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Future of Tax Q1 2023

Clear tax policies are needed for climate action

iStock / Getty Images Plus / ArLawKa AungTun

Helen Thornley

Technical Officer, Association of Taxation Technicians (ATT)

Tax is not just about raising revenue; it can also be a powerful way to influence behaviour. Sadly, current policies leave something to be desired when it comes to tackling the climate crisis.

Tax has been used as a tool to influence behaviours for centuries. High taxes discourage certain behaviours while tax reliefs can encourage them. But when it comes to the climate crisis — an area where we need big behavioural changes — tax policy is not always effective.

Go electric

Take road tax — or vehicle excise duty (VED), to be precise. To encourage drivers to switch, electric cars have been exempt from VED since 2001. But is this small annual saving enough to affect decision-making?

Or is it simply a bonus for those already intending to make the switch? We don’t have evidence for how effective this policy is and, with an estimated 660,000 electric cars now on the road, it is no longer sustainable. From April 2025, electric car owners will have to start paying VED simply to keep revenues coming in.

Repair or refurbishment

Sometimes incentives are simply inconsistent. The installation of energy-saving materials such as insulation or solar panels can benefit from 0% VAT. However, the savings only apply where these items are installed separately.

If you want to use energy-saving materials as part of a larger refurbishment, the benefit of the lower rate can be lost. This means it can be more tax-effective to retrofit materials than install them upfront as part of a bigger project.

From April 2025, electric car owners will have to start paying VED simply to keep revenues coming in.

Carbon capture

Even worse, current tax policy can stand in the way of people making positive changes. A healthy, squidgy peat bog accumulates carbon dioxide, while a damaged, drying bog releases it.

Much of the UK’s peatland is damaged, and the Government wants to restore 280,000 hectares of it by 2050 to provide climate, water quality and biodiversity benefits. But landowners who want to change how they use their land risk losing valuable inheritance tax reliefs. This is a massive disincentive and a significant barrier to getting more land into schemes that could help reduce and absorb carbon emissions.

Green taxes

In January, a government-commissioned review, Mission Zero, called for a review of how tax policy could incentivise decarbonisation.

If we want to make meaningful progress in tackling the climate crisis, then tax is an important lever, but the Government needs to carry out a serious, strategic review to deliver coherent, consistent policies which will deliver real change.

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