Environmental tax measures

As custodians of the tax system, HMRC and HM Treasury are responsible for designing, monitoring and evaluating taxes, as well as ensuring they support government’s wider objectives, including the environment, and raise revenue. We recommend that the exchequer departments should:
a) identify and monitor existing tax measures with a significant environmental impact. In doing so, they should consider the likely scale of the environmental impact (which may not be reflected in the revenue raised by a tax or the cost of a tax relief) and the level of monitoring that is appropriate. Where necessary, HMRC should work with other government departments to determine how tax measures can be monitored cost-effectively and proportionately;

b) clarify and set down their approach to designing, administering and evaluating tax measures with environmental or other policy objectives. The exchequer departments should build on existing work and formalise in tax policy-making and other relevant guidance the practical steps that their teams should take to comply with wider government guidance (such as The Green Book on appraisal and evaluation), including:
• establishing how the success of tax measures will be assessed against the policy objective and tax revenue; and
• monitoring impact, as well as revenue, by collecting and reporting data on the level of compliance and environmental outcomes;

c) develop clear criteria for prioritising which taxes with an impact on the environment to evaluate, taking into account risks to value for money and the costs of evaluation. Criteria could include the amount of tax revenue, the scale of the environmental impact expected, whether the tax is new, the extent of existing information and the risk of unwanted behavioural responses to the tax (such as environmentally harmful actions). The exchequer departments should consider value for money in determining how to review whether environmental taxes are fulfilling their objectives. They should consider the adequacy of existing evidence sources to support clear conclusions, and the cost of generating evidence to cover gaps. The exchequer departments should document their approach and findings from evaluations of environmental tax measures;

d) quantify and publish the expected environmental impact of changes to taxes, where significant. This includes, for example, publishing the expected impact on CO2 emissions and use of plastic. They should monitor and report the actual impact of those changes over time. Where a decision is made not to publish information on the environmental impact of tax changes, this should be made explicit in Tax Information and Impact Notes;

e) work with other departments to make visible how existing tax measures affect environmental goals. The exchequer departments should ensure the need to announce tax measures in the Budget does not act as a barrier to working with other departments to present an integrated picture of what tools are being used to deliver government’s environmental goals. The exchequer departments should look to ensure the role of tax continues to be considered in strategies for environmental goals such as net zero and waste; and

f) monitor the long-term impact of government’s environmental goals on tax revenue and ensure these are considered as part of risk management. This would include estimating, and reviewing when necessary, the impact on taxes of structural shifts in the economy. In doing so, the exchequer departments should build on both the risks set out by the Office for Budget Responsibility in its fiscal risk report and HM Treasury insights gathered in reviewing how the transition to net zero will be funded.