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GFC final report
GFC final report

Executive summary

Green Fiscal Reform (GFR) – a green tax shift

The concept of a green tax shift is simple: taxes on the things that are valued by society; like jobs, incomes and profits; are reduced and the lost revenue is replaced by taxes on things society does not like, such as pollution and environmental degradation. ‘Pay as you burn, not pay as you earn’ as one political formulation has put it. This shift not only reduces pollution, but is a more economically efficient way of raising necessary tax revenues. Taxes on labour at their current level, for example, distort the economy and reduce its efficiency and output. The same considerations suggest that, at times when taxes need to be increased to stabilize the public finances, green taxes should play a more than proportionate role in the increase.

The polluter pays

While a green tax shift does not mean the overall rate of tax will change at the national level, it does mean people and business will see the amount of tax they pay change: the polluter pays. Highly polluting households and businesses will see their tax bill increase where low pollution households and businesses will see their tax bill cut below what it would otherwise be.

The need for Green Fiscal Reform

If the UK is to meet its climate change and other environmental targets it will need to apply a wider range of policy measures, and apply them more stringently. Price is a fundamental factor which affects the type of products and services individuals and businesses buy and the level of demand for them. Changing the price of polluting activities relative to clean ones is a vital element in any serious package of measures intended to reduce climate change emissions. Green Fiscal Reform is the best way for a national economy to achieve this shift in prices.

This Report

There have already been relatively modest tax shifts in a number of European countries, including the UK, the results of which have been shown to be generally positive. A major purpose of the Green Fiscal Commission was to explore the economic, social and environmental implications of a major green tax shift for the UK, such that revenues from environmental taxes would more than double their current seven per cent share in overall tax revenues by 2020.

The results suggest that a large-scale green tax shift would be economically sensible and environmentally effective. If implemented with appropriate complementary measures, it could also be socially acceptable, especially as increasing numbers of people come to realise the imperative of reducing carbon emissions and climate change.

Key messages

Environmental taxes work: numerous studies, including those of the Green Fiscal Commission, have shown that green taxes are effective in reducing the environmental impacts on which they are targeted.

Environmental taxes are efficient: there are good reasons why environmental taxes in many situations will achieve environmental improvement at lower cost than other instruments.

Environmental taxes can raise stable revenues: some environmental taxes, like fuel duty, have been raising sizeable revenues for years. Raising them significantly would therefore both achieve environmental improvements and allow other taxes to be lower than they would otherwise need to be.

The public can be won round to green fiscal reform: a number of polls show majority public support for a green tax shift, which increases when people are persuaded that the green taxes really will be instead of other taxes.

The UK’s 2020 greenhouse gas targets could be met through green fiscal reform: the economic implications of doing so would be broadly neutral, and the green fiscal reform policy approach would increase employment.

Green fiscal reform would stimulate investment in the low-carbon industries of the future: investing a small proportion of the revenues from green fiscal reform in energy-efficient homes and vehicles, and in renewable energy development, would accelerate the growth of new low-carbon industries with real export potential, as well as increasing the environmental benefit of green fiscal reform.

Green fiscal reform can mitigate the impact of high world energy prices: high world energy prices are bad for the UK economy, which is now a net energy importer. Green fiscal reform can drive energy efficiency and make the UK economy less vulnerable to high world energy prices if they rebound once the global economy recovers.

The impacts of green fiscal reform on competitiveness can be mitigated: relatively few economic sectors would face serious challenges to their competitiveness from green fiscal reform, and there are a number of ways in which these concerns can be addressed.

For green fiscal reform to be fair, low-income households would need to be protected from energy price rises while their homes were being made energy efficient: the UK needs a massive programme of energy efficiency improvement to existing homes for social as well as environmental reasons. While this programme is being carried out, special measures would need to reduce the impacts on low-income households of the energy price rises entailed by green fiscal reform.

Green fiscal reform emerges as a crucial policy to get the UK on a low-carbon trajectory; help develop the new industries that will both keep it there and provide competitive advantage for the UK in the future; and contribute to restoring UK fiscal stability after the recession. It is a key to future environmental sustainability and low-carbon prosperity.

Read the report in full