Background to the report

Tax measures have been an important tool in implementing environmental policy, by taxing goods or services which harm the environment and incentivising businesses and people to change their behaviour. HM Treasury and HMRC administer four taxes with explicit environmental objectives – Climate Change Levy; Carbon Price Support; Landfill Tax; and Aggregates Levy. The government plans to introduce a fifth environmental tax – the Plastic Packaging Tax – from April 2022. In addition to environmental taxes, there are other taxes that have an impact on the environment, such as fuel duty and Air Passenger Duty, which do not have an explicit environmental objective.

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Within government, the Department for Environment, Food & Rural Affairs has lead responsibility for all environmental policy areas apart from climate change mitigation (including net zero emissions), on which the Department for Business, Energy & Industrial Strategy leads. Decisions on the use of taxes to pursue policy objectives are a matter for ministers. Where ministers decide to use tax measures to support environmental goals, HM Treasury and HM Revenue & Customs (the exchequer departments) are responsible for designing the measures to achieve objectives set by ministers, and for monitoring and evaluating their impact. HM Treasury is responsible for the strategic oversight of the tax system and HM Revenue & Customs (HMRC) is responsible for administering the system. The exchequer departments are expected to consider the government’s overall environmental objectives when undertaking their work.

Scope of the report

This report examines how HM Treasury and HMRC manage tax measures with environmental objectives, including the work undertaken to design, monitor and evaluate them. It also explores how the exchequer departments use their resources to manage the relationship between the wider tax system and the government’s environmental goals, including its statutory commitment for the UK to achieve net zero greenhouse gas emissions by 2050.

Our assessment in this report is informed by deep dives into how the exchequer departments used their resources to administer and oversee two established environmental taxes – the Climate Change Levy and the Landfill Tax – and their approach to designing the Plastic Packaging Tax.

Report conclusions

There is some evidence of the positive impact that taxes can have on the environment, but too little is known about their effect. The exchequer departments tend to focus more on the revenue that environmental taxes raise rather than the environmental impact they achieve. There are other measures – both taxes and tax reliefs – which impact on government’s wider environmental objectives but which are not recognised as environmental in nature. As such, the exchequer departments do little to identify these measures, or assess their relevance to government’s environmental goals, though they do consider environmental impact in some significant cases when advising ministers.

The scale of government’s environmental ambitions, particularly on net zero, means government needs to consider every tool at its disposal if it is to succeed. The exchequer departments need to fully understand the relationship between existing taxes and these ambitions, to ensure the taxes contribute as intended, and to learn lessons for any future taxes which may support wider environmental strategies. HM Treasury’s review of how the transition to net zero will be funded is an important first step in this process.

“Taxes are one of the tools available to government in pursuing its ambitious environmental goals. While there is some evidence of the positive impact that taxes can have on the environment, too little is known about their effect.

“HMRC and HM Treasury should work closely with other departments to ensure that existing and future tax measures are compatible with the wider environmental strategies being developed across government. HM Treasury’s review of how the transition to net zero will be funded is an important first step in this process.”

Gareth Davies, the head of the NAO


Publication details

Press release

View press release (12 Feb 2021)

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