UK environmental tax framework extended

Budget supports cleaner cars, reduces VAT for energy efficiency, puts new tax on quarries

The UK government today unveiled a range of new green taxes in the national budget for 2000/1. Finance minister Gordon Brown announced a new tax on virgin aggregates along with a further restructuring of vehicle taxes to favour cleaner cars and those that emit less carbon dioxide (CO2). VAT (sales tax) on energy saving equipment is to be cut, meeting a longstanding demand of green groups.

Introduction of a tax of UK£1.60 (euros 2.61) on virgin aggregates is the budget's largest single green tax measure. The levy is expected to raise about £380m per year and comes despite frantic efforts by the quarrying industry to propose alternative voluntary measures. The proceeds will be recycled in the form of reduced staff charges for employers (national insurance contributions) and a new fund to help communities affected by quarrying.

There are also to be significant extensions of green transport taxation, following a previous series of measures in last year's budget (ENDS Daily 9 March 1999). An existing lower rate of annual tax (vehicle excise duty) on smaller cars will be extended from a ceiling of engines up to 1,100cc to 1,200cc, bringing an extra 2.2m existing cars into the net.

From March 2001, excise duty for new cars will be made dependent on CO2 emissions. Cars that emit under 150 grams of CO2 per km will pay the least, and those emitting over 186g the most. Within each band, cars using cleaner fuels and technology such as liquefied petroleum gas, petrol/electric hybrids and electric cars will pay less. Diesel powered cars will pay a supplement.

A related series of tax changes to be introduced from April 2002 will favour cleaner and more fuel efficient company cars. A new 1 pence per litre incentive for ultra-low sulphur petrol is to be introduced from October this year.

Several tax changes are intended to encourage domestic energy efficiency while cutting fuel poverty. VAT on all energy saving materials is to be cut from the standard national rate of 17.5% to the EU-permitted floor of 5%, also applying to installation of solar panels. VAT on government-funded installation of central heating for pensioners will also be cut to 5%, while a new "affordable warmth programme" is intended to support better, more efficient heating in 1m low income homes.

Despite widespread predictions, the government's controversial proposed industrial energy tax, the climate change levy, has not suffered any further significant cutbacks, though a 50% rebate is to be introduced for the horticulture. The tax is still expected to raise about UK£1bn per year, to be recycled as reduced employment charges.

Other elements include further discussions promised on a possible voluntary package to reduce the environmental impacts of pesticides, and the announcement of a possible relief from duty on new housing built on previously developed, or brownfield, sites. No change beyond an inflation linked increase is to be made to road fuel prices following last year's abandonment of the fuel price "escalator" (ENDS Daily 9 November 1999).

Follow Up:
UK finance ministry, tel: +44 20 72 70 45 58.

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