling).4 Likestocks, services can recover from human degradation - but they can also bepushed beyond recovery, hence the recent scientific warnings over a climatictipping point.

Viewing natural systems as capital goes beyond conventional economicanalysis in which natural resources, or more precisely, land, is typicallyviewed as one factor of production.The natural capital framework recognisesthe capacity of stocks and services to be improved or degraded by theactions of man over time: their productive capacity is not static or fixed bynature alone. But there is scientific consensus that current levels ofexploitation and degradation of natural capital will have a major impact onour future capacity to provide social, manufactured and infrastructuralcapital. Growing human populations, and increasing demand of thosepopulations, have increased our use of provisioning services of food, freshwater, fibre, oil, coal and natural gas.This has brought a higher standard ofliving to many, but at the expense of regulating, cultural and supportingservices such as the purification of air and water, protection from disasters(for example the loss of mangrove swamps and inter-tidal salt marsh thatmitigate against storm waters) and productive soils.

The flow of benefits from natural capital is limited by sustainability criteria:maximum water abstraction rates, carbon sink capacity, and sustainable fishcatch.To benefit from this capital without irretrievably breachingenvironmental limits requires a growth in resource productivity: throughenergy and water efficiency, resource reuse and recycling, a harnessing ofrenewable sources of energy, and substantial changes in physicalinfrastructure, awareness and behaviour. Such resource efficiency must leadto absolute reductions in demand for both primary resources and ecosystemservices.

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


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“the broader issuefor the CSR is thedevelopment andapplication of the

economics ofnatural capital”

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narrowing it down to a focus on physical benefits and neglecting the socialand cultural services provided by the natural environment. It also does notfully answer the question of who should pay for restoring ecosystems thathave been degraded in the past. We believe that the broader issue for the CSRis 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 isdriving resource degradation. Much work has been done on the key drivers,both in terms of international and national trends. In the UK, NaturalEngland identifies the following as the most significant drivers:

• climate change, which is fast becoming one of the major drivers ofchange 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 puttingwater resources under strain and sealing soils;

• transport, both through carbon dioxide emissions and other atmosphericpollutants and through infrastructure causing further habitat loss andfragmenting 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 ofdestructive fishing techniques.

We have taken significant steps to reducing pollution caused by the by-products of economic activity, such as point source discharges to water.However, where the environmental impact is an inherent part of economicactivity, such as waste or energy and water use, it has been more difficult toachieve 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 astage in a country’s development. Resource productivity has to be positivelyengineered by policy mechanisms and incentive structures, as the followingsection sets out.


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As is evident from this brief discussion of the fifth challenge, naturalresource depletion creates moral, practical and political challenges forgovernments worldwide. Framing a policy response requires the right mixof spending, taxes and charges, and regulation; and co-ordinated responsesat domestic and international level. The right policies will achieveenvironmental protection and improvement and secure economic and socialbenefits: the CSR, along with the budget, offers the Treasury an excellentopportunity to implement them.

Five guidelines for action

We propose five guidelines for action, to inform debate on the CSR, bothinside the Treasury as the CSR process plays out, and outside in the nationaldebate promised by the chancellor.These apply in equal measure to futurebudgets.

1. Add resource productivity to the Treasury’s view of productivityThe growth of the global economy is such that the stock of natural resourceswe rely upon is becoming scarcer, and the balance of our natural systemsmore precarious. As a result, the UK must make the transition to a resourceefficient economy, decoupling economic growth from environmentaldegradation and resource use. However, we also need to recognise thatresource efficiency will only get us part of the way. Given the scale of thechallenge, resource efficiency must lead to absolute reductions in demandfor primary resources and ecosystem services.This will require atransformation in attitudes and behaviour as well as the physicalinfrastructure of our society.5

2. Follow the ‘degrader pays’ principle The government’s role with regards to taxation is threefold: to gatherrevenue to fund public spending, to internalise externalities to createefficient prices and to create an incentive structure that achieves thegovernment’s environmental policy objectives.These approaches shouldbecome part of the government’s productivity agenda, with the aim ofdeveloping the productivity of natural capital, whilst reducing the taxburden on employment and investment.

The market puts price signals on provisioning services flowing from naturalcapital such as food and fuel, and the polluter pays for cleaning up pointsource discharges. However, the government must act to correct systemicmarket failure when it comes to regulating services (climate regulation, airquality maintenance, water regulation) and supporting services (nutrientcycling, soil formation), ensuring that the degrader of natural capital pays.We believe that the scale of environmental taxation should reflect the scale ofthe challenge facing us.


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4. developing an effective policy response

“the scale ofenvironmental

taxation shouldreflect the scale of

the challengefacing us”

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3. Use taxes alongside information and advice to change publicbehaviour

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 tochange behaviour. Linking communications initiatives to fiscal measures cangive people and households incentives to think through their impacts andtake action. As well as providing more ‘carrots’, the Treasury need tocommunicate much more clearly their links to the ‘sticks’, to demonstrateboth the undesirability of certain choices and the existence of alternatives.When a tax starts to bite, such as the fuel duty did in 2000, goodcommunication is crucial to overcome public perceptions that the measureis solely about revenue raising.

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

5. Develop smart regulation The concept of regulation deserves rehabilitation. It is a reflection of thevalue society places on non-market goods and services and is a fundamentalpart of the policy response: to ensure a level playing field for business, tophase out the most damaging products and activities, to drive up standardsby promoting innovation, and to avoid information and transaction costs.Standards for appliances, vehicles and buildings are obvious places whereregulation can overcome numerous and well-documented market failures.Furthermore, environmental regulation, together with spending andeconomic instruments, can actually create markets for environmental goodsand services.The clarity with which the market is established will determineinvestors’ willingness to commit long-term investment and R&D.

We call for regulation to be ambitious, forward-looking and consistent, andcreated in a way that allows business to innovate. It must not be prescriptiveand lock industry into particular technologies or responses, but must setclear and demanding regulatory standards and allow business the freedom togo beyond them, and the capacity to adapt to requirements at least cost. We


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


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a) energy

Britain’s energy infrastructure urgently needs a wave of new investment.Theexisting ageing plant is representative of an era of low energy prices, little orno carbon externality, and limited environmental constraints, with end-of-pipe measures dominating the environmental response.The challenge overthe coming decade is to rapidly overhaul this infrastructure, both on thesupply and the demand side, to reflect the new conditions and priorities ofthe future.

The Stern review has powerfully reinforced the urgency of this challenge.His conclusions bear repetition. He found that a failure to tackle climatechange will have devastating effects on our economies and society, withunabated climate change reducing global GDP by perhaps five per cent ayear. He confirms that the costs of averting these impacts are far lower, butrequire decisive action now.

The review made three broad policy recommendations: the introduction of aglobal carbon trading regime, technology policy and action to tackle othermarket failures - removing the barriers to energy efficiency and personalaction. While internationally focused, they build on the approach outlined inthe 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 tohear the chancellor’s declaration at the launch that Europe should set a newemissions reduction target of 30 per cent by 2020 and at least 60 per centby 2050. But the Stern review also has implications for both spending andtaxation that the government must address. This section sets out our view ofthe policies needed to deliver demand-side reductions in carbon dioxideemissions at UK level and to enable the UK to play the leadership roleinternationally to which the chancellor committed. Our recommendationsbelow are focused on:

• establishing a reliable price for carbon;

• overcoming market failures;

• supporting innovation;

• bringing new technologies and processes to the market.


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5. recommendations

“the Stern reviewis a challenge notjust to theinternationalcommunity, butalso to the UKgovernment thatcommissioned it”

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Spending

More investment and support is needed to reduce emissions fromexisting building stockSix months after it was established, the government’s fund to supporthousehold microgeneration has run out after paying out or allocating £3.6million. Grants at this limited level are unlikely to deliver the cost reductionsneeded to stimulate much more widespread uptake of microgenerationtechnologies. Microgeneration has huge potential for contributing to energysupply and carbon reduction. For this potential to be fulfilled, the governmentneeds to give serious financial support to these technologies to give them theboost they need in a marketplace used to dealing with centralised, remote andcapital intensive power plants. Furthermore, successful penetration of the massmarket will need further government support in the form of supportive policymeasures: simplifying standards for micro-generators to connect to thedistribution network and to access Renewable Obligation Certificates, andensuring 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. Areview of our European neighbours’ expenditure on energy efficiencydemonstrates the disparity in spending on similar measures in the UK. InGermany each year, approximately £1.1 billion in grants is available tohouseholders to save energy in the home. In France, householders have taxincentives to spend money on energy-saving devices and services. In contrast,the UK’s energy efficiency policies are limited in scope, resources andambition.

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

The government has binding legal obligations to eradicate fuel povertyamongst the most vulnerable households by 2010 and by all households by2016.The CSR must drive make significant progress on the both targets. TheFuel Poverty Advisory Group has estimated that it will be necessary to increaseresources by at least 25-30 per cent over the period 2006-2010, as well asbringing in other measures.There is a strong case for a measure that is morefocused on eliminating fuel poverty and delivering physical measures thathave the most beneficial impact on social welfare, while the Energy EfficiencyCommitment (EEC) focuses specifically on energy efficiency to achieve carbondioxide reductions. Until the UK succeeds in tackling fuel poverty there willcontinue to be a distorting effect on public policy, whereby tax on theresidential sector is avoided while energy use in the productive sector is taxed.We recommend that the government increase financial support to efforts toreduce fuel poverty by at least 30 per cent.


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

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

Government procurement is valuable because it can give critical mass tofledgling technologies which otherwise cannot achieve market breakthroughwithout the support of a single large buyer. It also sends out an importantleadership signal to suppliers and other purchasers. We urge the governmentto become an exemplar purchaser in every aspect of its operations.

Both mitigation and adaptation spending must be increasedinternationally The Stern review emphasised the importance of early expenditure to drivethe transition required to a low carbon economy.This expenditure will comefrom both public and private sources. Government tax and regulation policyis critical to incentivise that private investment. But increased governmentexpenditure is also vital. Governments need to back up their language onurgency in spending decisions.

No one country can provide this. But Europe is the critical actor in thiscause. A dramatic increase in European funding is necessary to driveemissions reductions within Europe, to provide the resources needed tounderpin new strategic alliances on climate and energy with the keyemerging economies, and to enable developing countries to adapt to thedamaging impacts of climate change.

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


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

Fiscal instruments

Build on the EU ETSLaunching the Stern review, the chancellor announced proposals for new EUemissions reduction targets, expanding the scheme to cover more emissionsand other greenhouse gases, and extending it across the world. We welcomethese proposals. The government is right to see the trading scheme as acentral plank in a future global framework to drive emissions reductions.

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

Householders need financial incentives to install energy-efficiencymeasuresGreen Alliance has consistently argued for expansion of a schemesuccessfully pioneered by Braintree Council and British Gas, wherebyhouseholds receive a rebate on their council tax in exchange forimplementing energy efficient measures. It works at a local level, engagingand incentivising householders to reduce their energy use. Analysis suggeststhat the conversion rate for this activity is 50 per cent, which at five to tentimes the usual rate for incentive schemes is almost unheard of. Pilotschemes in a further 16 local authorities show good replication of theseresults.

However, local authorities wanting to replicate this scheme face a long,drawn out process. For this scheme to make a real difference to carbondioxide emissions it needs more support from central government. It alsocrucially needs funding to be rolled out at a national level: this could beprovided through VAT charges on inefficient products, linked to a labellingscheme. Assuming a take-up rate amongst eligible households of eight percent, this would cost the government approximately £100 million a year,and would save 9.8 million tonnes of carbon over the lifetime of themeasures.6 We recommend that council tax rebates be provided forhouseholds implementing energy saving measures.


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

The climate change levy needs reform to drive emissions reductionsacross more of industryWhere opportunities for financial savings differ, such as business energy use,economic instruments are more effective than regulation, hence we agreewith the basic rationale behind the climate change levy (CCL). However, arecent Carbon Trust report has said that the current package of climatepolicies is not providing sufficient incentive for change across the lessenergy intensive sectors where energy costs are less material and where, inparticular, the CCL does little to drive change. Given the predicted rise inenergy use in the business and public sectors of 20 per cent by 2020, thereis clearly a need for a more suitable mechanism to halt and reverse thepredicted increase in emissions from this sector than the blunt instrumentthat is the CCL.

We support the proposals for an energy performance commitment, recentlyconsulted on by Defra, to implement an absolute cap on emissions from thissector and bring more businesses into cap-and-trade schemes. The schemeshould include electricity-related emissions, which make up 70 per cent ofthe carbon dioxide emissions generated by such sectors, and should bebased on an auctioning system that recycles revenues back to participatingsectors.

More broadly, a mechanism to give a ‘long, loud and legal’ carbon pricesignal should be developed, to give businesses the confidence they need tomake long-term investments.This will need to be more than the energyreview’s vague statement of intent about the EU emissions trading scheme.We believe that the climate change levy should be reformulated as a carbontax 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 anyother sector7 and are likely to become the largest source of emissions in theUK in the near future.This is unsurprising: it is the sector where the‘polluter pays’ principle has been applied weakly and inconsistently, togetherwith a lack of sustained investment in environmentally-preferable forms oftravel.

Transport is both the most technically difficult sector in which to reducecarbon emissions and the most politically difficult. Significant cuts inemissions require a fundamental change in behaviour and one thatchallenges one of the keystones of modern society: the ever-expanding senseof personal freedom and mobility that has followed the increasingaffordability of both driving and flying compared to the costs of publictransport.

Lack of progress in emissions reductions shows that current mechanisms areclearly failing and there seems to be little urgency at the Department forTransport to alter this, despite its joint responsibility for the PSA target onclimate change. Government should establish a sector-specific target forcarbon emissions from transport against which the department should berequired 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 reductionin emissions by 2030 could be reached. We urge the government to examinethis study carefully to construct an ambitious and well thought out targetand package of policies. Targeted spending, taxation and smart measuresshould be used to curb the demand for travel, as well as the carbon intensityof journeys taken. The government needs to set out its strategy for reducingemissions from transport and all transport policies should be geared towardsthis. It should also develop a more robust and transparent approach tomonitoring 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-constrainedfuture and should be aimed to reduce dependence on cars, lorries and airand change travel behaviour to more sustainable means.


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Spending on roads should be reducedAccording to recent government figures, one mile of a new three-lanemotorway costs £28.4 million8 and over £10 billion of approved roadprogramme schemes are in the pipeline. Increased road capacity has beenshown to increase car use (and therefore emissions), increase cardependence and promote dispersal resulting in locations less capable ofbeing reached by public transport. Spending on roads is poor value formoney when compared properly to alternatives and can add to regionaldisparities in infrastructure. We urge the government to reduce plannedspending on roads and reapportion this money to investment in publictransport, walking, cycling and promotion of smart measures.

Spending on aviation growth should be reducedPredict and provide is discredited for car travel, but still seems to prevail inaviation. ‘The future of air transport’ white paper plans for a trebling ofannual passengers by 2030, spending that will directly undermine thechance of hitting our carbon reduction targets. Any growth of the aviationindustry 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 bereallocated to other sectors.

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

Support for active travel - walking and cyclingNon-motorised forms of transport have suffered decades of under-investment. Many European countries spend around £5 per head oninfrastructure for these modes, whilst the spending is under £1 per capitaon average in towns in the UK.10 Consistent spending means that manylocations 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 quadrupledin the UK Sustrans et al recommend a spend of around £260 million perannum, compared to the £35 million currently spent.11 More active travel


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

Support for measures that actively enhance social inclusion and abetter local transport environmentThe trend for longer journeys contributes both to social exclusion and thedispersal of facilities, leading to a loss of agglomeration. Dense cities can bemore easily served by public transport and reduce both the need to traveland journey lengths, making other forms of transport more attractive.Spending should support measures that enhance clustering, quality of placeand stronger land use planning to reduce the need to travel.

Current levels of spending on rail must be maintainedWe need an expanding railway to reduce carbon dependence, promoteclustering and relieve congestion. However the current system needs to beintegrated better with other forms of transport. Local transport integrationshould be prioritised and any decisions on the future of local rail servicesshould be subject to thorough and transparent assessment, including the fullnetwork effect and long-term impact on carbon emissions from havingcommunities directly connected to the rail network. Support should also begiven for new high-speed rail links, both for the role they would play inachieving modal shift from rail to air, and for freeing up capacity on thenetwork.

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

The Transport Innovation Fund must fund carbon reductions in transportThe Transport Innovation Fund (TIF) is set to become the single largestsource of public investment in transport, forecast to grow from £290million in 2008-09 to £2 billion by 2014-15.The fund currently lacks anyenvironmental criteria, focusing exclusively on tackling congestion andimproving productivity. We urge the government to make environmentalobjectives, specifically emissions reductions, the overriding criterion of thisfunding.


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Fiscal Instruments

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

The government’s preferred option to address aviation emissions, theinclusion of the sector in the EU Emissions Trading Scheme, is unlikely tohappen until 2013 at the earliest and its effectiveness will depend on thedetailed design of the scheme.There is a strong likelihood that industrylobbying will result in unambitious allocations.Estimates suggest that at least 40 per cent of the recent growth in air travelhas been generated by fare reductions. A doubling of air passenger duty(APD) would help to counter this trend and provide a consistent and long-term signal to passengers about the environmental damage caused by airtravel. APD receipts have declined in recent years despite a large rise in thetotal volume of passengers: average APD receipts per passenger were only£8.86 in 2005 compared to £13.40 in 2001.13 Recent surveys suggest thatthe majority of the public (60 per cent) support higher taxes on aviation toreflect environmental damage, even if this means higher airfares.14

We urge the government to discourage an expanding air culture by doublingair passenger duty. We also urge the government to push for the inclusion ofinternational aviation in international emissions inventories.

Reducing emissions must be at the core of a road user charging systemKey to rising emissions from transport have been soaring traffic volumes:between 1990 and 2004 total vehicle kilometers traveled by car and taxirose by 19 per cent whilst light van use increased by over 50 per cent anduse of heavy goods vehicles (HGVs) by 18 per cent.15 Behind these figures isa 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 favourcleaner vehicles and reducing mileage will undermine one of the basicfunctions of taxation: to generate government revenue.The current transporttax system has been designed to produce a substantial income from internalcombustion engine vehicles in an easily administered form. A majorrestructuring of transport taxation is required to fully address a different


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goal: that of stimulating improvements in environmental performance. Wetherefore support the long-term move to a road user charging-based systemas 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 addressedthrough the existing regime.

Incentives for low emission vehicles should be increasedAlthough average emissions of new cars in the UK have reduced by 10.7 percent since 1997, at the current rate of improvement we are unlikely to beanywhere near the EU target of 140g/km by 200816 and our new caremissions are some 7g/km above the EU average.17

The point of purchase has a major effect on future emissions, and thegovernment deserves praise for being the first in Europe to introduce vehicletaxes specifically based on emissions. Its boldness in company car tax reformhas been rewarded with visible progress in that market, but there is anincreasing split between the company car market where emissions havecontinued to fall and private cars where progress has stagnated.A note of warning: reliance on increasing the carbon efficiency of car travelwill not be sufficient to reduce carbon emissions from road transport inabsolute terms; more must be done on reducing demand.

Vehicle excise duty (VED) should be reformedAs a fixed cost of car ownership,VED does not provide motorists with anyincentive to drive less, but it does encourage them to choose more fuelefficient vehicles as the tax is explicitly linked to emissions.The gap betweencurrent annual VED rates rose to £210 in 2006-07, but the new band G isineffective; the £40 rise in VED costs less than the cost of a tank of petrol forthe cars affected, and represents very little of the purchase price.18 Althoughthe average emissions rating of new cars purchased has been steadilydeclining19 these changes started before the banding of VED rates in 2001,so it is hard to disentangle the contribution made by reforms to VED andchanges in manufacturing standards for example.

What is clear is that the current differential is a relatively small part of therunning cost of a car and has yet to offer sufficient incentive for a markedchange in consumer choice. Wider VED differentials are needed. Adifferential between bands of £50 would be enough for 33 per cent ofpeople 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 reinstatedIn the longer term we would like to see the reinstating of car purchasetaxes, abolished in the UK in 1992, as recently introduced into theNetherlands. Cars in the Netherlands are now ranked according to sevendifferent categories including: fuel consumption; carbon dioxide emissionsand an efficiency rating that assesses them relative to vehicles of the sameclass.

The fuel duty escalator should be reintroducedDuties on road fuels represent the single largest green tax in the UK, andcertainly the most controversial, as the protests of 2000 showed. Fuel dutyrepresents a marginal cost, with more payable by those that drive further; itsaim should be to send the correct price signal to motorists therebyproviding an incentive to choose more efficient vehicles and reduce tripfrequency and journey length to the socially optimum level, taking intoaccount the external costs of motoring.

The Environmental Audit Committee (2006) has shown that between 1980and 2004 the real cost of motoring declined by around 15 per cent, whilsthousehold 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 dutybeen maintained at their peak values since 1999, we might expect currentfuel consumption to be around four to five per cent lower, and revenue tobe about £4.2 billion per year higher.

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

Approved mileage rates for business travel should be reducedAs the review of car ownership schemes will probably make clear, thegenerous threshold of 10,000 miles a year for the 40p per mile rate is aperverse incentive for the use of private cars for employer’s business. Wesuggest halving the threshold to 5,000 miles, which would cover the businesstravel 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 alsobecause dealing with waste causes damages to other natural resources suchas 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 beforebeing discarded.

The government will publish a new waste strategy for England early in2007. It should take significant steps towards decoupling waste generationfrom wealth, recognising that we should no longer see the ability to wasteas a sign of prosperity, and that wasteful consumption risks breachingenvironmental limits. The UK’s approach so far has been characterised by alack of ambition, too narrow a range of policy instruments to drive realchange and a focus on achieving least-cost compliance with EU directives.Instead, the government should be aiming not only to deliver world-classwaste management, but also to change the nature of waste, by transformingthe way we make and use products. At the moment, the economicframework provides incentives for inefficient resource use and cheap,disposable products. The Treasury can play a key role in leading thegovernment in a step change from a waste to a resources focus as the wastestrategy review is finalised, through the CSR and budget in 2007.

Green Alliance has studied a number of countries, states and regions thathave implemented what are, by the UK’s standards, both radical and creativepolicy packages for waste.21 The instruments used are diverse, but have onething in common - they employ clear and bold measures.The UK has startedto act along these lines but the signals current instruments send out, to localauthorities, waste companies, investors and householders, are not strong orconsistent enough to change individual and corporate behaviour to theextent that is needed if we are to make real progress on the waste andresources 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 andbanning easily recyclable materials from landfill. Here, however, we set out aprogramme of taxation and spending that would reduce the amount ofmaterial and embodied energy reaching the lowest parts of the wastehierarchy.


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Spending

The most pressing short-term issue is meeting the UK’s obligations underthe landfill directive.There is going to have to be a significant increase inmunicipal waste management expenditure: Defra has estimated that £10billion of capital investment is required. Assuming a constant cost of adiversion, this means that £4 billion of capital investment is required duringthe next four years, up to the first target date of 2010. It is clear that neitherthe private sector nor local authorities are on track to deliver this.

There are significant concerns amongst many local authorities about thefunding gap facing them as they attempt to avoid fines under the LandfillAllowance Trading Scheme. Local authority expenditure on wastemanagement has risen by over 80 per cent (at current prices) since 1998.Given the assumption that recycling costs increase as cheaper options areexhausted, further and more significant expenditure by local authorities willbe needed.

Local authorities need increased financial support for procuring andoperating new recycling technologies, judged on both their carbonbenefits and their effectiveness at reclaiming materialsIt is clear that funding of waste treatment and disposal is becoming one ofthe major financial threats to local authorities. The Local GovernmentAssociation reported in June 2006 that Cheshire County Council has an‘affordability gap’ of £480 million, and North Yorkshire’s £800 million gapcannot be contained within capping limits. Essex County Council faces anaffordability gap of approximately £30 million by 2015 even with the mostbasic bio-treatment of residual waste.The problem is compounded by thehigh ratio of operating to capital costs. The funding crisis is putting pressureon council tax and threatening cuts to other services. Efficiency savingsderived from better ways of working will go some way towards closing thegap but the fundamental problem remains, irrespective of funding route ortreatment technology chosen. We urge the government to address the fundingcrisis in local authority waste management and question whether the PrivateFinance Initiative (PFI) is the right mechanism to fund waste management.

Local authorities need incentives to go beyond basic wastemanagement targets At the moment measures employed by central government are punitive anddo not provide incentives for local authorities to do any more than theminimum required of them - which at the moment is all they can afford.There are also major concerns that less affluent inner city local authoritieswill struggle to match the recycling rates of more affluent areas due to lackof space for recycling and composting as well as greater demands on


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

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

• a strong bottom-up approach: regional waste management plans areprepared and implemented by joint working between central andregional government, and based on experience of both to ensure sharedownership;

• regional government subsidies for municipalities, including voluntaryenvironmental cooperation agreements (commitment to achieve a seriesof environmental goals in exchange for subsidies) and subsidies forspecific investments concerning prevention and separate collection ofmunicipal solid waste, for example, help with costs of home compostingschemes, subsidies for re-usable nappies and help with other recyclinginfrastructure.

We believe the government should consider negotiated agreements betweencentral and local government to provide local authorities with incentives to gobeyond basic waste management targets.

Public procurement must be progressive Government should use its spending power to drive market development forrecycled products as part of a wider approach to incorporating sustainabilityconsiderations into public procurement.This could include initiatives suchas minimum recycled content for construction materials, paper, and othergoods used on the government estate. It could also include embeddingwaste neutral objectives into public bodies, an approach that seeks tobalance recyclable materials sent out of the organisation with recycledmaterial brought in, thereby concentrating minds on supply chains andencouraging the identification of more ‘closed loop’ systems. Puttingincreased resources into specialised training of purchasing professionals andtheir managers is a crucial part of delivering more sustainable procurement.We recommend that the government act on all the recommendations made bythe Sustainable Procurement Task Force and use its spending power to embedclosed loop systems in the wider government estate.

The Business Resource Efficiency and Waste Programme (BREW) accountsfor half the £100m research money available for waste, but is currentlyspending 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, materialand supply chain innovation. The focus of public spending must be focusedon stimulating transformative approaches to resource use and wastemanagement, in ways that work throughout supply chains. This will yieldsignificant environmental and economic benefits both for large companies andthe UK’s large proportion of small and medium enterprises.

Fiscal Instruments

Altering the economics of waste management is fundamental to deliver themost environmentally preferable outcomes.This section sets out a number offiscal 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 thelandfill tax escalator, to faster improve the economics of recycling. If adoptedin the next budget this would mean the tax would exceed £35 per tonne -the rate suggested as providing the tipping point for making landfilluneconomic by taking gate fees22 to £50-£60 per tonne - in 2009/10instead of 2011/12. While this difference of two years may not seem likemuch, it is important in terms of signalling the speed with whichgovernment 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) madewhen the tax rate was set may no longer be valid, due to the changingeconomics and circumstances of the sector and the elasticity of demand forlandfill. The tax is currently a cost to business, but not one high enough tostimulate the required scale of investment in new options and changedpractice, due to the low capital costs of landfill and the additional risksassociated with a processing facility being left dormant. A large-scale moveaway from landfill will only be seen when landfill stops being the cheapestwaste management option, by both industry and the public sector. A recentsurvey of selected local authorities revealed that landfill is still generally thecheapest option, and that while other treatment options can be slightlycheaper in some areas, the value obtained from the recyclate does notcompensate for the large collection costs. Similarly, solutions such asadvanced energy-from-waste plants or CHP using food waste from thecommercial sector, and supplying a cheaper energy source than gas orelectricity, will not be realised until the landfill tax has reached a levelsufficient to persuade operators to take long-term decisions to invest in suchalternatives.


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Raising landfill tax is particularly important given the absence of targets orother incentives for recycling of industrial and commercial waste. Anadvantage industrial waste has over household is that the relationship withwaste operators is more direct: companies pay for what is taken away.Theyjust don’t currently pay enough to make waste costs a big consideration. Sohigher landfill tax is the main, and probably only, short-term lever onindustrial 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, particularlyin commercial and industrial waste.

Markets for recycled materials need support to develop The economics associated with alternatives to landfill could also be radicallyimproved by the development of robust markets for recycled products. Thesemarkets could be developed by a resources tax on virgin materials alongsiderequirements for minimum recycled content.These taxes could be geared todiscourage materials giving rise to hazardous and difficult wastes as well asencouraging the use of recycled alternatives. Such an instrument would haveto provide a clear, long-term signal to stimulate private sector investment todevelop sufficient reprocessing infrastructure.To continue the progress madeby the aggregates levy, we believe that it should at least keep pace withinflation; there is a case for raising it to £4/tonne to drive fasterimprovements in this sector. We recommend the government implements abroader resources tax on virgin materials to drive the development of robustmarkets for recycled products.

Incineration must not become the preferred option as the cost of landfillincreasesAs the cost of landfill tax increases due to the landfill tax escalator, there is adanger that waste will be diverted to the next cheapest or easiest option inthe waste hierarchy, which is likely to be mass-burn incineration.The sizeand cost of these facilities means that there is a risk of ‘lock-in’ of wastestreams i.e. a prolonged need to send waste down that route and a lack offlexibility as new recycling and energy recovery options come on stream.Although the government stresses the importance of the waste hierarchy andthe desirability of prevention and recycling over incineration, there iscurrently no mechanism in place to ensure that local authorities follow thisguidance when deciding how to achieve their targets under the LandfillAllowance Trading Scheme. We recommend that the landfill tax be broadenedto cover all disposal options, including incineration.

Setting an incineration tax at a low rate initially, but with the clear indicationthat it will be increased if much higher levels of recycling are not quickly


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

Local government should be enabled to charge variably for householdwasteWe welcome the recent findings from the pilots of the household incentiveschemes as an excellent first step in encouraging more sustainable behaviour.However, continuing to reward people for behaviour we wish to seenormalised is not a viable long-term strategy. Charging householders forunrecycled waste is a crucial signalling device, and enabling powers wouldallow local authorities to develop schemes to suit their own circumstances.Variable charging powers are in place in all European countries that haveachieved over 40 per cent recycling, which is the aspiration in Defra’s wastestrategy review consultation. We recommend government create enablingpowers for local authorities to introduce fiscal mechanisms.

Environmentally damaging and hard-to-recycle products should bediscouragedExisting instruments such as the essential requirements of producerresponsibility legislation need to be better implemented.The UK also needsto take a proactive position on the energy using products directive and thepossibilities it creates for addressing the environmental impacts of products.More targeted incentives such as a levy on particularly environmentallydamaging or hard-to-recycle products should be developed, to send a signalto the market that disposable products should be avoided.The money fromsuch a levy could be used to fund recycling or the charge could be used topersuade consumers to switch to alternative products. High on the listwould be disposable, or non-recyclable products such as disposable cameras,non-refillable printer cartridges and non-rechargeable batteries, all of whichhave less wasteful alternatives readily available.23 We recommend that taxesbe levied on environmentally damaging or hard-to-recycle products toencourage 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 thedisposal of pollutants. There has been massive investment in water industryinfrastructure since privatisation and this has reduced gross pollution.However more must still be done to mitigate the impact of damagingabstractions and diffuse agricultural and urban pollution.

One of the major challenges is managing rising domestic demand. Successwill benefit the environment (through reducing the need for new resourcedevelopment and allowing lower levels of abstraction from sensitive aquifersand rivers) and saving water customers from unnecessary bill increases.Savings in water use of between 30-50 per cent are possible in new buildcompared to conventional housing through simple means. Even greaterlevels of water efficiency can be achieved through the use of technologiessuch as greywater recycling and rainwater harvesting, which have beenwidely adopted in many EU countries. If the new housing proposed for thesustainable community growth areas were built to even moderate waterefficiency standards (25 per cent lower per household consumption thancurrent building regulations standards) then overall demand would bereduced by 419 million litres a day.This is more than the predicted dailyoutput from Thames Water’s proposed new Oxfordshire reservoir, whichcould cost more than £1 billion. Significant levels of water saving can alsobe achieved in existing housing stock through incentivised retrofittingcampaigns.

Such action would translate into significant financial savings due to reducedneed for supply side investments, and could allow new housing proposals tobe water neutral, requiring no additional water resource development orabstraction.

Other sectors, especially farming and spatial planning and development,need to contribute to sustainable water management so that the burden doesnot fall exclusively on water companies and customers, in line with thedegrader pays principle.This will need action on diffuse pollution (seeproposals for input levies in section 5e), improved standards of waterefficiency in housing (both new and existing stock), and action to tackleurban water drainage and flooding: Defra estimates that £250 billion inassets, including two million homes, are at risk from flooding and coastalerosion.24


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Spending

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

More funds are needed for catchment management and restoration£200 million a year of water customers’ money is currently spent removingdiffuse pollutant such as nitrates and pesticides from water.This is far morethan the funds currently allocated to persuading farmers to reduce damaginginputs and change their land use.This spending could be found from areallocation under the CAP or funded from input taxes on the agriculturalsector. Where the degradation to natural capital is historical, such as thedrainage of wetlands, and the degrader pays principle cannot be appliedeffectively, we believe it is the role of central government to spend publicmoney on restoring that capital. We recommend that the government allocateat least £130 million a year to fund advisory and assistance programmes forfarmers, to help them adopt catchment sensitive farming practices. This wouldreduce the need for expensive, and energy and chemical intensive, treatment.

Effective enforcement relies on sufficient fundingMore resources are needed to enforce pollution regulation. Fines for seriouswater pollution incidents are still trivial and need to be increased markedly.Increased revenue from fines should be recycled back into enforcement orshould finance catchment restoration.

The value of water, and the importance of water efficiency, needswidespread promotionWater efficiency needs more effective promotion across business andhouseholds. The Treasury should fund advice and promotion of water efficientgoods and activities, possibly through a Water Saving Trust or expanding theremit 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 revokedHistoric over-allocation of abstraction licences and rising demand for watermean that current levels of abstraction are unsustainable in many parts of thecountry and have the potential to inflict significant damage on theenvironment.The Environment Agency has spent considerable resources overthe last ten years in identifying abstraction licences that could damageinternationally and nationally important wildlife sites, through its RestoringSustainable Abstraction programme and the review of consents. Howeverthere is currently no system in place to fund action to amend or revokethem, after the decision was taken to shift the financial burden from watercustomers to abstractors during the last periodic review.The effectiveness ofthese changes has been further compromised by the government placing alimit the revenue that can be raised through abstraction charges tocompensate licence holders. With insufficient funds available, thegovernment risks breaching the habitats directive. We urge the government tofollow through on its commitment to making the degrader pay forunsustainable water abstraction.

The price signal to consumers must be strengthenedThere is currently only a very weak price signal to customers about the valueand scarcity of water resources. We do not believe that efficiency measureswill have sufficient effect on reducing the demand for water in the home inthe absence of a clear financial incentive. Universal water metering,proceeding fastest in water stressed areas, would provide a clear price signalto householders.Variable charging structures would provide support to low-income households, and could actually make water bills more sociallyprogressive by providing a low-cost block for essential use while penalisingunnecessary or luxury use such as power showers, spa baths and swimmingpools. We recommend the government implement universal water meteringand new social ‘rising block’ tariffs alongside careful measures to alleviateimpacts on vulnerable groups.

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


35

“current levels ofabstraction are

unsustainable inmany parts of the

country”

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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 arenot sidelined in this analysis. Both deserve equal status, making an importantcontribution to natural capital. The quality of the natural environment istangible to people and provides both public benefits, through contributingto physical and mental health and well-being, and economic benefits,through the conservation sector, tourism and both business and residentialdesirability: IUCN research suggests that biodiversity accounts for aminimum 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 awhole, which accounts for £18.6 billion of GDP.26

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

A number of easy wins have been tackled mainly through regulation, suchas the birds and habitats directives, but we now face more difficult issues,which require a more sophisticated approach.These need a more creativemix of policy instruments: an effective regulatory framework, smart taxesand incentives, and subsidy. An example of this is in the policy responseneeded to tackle diffuse pollution. Here, minimum standards, transitionalsupport in the form of public expenditure to help farmers withinfrastructure, changes in land management practices, and pesticides andphosphate input taxes are all needed. Our response to the threat of climatechange will require a similar flexibility: retaining the protective frameworkprovided by legislation and medium-term targets, investing in habitatcreation, and softening the wider countryside to make it ‘permeable’ for


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“It is importantthat biodiversityproblems are notseen as beingsolved”

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

Spending

Our approach to public spending and biodiversity follows the approach setout in the Defra-Treasury paper on the future of the common agriculturalpolicy (CAP), which is that public spending on land management shouldaim to secure public goods. Biodiversity is a public good that yields specificbenefits, both market and non-market, and now and in the future. As aresult, it is also an example of market failure, whereby the market currentlyprovides significantly less than optimum levels of biodiversity conservation.It is therefore appropriate and right that the government should intervene toconserve it.

Declines in biodiversity should be tackled, and landscape qualitysecured, through transferring £300 million from farm payments to agri-environment schemesFigures prepared for Defra27 have illuminated the significant gap in fundingrequired to deliver the UK BAP, central to delivering the EU’s target ofhalting biodiversity loss by 2010. Current funding stands at £340 million ayear, while estimated costs are £677 million a year: an overall fundingshortfall of at least £300 million a year in the UK. Much of the shortfall infunding relates to widespread species.

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

We therefore believe that a proportion of the UK’s BAP costs could andshould be met through agri-environment schemes.Total BAP delivery coststhat could be met through agri-environment schemes are approximately£470 million a year, but only £215 million is currently spent on the BAPthrough these schemes, leaving a funding shortfall of £255 million/year.28

The scale of funding needed here (£255-500 million) is achievable throughreallocation of spending within the CAP - currently £2 billion in the UKand over £1.2 billion in England.


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We recommend that the shortfalls in biodiversity and landscape funding bemade up through re-allocating funds within the CAP of at least £300 million toagri-environment schemes.

The fishing industry will need public support to adjust to lower catchinglevelsA shift in approach is needed to the fishing industry, with greaterapplication of the degrader pays principle, the ecosystem approach tofisheries management and determining sustainable catches. To ease the socialand economic impacts, the government should seriously consider how to usetransitional support as a tool to help the fishing industry adjust to lowercatching levels.

Fiscal instruments

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

The use of peat, phosphorus and pesticides should be discouragedThe continued use of peat degrades natural capital and results in releases ofstored carbon into the atmosphere as carbon dioxide. Peat extractioncontinues despite the presence of alternative sources of growing media, suchas other composted materials. A levy at point of sale would increaseconsumer awareness of damaging peat extraction and encourage thepurchase of alternatives, as well as diverting waste away from landfill anddeveloping the markets in alternative composts and composting facilities. Weurge the government to reconsider their stance on fiscal measures to tacklethe use of peat.

Economic instruments addressing phosphorus and pesticide pollutionshould help fund support and advice for farmers in lowering the impact oftheir chemical use on the environment and water customers.

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

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


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

The decision to put together this pamphlet was made in the summer of2005. At that time, we seemed to have reached an impasse.The Treasury’s‘Statement of intent on environmental taxation’ provided an excellentframework. However government decisions often appeared to sideline orreject these principles. Similarly, although the government acknowledged thetransformative effect of public spending, the levels dedicated toenvironmental outcomes were simply not of the scale required. Defra and itsagencies were already beginning to suffer from spending constraints, whichhave worsened considerably since then.The use of regulation was underconstant attack in the guise of better regulation, for which too often readderegulation.

A lot has happened since then.The environment has risen dramatically upthe political agenda, and the chancellor’s action list. Our sense is that manywithin the Treasury now wish to make the step change needed on theenvironment.They appear to include the chancellor. His speech at the Sternreview opened with a commitment to make environmental care a third over-riding 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 unlesssufficient regard is given to the interconnections between these objectivesand the environment.There is a wealth of evidence, both in the UK andinternationally, about the market and non-market benefits of natural capitaland the costs of failing to take action on its depletion and degradation.

This agenda goes beyond climate change. Climate change is the world’s mostpressing challenge, and certainly pre-eminent among environmentalconcerns. But the CSR provides an opportunity to develop a broaderapproach, and to plan the transition to a sustainable resource efficient UKeconomy, with associated economic and environmental benefits. We urge theTreasury to grasp it with both hands.


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6. conclusions

“The environmenthas risen

dramatically upthe political

agenda, and thechancellor’saction list”

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notes and references

1 Written statement to parliament on the spending review, 19 July 2005: Press Notice 652 See also UNEP’s Environmental Outlook and the OECD’s 2005 Environment Outlook.3 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 someparticulate matter.

4 Millennium Ecosystem Assessment 2005 5 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 seriousabout increasing economic growth in line with sustainable development principles… £229 million ayear could be added to [the East of England’s] economy through the improved use of resources by ourbusinesses: a sum which would require considerably more effort to achieve through business growthalone”.

6 A Green Living Initiative: Engaging households to achieve environmental goals, Policy Studies Institute/Green Alliance,January 2006

7 Transport accounted for 33 per cent of total UK CO2 emissions in 2004,Table 5, UK Climate ChangeProgramme 2006

8 Hansard, 21 May 20069 Sustrans TravelSmart programme on ITM has achieved average reductions in car use of 9-14% in a

variety of urban settings.10 Car Sick: Solutions for out car-addicted culture, Lynn Sloman, Green Books 200611 Department for Transport, June 200612 Defra, E-Digest of Environmental Statistics, January 200613 The UK tax system and the environment, The Institute for Fiscal Studies, November 2006, p4214 MORI, June 200615 The UK tax system and the environment,The Institute for Fiscal Studies, November 2006, p2416 Department for Transport,Transport Trends: 2005 Edition, p8617 SMMT, UK New Car Registration by CO2 Performance: Report of the 2005 Market, p2718 Reducing Carbon Emissions from Transport, Ninth report of session 2005-06, Environmental Audit Committee,

August 200619 Society of Motor Manufacturers and Traders Ltd, 200620 Assessing the impact of graduated Vehicle Excise Duty- Quantitative Research, MORI for the Department of Transport,

200321 Creative Policy Packages for Waste, Green Alliance, October 2002 and An International Survey of Zero Waste

Initiatives, Green Alliance, June 200622 Gate fee is the price per tonne charged at the landfill site gate.23 A Zero Waste UK, Green Alliance/Institute for Public Policy Research, October 200624 National assessment of defence needs and costs for flood and coastal erosion management (NADNAC)

http://www.defra.gov.uk/environ/fcd/policy/nadnac0604.pdf25 Uses of Wild Living Resources in the UK, IUCN UK Committee, 200226 Wellbeing Through Wildlife, RSPB, http://www.rspb.org.uk/policy/Economic development/wellbeing.asp27 UK Biodiversity Action Plan - preparing costings for Species and Habitat Action Plans, Report to Defra, GHK Consulting

Ltd, April 200628 Analysis of Agri-environment Delivery for UK BAP, RSPB Discussion Paper, September 2006

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Documents

Beyond Stern: the environmental challenge for the comprehensive spending review