UK Budget 2021 lacks clear tax policies for net zero

The chancellor announced the freezing of key ‘green taxes’ such as fuel duty and the carbon price support.

From April 2022, reduced and standard short-haul air passenger duty (APD) rates will remain frozen at the same level that they have been at since 2012. However, long-haul rates will increase in line with the retail price index (RPI) measure of inflation.

The budget document said that the government is committed to carbon pricing as a tool to drive decarbonisation and that it intends to set out additional proposals for expanding the UK emissions trading scheme (ETS) over the course of 2021.

Jason Collins of Pinsent Masons, the law firm behind Out-Law, said: “The budget lacks any substantive measures on tax policy to support the journey to net zero”.

“However, some positives can be drawn. The establishment of a new carbon markets working group to encourage more voluntary carbon offsetting and the chancellor's commitments to green-led infrastructure projects via the UK Infrastructure Bank signals a step in the path to net zero across the UK,” he said.

The chancellor announced that the main UK corporation tax rate will rise to 25% from April 2023, but in the meantime a temporary 'super-deduction' of up to 130% will be available to encourage investment in new plant and machinery.

“Tax policy needs a wholesale change to help achieve net-zero. For example, the companies paying the increased corporation tax rate might be amongst the heaviest polluters or the least – the system isn’t set up to care. And the super-deduction for expenditure on plant and machinery is an opportunity missed – that could have been more generous and applied only to cleaner technologies,” Collins said.

The UK has legislated to reduce its net emissions from greenhouse gases by 100% back to 1990 levels by 2050. In addition to the 2050 target, in December 2020 Prime Minister Boris Johnson announced an intention for the UK to have achieved a 68% reduction in emissions by 2030.

“Although this year and next might be ones on which to focus on less radical changes to the tax system, at some point we have to wake up to the need to boost climate friendly businesses, making sustainable profits, and encourage the turnaround of those that aren’t,” Collins said.

The House of Commons Environmental Audit Committee (EAC) said in a recent report that the need to provide a stimulus to economic recovery should be treated as an opportunity to accelerate investment on nature recovery, climate adaptation and cutting emissions to net zero.

It recommended changes to the VAT system to encourage environmentally beneficial behaviour, including VAT reductions on green home upgrades to incentivise more people to install low-carbon technologies and improve the energy efficiency of existing homes. It also recommended reducing the rate of VAT on repair services and products containing reused or recycled materials in order to increase the circularity of the UK economy. However, no such changes were announced in the budget.

Until the end of the Brexit transition period, the UK participated in the EU's ETS, under which those covered by the scheme were required to receive or, in most cases, buy allowances or 'permits' to emit.

The EU ETS only covers power generators and businesses operating in very energy-intensive industry sectors, including oil refineries, and cement, steel and chemical production, plus aviation, but only involving flights within the EU.

In summer 2020, the UK consulted on whether to set up its own ETS or whether to impose a ‘carbon emissions tax’ on UK businesses. In the end the government went for the ETS option, which will largely mirror the EU ETS, albeit with proportionately fewer allowances in play in an attempt to make carbon more expensive.

“The government’s commitment to the ETS as a tool to reduce carbon emissions rather than a broader based carbon tax means that a carbon price is only imposed in respect of 30-40% of emissions generated in the UK – and none on those generated outside the UK in making products and delivering services to consumers in the UK. This means a large proportion of carbon emitting businesses slip through the net,” Collins said.

“While the UK’s ETS is estimated to bring in an additional £115m by 2025-26 this policy is not ambitious enough and doesn’t do enough to speed the UK’s transition to a low carbon economy,” he said.