Geoffrey Lean: Green taxes don't have to be a punishment

It was one of the most effective pieces of Whitehall sabotage in years. Just before the publication of the long-awaited Stern report on climate change, someone leaked an incautious ministerial letter brimming with ideas for new green taxes. The letter - from the Environment Secretary David Miliband ("the boy emperor", as is known in his department) - proposed increasing duty on gas-guzzling cars, imposing VAT on air travel and raising tax on petrol to offset falls in its price, among other measures. Its publication in The Mail on Sunday hijacked much of the impact of the Stern report.

"I'm saving the world - YOU lot are paying," screamed The Sun's front page over an article by Tony Blair, perhaps forgetting James Murdoch's enthusiasm for combating global warming. Polls show that while 85 per cent of Britons recognise that the climate change is taking place - and a majority are prepared to pay green taxes to try to control it - about two thirds believe the Government is using it as an excuse to raise revenue.

The truth is that Britain needs green taxes, if they are properly applied. They can increase jobs and prosperity, at the same time as they fight pollution. At present we tax - and so discourage - things that we ought to be promoting, such as employment, far more than we penalise things we should curb, such as pollution. Perversely, we tax "goods" - through income tax and national insurance contributions - much more than "bads".

We should switch the tax burden to give companies a greater incentive to cut kilowatts rather than labour. A study by the EU concluded that this would create at least 2.7 million jobs, while slowing global warming.

Rising workforce costs, partly through taxation, have caused employers to use labour 20 times more productively over the past 150 years. Increasing energy costs would have a similar effect. Constantly raising taxes on petrol curbed emissions from transport before the Government scrapped the policy in the wake of the 2000 fuel price protests.

But this involves a thorough-going "ecological tax reform", where income tax and national insurance are cut as the pollution taxes rise. Failure to do this will reinforce suspicion of the Government's motives and spawn opposition, as six years ago. It also needs to be accompanied by measures to ensure that the poorest do not suffer from the scaling down of income tax, which they do not pay. Increasing the tax on petrol avoids some of this, but it disproportionately hits the less well-off in the countryside.

The Dutch have shown how green taxes can be tweaked so that the poor benefit from them by providing cheap energy for meeting basic needs while charging for luxury use.

Gordon Brown understands the issue. He promised such reform, before becoming Chancellor, and he cut national insurance contributions to offset the Climate Change Levy on industry. But will he have the bottle to undertake it, as he should, in the wake of the Stern report?

Yet it would be wrong - as some environmentalists and opposition groups do - to judge the Government's commitment to tackling global warming purely on the basis of the number of green taxes it introduces.

More sophisticated measures are emerging, such as emission trading, which gives companies a pollution allowance; those that exceed it can buy extra permits from the better behaved. It can work well, if the allowances are set low enough. Mr Miliband is also toying with the idea of doing the same with individual people. And old-fashioned regulation can be surprisingly effective.

The real test for ministers should be how rapidly they can bring down emissions of greenhouse gases, by whatever means. At present they are failing it - but after the Stern report they have no excuses left.

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