Environment related provisions in budget 2002

United Kingdom

In its 2002 Budget, the Government announced that its strategy was to "protect the environment by continuing to work with business and consumers and harnessing the power of markets" and declared that economic efficiency and environmental protection were complementary. The series of measures it believes will achieve this aim are outlined in this report.


Exemption from climate change levy (CCL), currently available for electricity generated from renewable sources and certain qualifying combined heat and power (CHP) schemes, is to be extended to all 'good quality' CHP schemes and coal mine methane. However this will be subject to EU state aids approval.

Five new groups of energy-saving technologies have been added to the eight technologies already covered by an enhanced capital allowances (ECAs) against tax for investments in approved technologies introduced in 2001 The new qualifying technologies are heat pumps, radiant and warm air heaters, solar heaters, energy-efficient refrigeration equipment including display cabinets and compressor equipment. The availability of ECAs for these environmental technologies is also to be extended so that lessors may claim ECAs on qualifying energy-saving assets for leasing. The Government anticipates that, subject to EU state aid approval, the new technology groups will be added to the list of qualifying technologies during the Summer 2002.

The rate of duty on non-road fuel oils, such as red diesel, is frozen. New measures aimed at combating oils fraud were outlined in a consultation exercise in November 2001 following the pre-Budget Report. These comprised the introduction of: a new approval scheme designed to tighten controls on the distribution network for rebated fuels, intended for off-road use and kerosene intended for home heating; tighter controls on the use of duty-free oils in industrial processes ('tied oils'); a new, EU-wide 'Euromarker' to be added to rebated fuels, designed to make it easier to detect vehicles using rebated fuel purchased abroad for illicit use on the UK's roads; and the release of additional resources to aid the enforcement of these new controls, including the deployment of increased staff and investment in new technology to support the detection and investigation of oils fraud.


There was a freeze on vehicle excise duty (VED) for cars. A new reduced band of VED for the most efficient, 'low-carbon' cars has been introduced. For new licenses commencing from May 2002, a new 'AA' VED band will be introduced for low carbon cars first registered from March 2001 and emitting up to 120g/km of carbon dioxide. This will reduce the VED rate for these cars by £30 and will result in a difference of £100 a year in VED between the most and least polluting cars. Cars that will qualify for the new reduced band include the most efficient versions of the Ford Fiesta, Vauxhall Astra and Peugeot 206, as well as the hybrid electric-diesel Honda Insight and Toyota Prius.

There is also further support for new low emission cars in the form of 100 per cent enhanced capital allowances (ECAs) (first-year allowances) on the amount spent by businesses on purchasing new cars, registered on or after 17 April 2002, emitting up to 120g/km of carbon dioxide. Prior to this measure, cars did not qualify for first-year allowances but expenditure qualified for allowances at 25 per cent a year on the reducing balance basis, subject to a maximum yearly amount of £3,000. The new measure also removes the special rules that apply to cars with a retail price of more than £12,000.

Motorcycle VED has been reformed with the intention of reflecting the environmental benefits of motorcycles compared with cars, to take effect for licences starting from May 2002. For licences commencing from May 2002, the new rate for motorcycle VED will be: £15 up to engine size 150 cc; £30 for engine size 151 - 400 cc; £45 for engine size 401 - 600 cc and £60 above 600 cc.

A reduced VED rate of £105 has been introduced for vans which meet the euro-IV emissions standard from March 2003, while VED for other vans and buses was also frozen. The Government also said that as part of Spending Review 2002, it will review existing support mechanisms for buses, in particular the fuel duty rebate, to assess whether they provide effective support for buses and are consistent with the Government's objectives.

In order to address the increasing problems of abandoned vehicles, the Finance Bill 2002 will include provisions for a new offence to ensure that, in future, all vehicles will be traceable to the current keeper.

Vehicle fuel

Duty on road fuels was unchanged, although there was some new support for cleaner fuels as it was revealed the Government intends to introduce a fuel duty differential for sulphur-free petrol and diesel in 2003. In addition, a second competition under the Green Fuel Challenge for pilot projects researching future cleaner fuels is to be launched. A second round of bids seeking support for research into a wider range of alternative transport fuels with duty reductions or exemptions is to be invited. Subject to the outcome of the first round of that competition, the Government intends to exempt hydrogen from fuel duty for a limited period to encourage its further development and early take-up.

The Government will also provide 100 per cent ECAs for installing equipment for refuelling vehicles with natural gas or hydrogen fuel. As announced in Budget 2001, in recognition of its environmental benefits, biodiesel will shortly benefit from a new, lower rate of duty, 20 pence per litre less than ultra-low sulphur diesel.

Road haulage

While VED for lorries was frozen, it was announced that the Government aims to introduce a distance-based road-user charge for lorries by 2005 or 2006. This follows a consultation launched in the Pre-Budget Report. However, it promised to introduce tax cuts for the haulage industry to offset this charge for UK operators when the new charge is introduced. Further details are to be outlined in the near future.

Employer-subsidised transport

Employees receiving free or discounted travel on buses subsidised by their employers will not pay tax on it as a benefit in kind.

A reform of the fuel scale charge, under which employees pay tax on fuel received free from their employers for personal use was confirmed. It will reflect from 2003-04 the carbon dioxide emissions of their car rather than its engine size, in line with the company car tax system. There will also be a proportionate reduction if an employee receiving free fuel decides to opt out part way through the year.

Air travel

There was a freeze of the current rates of air passenger duty (APD) and, from 1 November 2002, extending the scope of the reduced rates that currently apply to European Economic Area destinations, to include Switzerland and countries applying to join the European Union. This will reduce the duty to holiday destinations such as Cyprus, Malta and Turkey by at least £15 a flight. The Government is to consider the role of economic instruments to deal with the environmental impacts of aviation as part of the Aviation White Paper in the near future.


In line with the 1999 Budget commitment to adopt a landfill tax escalator of £1 per tonne a year for five years until 2004, the current standard rate of landfill tax will increase from £12 per tonne to £13 per tonne with effect from 1 April 2002. The lower rate of tax for inert waste remains at £2 per tonne. It was also stated that the Government anticipates that the standard rate of landfill tax will need to be increased significantly in the medium term as part of future policy measures. Future decisions on landfill tax and the case for a tax on incineration will be influenced by the Performance and Innovation Unit (PIU) waste project findings. The Government is currently consulting on the future of the landfill tax credit scheme. The consultation seeks views both on options for funding mechanisms and on priorities for support. Responses to this consultation will be considered in the context of Spending Review 2002.

Use of Economic Instruments

It was also announced that the Government would review the potential to extend the use of economic instruments for environmental purposes. It declared that it would develop with stakeholders its strategy to tackle environmental issues using economic instruments over the coming months. Specific areas referred to included nutrient pollution associated with agriculture in an attempt to ensure that forms of farming less harmful to the environment would not be penalised. Another area alluded to was household energy efficiency, although existing Government policy not to introduce new taxes on the use of energy by households was maintained.


Also announced was a Government plan to introduce ECAs for investment in designated technologies to minimise water use and improve water quality during 2003. Work is being undertaken currently to identify the most appropriate qualifying technologies.


There were no new provisions relating to quarrying or aggregates in Budget 2002. The aggregates levy was introduced as planned on 1 April 2002. All revenues from the introduction of the levy are to be recycled back to business via a cut in employers' National Insurance Contributions and the £35m Sustainability Fund. DEFRA are responsible for the Fund in England, while the Devolved Administrations are responsible for the Fund in Scotland, Wales and Northern Ireland.

For further information please contact Mark Rutter on +44 (0)20 7367 3182 or at [email protected].