Research and analysis

Executive Summary: Environmental impact of taxes: Evaluation proof of concept study scoping paper

Published 25 June 2025

Prepared by Ipsos and UCLC for HM Revenue and Customs. The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs

HMRC Research Report 826

1. Executive Summary

The National Audit Office report (NAO, 2021) found that impact evaluations for changes to taxes have rarely quantified their environmental impact. This scoping study has determined that while the environmental impact of at least some taxes can be empirically evaluated, the robustness of the assessment will depend on a number of factors including data availability and quality and the specific environmental impacts of interest. This report presents an overarching framework to guide undertaking well-designed impact evaluation of such tax policies.

This overall framework for evaluating the environmental impacts of taxes or tax changes is structured into three key elements. The full paper provides detailed options and guidance, but a summative discussion is provided below:

1. Assessing economic impact: The central element of any impact evaluation is the assessment of how a given tax or tax change influences outcomes of interest at the firm or individual level. This will usually focus on investigating the economic impacts of a given tax or tax change, resulting from a change in firm or individual behaviour. A large number of econometric methods exist to choose from. Generally, the most robust and feasible method should be chosen to lend sufficient credibility to results. Important considerations when choosing the appropriate method are the specific nature of the evaluation study for instance whether it is undertaken before (ex-ante) or after (ex-post) the introduction of the tax or tax change, the specific data available as well as its quality, and whether a suitable control group of firms or individuals can be identified to compare against.
2. Environmental modelling: Secondly, an approach to estimate the environmental outcomes of interest based on the impact assessment results then needs to be selected. Quantification of environmental impacts is generally done using Life Cycle Assessments. Life Cycle Assessments are a systematic modelling approach to quantify the environmental impacts of a product system over its whole life cycle from extraction of materials to its final disposal. International guidance ^{[footnote 1]} should also be consulted when designing Life Cycle Assessments.
3. Cost-Benefit Analysis (CBA) and Value for Money (VfM) assessment: The final element of the framework is a possible cost-benefit analysis (CBA), compliant with HM Treasury’s Green Book methodology and using the Department for Environment, Food & Rural Affairs’ Enabling a Natural Capital Approach framework to cost the environmental impacts estimated. Note that the economic, social and environmental outcomes can act as benefits or costs, depending on how they are affected by the tax in question.

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1. For example, the International Reference Life Cycle Data System handbook, or the recently published Product Environmental Footprint guidance. ↩