UK raises only 6% of tax revenue through green taxes

The total accounts for just 6% out of the £633bn raised through taxes overall, down from 8% of all taxes a decade ago. In addition to revenue from green taxes remaining low, Pinsent Masons’ research shows that the government gave back only £2.9bn in green tax breaks last year, which represents just 7% of the amount raised by green taxes.

Jason Collins, a tax expert at Pinsent Masons, said that the UK’s approach to environmental taxes is currently “not enough stick and not enough carrot” and does not give strong enough incentives for businesses to invest in environmentally friendly technology. For example, the ‘super-deduction’ for capital investment, announced in the budget in March, could have been geared more heavily towards incentivising investment in green technology, he said.

Companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023 benefit from a first-year allowance of up to 130%.

“The government needs to address the imbalance between taxes and tax reliefs to not only penalise polluters but reward businesses that invest in green technology to get the UK closer to carbon neutrality. A wholesale review of the tax system is needed – with all new legislation designed with a focus on the impact on the net zero target,” Collins said.

The amount of money brought in by green taxes has only risen by 19% in the ten years since 2009-10, compared to a 53% rise in taxes as whole and far lower than inflation over the period, Collins said. Green taxes include fuel duties, air passenger duty, landfill tax, climate change levy, aggregates levy, vehicle duty and the EU emissions trading scheme.

“The statistics suggest that far from making progress in using tax policy to reduce polluting activity, the UK has been going backwards,” Collins said.

“Taxation will play a vital role in driving the UK to its net zero target. The shrinking share of revenue brought in by green taxes is evidence that the government isn’t yet doing enough to discourage polluting behaviour,” he said.

The government announced in March that it is considering a cut to air passenger duty (APD) on domestic flights and adding extra bands so charges are more closely linked with the emissions created.

“It is not yet clear whether the government intends to use this reform to raise extra revenue from APD,” Collins said. “Even though domestic flights represent only around 1% of the UK's emissions, cutting APD on domestic flights to help connectivity within the UK looks like a backwards step in terms of encouraging climate friendly behaviour.”

“Businesses need certainty over the future of taxation and tax reliefs for environmental issues in the coming years as the net-zero deadline gets nearer. The sooner the government gives businesses clarity on what this tax roadmap will look like and what it will cost the better,” he said.

For example, he said there are still questions around which industries and business will be covered by the UK emissions trading scheme (ETS), which was established as the UK left the EU’s scheme. An ETS sets a limit on the volume of greenhouse gases that polluters covered by the scheme can emit and requires them to acquire carbon credits, which can be traded, to cover their output. The UK ETS largely mirrors the EU ETS and only covers some industries, but the government has signalled a willingness to extend the scheme into other areas. 

“With the government’s suggestion it may be considering extending the UK’s ETS, it’s crucial that businesses are given enough warning, so they can forward plan and make investments into reducing emissions,” Collins said.