MPs call for VAT reductions in green sectors to grow back better after covid-19

VAT reductions to encourage energy efficiency, the use of recycled materials, and repair services are among recommendations the Environmental Audit Committee (EAC) makes today as it publishes its report on how to ‘grow back better’ after covid-19 – to create a greener, healthier and more resilient economy.

The cross-party EAC warns that if the economic recovery from covid-19 is not used as an opportunity to ‘grow back better’, climate change and biodiversity collapse may deliver an even greater crisis.

While the Prime Minister’s Ten Point Plan for a green industrial revolution points in the right direction, it is not yet investible and underlying strategies need to be published rapidly to give industry confidence. The report calls for the Government to front-load its investment in areas such energy efficiency, the circular economy, climate adaptation and nature recovery, to counter rising unemployment by creating green jobs. The EAC heard that this investment will provide economic multipliers in terms of jobs and improved productivity and will offer wider benefits such as cleaner air and warmer homes.

Infrastructure invested in now will be in use for decades to come. It is essential that all decisions on infrastructure investment comply with the UK’s air quality, biodiversity protections and climate change commitments.

The EAC has specific recommendations in the following areas:

Green transport

Air pollution has been linked to higher Covid-19 mortality rates. The Government should use the upcoming transport decarbonisation strategy to set out plans for long-term investment in public transport, and enhance travel infrastructure to support more walking and cycling in towns and cities. It is also clear that cutting-edge manufacturing processes are required for the roll-out of electric vehicles and their batteries, with estimates suggesting the UK will require up to eight gigafactories.

Together, these initiatives will improve the air we breathe, cut carbon and improve our health and fitness. The Government's road building programme must be rigorously assessed against the UK's air quality, biodiversity protection and climate change targets before individual projects proceed.

Homes and energy efficiency

The EAC recommends that the Government introduce embodied carbon targets for the construction of new homes, so as to increase demand for low carbon materials, thereby stimulating growth in low-emission manufacturing of traditional, local materials and promoting the use of new low carbon materials. The Green Homes Grant must be overhauled and given a multi-year extension if it is to meet the Government’s target of issuing 600,000 vouchers.

Industry

The hydrogen strategy is long-overdue, and its publication cannot come soon enough to offer incentives for the private sector to invest in hydrogen production, which could play a key role in the low-carbon energy mix. The Government should begin scoping work on a carbon tax to incentivise low-carbon changes across the whole economy. The EAC is also calling on the Government to investigate the merits of carbon border adjustments, to accompany work on a carbon tax, as one way of addressing carbon leakage.

Investment in nature

The nature recovery network that the Government has promised must not be an afterthought established after other infrastructure is built. Nature recovery must be integral to the Government’s infrastructure plans. The EAC realises that investment in nature recovery projects could protect UK wildlife, and could create thousands of job opportunities. The idea of a National Nature Service should be piloted – in partnership with conservation charities – to test its feasibility and open up conservation opportunities.

VAT reductions

In addition to promoting specific sectors, wider tax changes could offer a ‘reset’ to design an economy fit for net-zero Britain.

The EAC believes that this should include VAT reductions to repair services and items that have been recycled to encourage a circular economy. VAT reductions on energy efficiency upgrades in homes and tax incentives to encourage more take-up of ultra-low emission vehicles could make greener options more attractive to consumers. The Government should also look wider and consider applying carbon taxes in areas across the economy.

Environmental Audit Committee Chairman, Rt Hon Philip Dunne MP, said:

“The Covid-19 crisis must be treated as a wake-up call. It is a symptom of a growing ecological emergency. The economic recovery will shape our national economy for decades to come, and it is crucial that tackling climate change and restoring nature is at its core.

“A tax system fit for net-zero Britain is key. It will encourage innovation, give confidence to the sector and support companies to make the low-carbon transition.

“There are endless initiatives that can lead to a greener future and the Chancellor should use his upcoming Budget statement to start this process. Boosting energy efficiency of homes by reducing VAT on retrofits can spur growth in low-carbon manufacturing. The funding allocated to the Green Homes Grant should be rolled over to meet the target to issue 600,000 vouchers. The electric vehicle transition must be accelerated with further tax incentives to encourage take up.

“But a greener future hinges on the health of biodiversity and ecosystems. The economic recovery must not overlook nature recovery. Planning and infrastructure decisions must take into account the impact of nature, and piloting a new National Nature Service can protect wildlife while offering employment opportunities.

“There will be no vaccine against runaway climate change, and it is our responsibility now, using the opportunity of the economic recovery, to set the UK on track for net-zero.”

The EAC recommends that the Bank of England align its quantitative easing programme with the Paris Agreement. The EAC recommends that its monetary policy remit should include both nature and climate impacts, and any continuation of the covid-19 Corporate Financing Facility (CCFF) should require climate related financial disclosures.

Recommendations

• The Government should front-load investment in areas including energy efficiency, the circular economy, climate adaptation and nature recovery, providing a green jobs boost to counter unemployment.
• The Government should establish clear and ambitious statutory targets for the state of nature, waste minimisation, water quality and air quality under the Environment Bill once enacted.

Green Finance

• The Bank of England’s monetary policy remit should include climate and nature objectives, including when considering any extension of the Covid Corporate Financing Facility (CCFF) or future such mechanisms. Any future support offered via the CCFF should require recipients to publish climate-related financial disclosures in line with the Government's Green Finance Strategy as a minimum condition.
• The Bank of England should write to each CCFF loan recipient to alert them that the Government's Green Finance Strategy expects all listed companies and large asset owners to publish climate-related disclosures not later than 2022.
• The Bank must set out the steps it intends to take to reduce the average carbon intensity of its corporate bond portfolio to align with the temperature goals of the Paris Agreement.
• The Green Finance Strategy should be updated to add an explicit objective to reduce the carbon intensity of the UK corporate sector and financial markets, such as the London Stock Exchange. The Government should examine how best to use the mechanism of mandatory climate-related financial disclosures to encourage listed companies to draw up transition plans aligned with the objectives of the Paris Agreement.

Investment in infrastructure and nature recovery

• The Government should set out a clear strategy for carbon, capture, usage and storage (CCUS), and publish a hydrogen strategy as soon as possible.
• The Government should introduce embodied carbon targets for the construction of new homes to increase demand for low carbon materials.
• The Green Homes Grant scheme should be urgently overhauled and extended to provide greater long-term stimulus to the domestic energy efficiency sector.
• Programme expenditure should be front-loaded, and the Government should support the capital cost of upgrading the energy efficiency of schools, hospitals and social housing stock.
• The Government should give greater priority to strategic projects aimed at encouraging nature recovery, and work with conservation charities to pilot a National Nature Service this summer.

Fiscal and financial incentives for a green recovery

• The Government should undertake a full evaluation of the potential economic and social benefits of its bond issuance, especially with respect to the creation of green jobs.
• In his forthcoming Budget Report, The Chancellor should set out a plan to ensure that revenue from the Sovereign Green Bond is invested only in projects which deliver demonstrable, significant and measurable environmental benefit.
• The Government must guarantee, supported in statute if necessary, that the Bank will be maintained as a public institution for the long term. In addition to a mandate to contribute to the delivery of net zero, the Bank must be given a mandate to encourage the financing of projects which promote nature recovery.
• The Chancellor of the Exchequer should bring forward proposals to reduce the rate of VAT on repair services and products containing reused or recycled materials to increase the circularity and resilience of the UK economy.
• The Government should reduce VAT on green home upgrades to incentivise more people to install low -carbon technologies and improve the energy efficiency.
• Further tax incentives should be introduced to make ultra-low emission cars more affordable.
• Where current environmental taxes, such as Air Passenger Duty, are blunt in their effect, the Chancellor should consider fine-tuning them to reward and incentivise investment in cleaner, more efficient, low-emission technology.
• The Government should begin scoping work on a carbon tax to incentivise low-carbon changes across the whole economy.
• The Government should investigate the merits of carbon border adjustments as one way of addressing carbon leakage.

Notes to editors:

• The EAC wrote to the Bank of England on 22^nd January outlining the recommendations listed above on its quantitative easing programme. The response by Governor Andrew Bailey is included as an Appendix to the report and will be published on the EAC website on Wednesday at 00.01am.
• The EAC has an ongoing inquiries considering Biodiversity and Ecosystems, Energy Efficiency, and Green Jobs.