Shock: King Herod turns green

Michael Jacobs thinks that, before very long, we really will have an energy tax<strong> </strong>

Lord Marshall of Knightsbridge makes an unlikely green hero. Chairman of British Airways (one of the biggest companies in one of the world's most polluting sectors), former captain of the captains of industry at the CBI, he is a man who just eight months ago was not known to have any environmentalist sympathies whatsoever. Indeed, when he was asked by Gordon Brown in March to examine the potential role of an energy tax on industry, Friends of the Earth described this as "like putting Herod in charge of childcare".

Herod has obviously been to parenting classes. Marshall's report to the Chancellor, published with the pre-Budget statement last week but little noticed, not only recommends that an industrial energy tax be introduced, but in doing so accepts the central assumptions and claims of the environmental movement. It is not too much to say that the Marshall report marks a coming of age for the green movement.

The power of the report stems from its conclusion that industrial competitiveness, contrary to the CBI's view, need not be harmed by an energy tax.

First, Marshall insists the revenues from the tax should be recycled back to business: partly in the reduction of other business taxes, partly as assistance towards energy efficiency investment measures. This will ensure that the overall tax burden on industry is kept broadly neutral: there would simply be redistribution from extravagant to efficient energy users.

Indeed, Marshall argues that if the introduction of an energy tax allowed labour taxes (such as employers' national insurance contributions) to be reduced, the overall effect on the economy could be positive. This would be the so-called "double dividend", in which falling energy use is accompanied by rising employment. This claim has been widely modelled by environmental economists; it is the first time it has appeared in a Treasury document.

Second, Marshall shows how, throughout industry, improvements in energy efficiency would save firms money. A tax would help to get these implemented, but would leave firms no worse off overall. He argues that it is only in the energy-intensive sectors (such as iron and steel, cement and chemicals) that seriously higher costs would result. He recommends that energy-intensive firms should be given either lower tax rates in return for signing energy efficiency agreements with the government, or tax credits or reliefs for emission-reducing investments.

Third, the report points out that six European countries already have energy or carbon taxes. An energy tax package (with lower labour taxes) is a centrepiece of the new government programme in Germany, and the Italian government has proposed a carbon tax in its latest budget. The claim, therefore, that an energy tax would raise British industry's costs above those of its competitors does not stand up.

So the environmentalist baton has been passed to the Treasury. Will Gordon Brown run with it? Don't be fooled by his non-committal statement last week; the Treasury is definitely interested. This is not surprising: after a short while, an energy tax could bring in several billion pounds a year, and the Treasury does not turn up its nose at new revenue streams of this magnitude.

Just as importantly, Brown is well aware of the political opportunity. The transport white paper has proposed allowing local authorities to introduce road-congestion charges, and to use the money for public transport spending; it has also raised the prospect of a tax on office car parking. Other measures, including the reform of company car taxation, a pesticides tax and water pollution charges, are under review.

But the energy tax is the big one, and would firmly establish Brown as the first green Chancellor. The prospect of combining environmental virtue with reductions in other business taxes, including possibly the national insurance "tax on jobs", might well look enticing.

Peter Mandelson at the Department for Trade and Industry will be the principal focus for industry lobbying. The DTI has co-operated fully with the Marshall study, but its instincts are likely to be negative. Which way Mandelson will turn, however, is not clear. On the one hand, his agenda is pro-business and he will not want to damage the government's good relations with the CBI. But on the other, the energy tax can be seen as wholly in line with his vision of a highly efficient, high-technology future for British industry.

Current energy use patterns by British firms are wasteful and unproductive; investing in the latest energy-efficient technology should be a central part of any strategy of modernisation. As the Marshall report argues, there are potential export opportunities here, too. In these circumstances Mandelson might well find the environmental case as attractive as Brown.

All eyes will now be focused on the Budget next March. Clearly more work needs to be done on the precise design of any new tax. But the environmental lobby argues that this should not prevent the government announcing an intention to introduce it, just as it did with the windfall tax. A clear commitment would encourage firms to make adjustment plans well in advance of implementation.

Either way, the proposal for an industrial energy tax is now firmly on the agenda. At last, the environmental movement has entered the heart of government.

The writer, an environmental economist, is general secretary of the Fabian Society