Tax: a neglected tool in the nature emergency?

RSPB Dove Stone, (c)

Today's blog is written by William Riley, the RSPB's Senior Economist. He joined the RSPB earlier this year from the Government Economic Service which included posts in HMRC and Defra. He holds a masters in Environmental Economics and Climate Change from LSE. He has a particular interest in environmental taxation.

A powerful and influential tool in a government toolbox for tackling the nature and climate emergencies is being largely ignored and its potential untapped. This tool is taxation. Taxation as a tool in this arena is so poorly applied and understood that it is actively worsening these twin crises. The Dasgupta Review pointed out, globally we spend between $4 trillion to $6 trillion per year on subsidies that damage nature showing that there needs to be much more consideration of how the tax system is impacting on our natural environment.

In the UK the issue is no less prominent. VAT incentivises new build houses over renovation or repair, there are significant tax advantages for commercial (as opposed to conservation or amenity) woodland and agriculture is afforded a panoply of tax benefits (e.g. ratings on buildings, Income tax averaging, Red diesel, Vehicle Road tax) that conservation practices are not. These are just some of the features of the tax system that could well be hastening natures decline across the UK.

These disparities haven’t gone unnoticed. A report released in April 2021 by the Public Accounts Committee concluded that Treasury and HMRC officials are unable even to explain “how the tax system is used in achieving the government’s environmental goals”. In a nature and climate emergency this situation cannot continue.

Taxes, if designed well and applied to the right markets, can be an efficient tool to price in the environmental damage caused by an activity. Taxes used in this way align with the polluter pays principle, one of the 5 principles set out in the Environment Act, which states that the costs of pollution should be borne by those causing it. Taxing the environmentally harmful activity drives behaviour change and innovation as sellers have an incentive to up their game and reduce environmental impact, effectively reducing the costs of their products making them more attractive to buyers. Given the loss of nature is one of the biggest crises facing the UK and that access to nature rich space benefits all of us in society, we need to be smarter at using taxes to achieve our environmental goals.

Making tax work for nature

We hope that the recent HM Treasury consultation on the taxation of environmental land management schemes and ecosystem service markets will result changes to the tax system to benefit nature.

The consultation was split into two different areas. The first of these asked how we should tax newly emerging ecosystem service markets. Ecosystem service markets are places where actors can buy and sell promises to deliver an amount of biodiversity, carbon sequestration, water quality improvement or other service delivered by nature. These markets are growing and if government is to meet its ambition to reach £1 billion in private finance for nature’s recovery annually by 2030 then they must grow rapidly. To instil confidence in markets, taxation must be clear and proportionate and that is what we advocated for in our response.

The second part asked how inheritance tax is applied to land managed under an environmental land management scheme. Under current rules if you are a landowner renting land to a tenant that is engaged in agricultural or business practices you are eligible for 100% relief from inheritance tax on that land. However, if your tenant decides that they want to do their bit for nature and engage in an environmental land management scheme you may stand to lose that relief from inheritance tax. Given the average age of farmers is 58, concerns about loss of inheritance tax relief are likely to be prevalent amongst this population. It is possible that these concerns are preventing the uptake of environmental land management schemes on the 27% of farmland in England where landowners rent to tenants.

Our consultation response highlighted these disparities and argued that all land managed for nature should be eligible for a range of tax reliefs. Land managed for nature delivers a wealth of public benefits including flood mitigation, air quality improvements, pollination of crops, disease resilience and well-being enhancement. It makes sense that we create tax incentives for individuals to manage land for nature.

Fundamentally, we need a tax system which helps create a level playing field for conservation actions compared to other activities such as consumption, business and agriculture. A tax system that incentivises individuals to make decisions that are better for nature would bring significant benefits, not only for our threatened wildlife but, for society as a whole. It is time to change our approach to one where the tax system and other policy levers work to help us be more responsible for people and planet.