Jeremy Warner's Outlook: Ministers cannot win case for green taxes if they won't apply them to green causes

It is little surprise that Defra has so firmly rejected proposals from the European Commission that revenue derived from auctioning emission permits be earmarked for spending on climate change initiatives. As on everything to do with the growing burden of business taxes, ministers have got their heads buried in the sand.

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The UK Government has always been philosophically opposed to hypothecated taxes, and it shows no sign of budging on the new forms of taxation being introduced to curb emissions and other forms of environmental pollution.

Yet to reject the EU's suggestion on the grounds that it infringes the principle of subsidiarity is ridiculous and disingenuous. Nobody wants the EU to make the idea mandatory, but nor does this appear to be in contemplation. Rather, the hope is that nation states will follow the hypothecation course of their own accord.

Instead, the Government seems determined to regard the European Emissions Trading Scheme as another lucrative source of business taxation, the revenue from which will be mixed into the general pot of public spending. Unfortunately for ministers, it is not just the EU and the environmental lobby that wants hypothecated environmental taxes.

Yesterday, the heads of the CBI, its Climate Change Task Force, the conservation group WWF-UK and the Energy Research Group all put their names to a letter to the Prime Minister dem-anding exactly the same thing.

The writers point out that moving to a low-carbon economy depends crucially on two things – the successful implementation of the emissions trading scheme and more investment in climate change technology, an area where Britain significantly lags other countries in terms of research and development.

Last year, BP abandoned its carbon sequestration experiment at Peterhead in Scotland because of lack of government commitment on funding. It was only one of a number of examples of luke-warm support for crucially important climate change initiatives.

Meanwhile, the Treasury is licking its lips in anticipation over the emission-trading auctions, which begin this autumn. Phase Two of the scheme is expected to raise some £300m to £400m a year, but it is when Phase Three comes into operation at the end of 2012 that the real dividends kick in. Forcing power companies to pay for all their carbon allowances and other industries to pay for some, as envisaged under Phase Three, is expected to raise well over £1bn a year.

These extra costs inevitably find their way through to consumers who are already burdened by having to meet the Government's renewables obligation. Again, the high costs of paying for wind farms are met not by the Government, but by consumers.

Business won't back the case for high levels of environmental taxation if the money goes towards meeting other public spending commitments. Obviously, it is the Government's prerogative to decide on its spending priorities, but if the environment is seen as just an excuse for leeching yet more revenue from the productive economy, then green taxes are unlikely to command public support.