Time For A UK Carbon Tax?

Time For A UK Carbon Tax?

By Paul Homewood

 An argument for carbon taxes from CAPX.

(I should point out that Rachel Wolf acts as the secretariat for the Zero Carbon Commission, which includes Adair Turner and Bryony Worthington amongst its Commissioners. More worryingly, she co-wrote last year’s Conservative manifesto)

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There’s a belief shared by many of us lockdown parents that Disney has (accidentally) timed its entry into streaming services perfectly. Success was more-or-less guaranteed by the closure of schools around the world. Sure enough, desperate mums and dads flocked in their millions to hand over their credit card details.

In policy and political terms, the same can be said for “carbon charging”. 

As we explain in the Zero Carbon Commission’s latest report, a carbon charge requires people who produce, distribute, or use fossil fuels, or whose activities result in other types of greenhouse gas emissions, to pay for every tonne of greenhouse gases that enter our atmosphere. This incentivises them to switch to another, lower emissions alternative.

It is an idea long proposed in principle, then dismissed because of its electoral impossibility.  But as we emerge from the dark shadows of Covid-19, the conditions have never been better. Carbon charging could make a huge contribution to our ability to reach Net Zero by 2050 without kneecapping the economy, or relying on implausible levels of competence and foresight from regulators. It is also possible to implement with public consent.

First, both the Government and the public are enthused by the idea of a green recovery, more so than a return to the ‘norm’. Covid-19 has clearly made the public more aware of, and more sympathetic towards, the environment around them. This is supported by our polling – perhaps surprisingly, the majority are prepared to sanction a slower recovery if it is a greener one.

Second, we need policy substance to back up the Prime Minister’s impressive rhetoric around the creation of new green jobs and the transition to Net Zero. This needs to bake the right investment signals into the market: a carbon charge would tell businesses and investors where to place their money, and provide fresh employment opportunities in new sectors.

Third, and perhaps counter-intuitively, the kind of carbon charge that the Zero Carbon Commission are proposing could cut red-tape for both consumers and businesses – something Boris Johnson enthused about in his speech yesterday. We already have some carbon pricing in the UK but it is opaque, and mostly piled sequentially on top of electricity bills. This is perverse – electricity is the sector we most want to grow as we decarbonise the grid and electrify cars, ships, and planes. Under the current pricing system, Industry often has several reporting systems and multiple bills to pay. Our proposed model represents clarity and simplification. It will also cover more of the economy.

Fourth, voters accept that taxes are going to have to go up to pay for the billions that have been spent on furlough and supporting businesses through lockdown. They are also broadly in agreement that, if taxes have to rise, then you may as well do something positive about the environment in the process.

Lastly, the Government needs something big and bold to announce ahead of the COP26 summit that it is hosting in Glasgow next year. The Prime Minister wants to be able to go to the summit and point to a substantive policy intervention that he can call his own.

The fact is, introducing a carbon charge would not be truly revolutionary. Other countries, most notably in Europe, are ahead of the UK. Germany and Denmark announced carbon pricing policies during Covid-19. Ireland has doubled down on theirs. But this too represents an opportunity: we can learn lessons from these systems and make ours, as ministers are fond of saying, “world-beating”. 

After all, many a naysayer said that Disney did not have it within itself to launch a successful streaming service. It was too late to the party, they said – it was too far behind Netflix, Amazon and the others. How wrong they were.

Just like Disney in 2018, the Government cannot afford to twiddle its thumbs any longer: the improbable set of conditions that would allow for the introduction of a successful and popular carbon charge could soon dissipate. As the Prime Minister said yesterday: “Covid has taught us the cost of delay.” He is right.

Her article, far from justifying a carbon tax, highlights why one would be such a bad idea.

Let’s get straight to the quick.

As the writer makes clear, a carbon tax will be used to raise revenue, which scotches the usual defence that the money raised will be repaid as tax credits in another form.

A carbon tax would have the inevitable effect of pushing up energy and fuel bills in a most regressive way. This would not only be the worst possible way to raise revenue, but would go down like a lead balloon with the public at large.

Wolf talks about polling showing people want a green recovery. People say all sorts of things in polls, but that does mean they are actually prepared to put their money where their mouth is.

Worse still, people won’t even see any tangible benefit from higher taxation. They might accept higher taxes if they were used to employ more nurses and police. They certainly won’t if the money raised is spent on green flim flam.

Wolf’s commentary also includes plenty of other false assumptions.

For instance, it is not true that a carbon tax would reduce bureaucracy. Quite the opposite, if companies are expected to assess how much they are paying, and on what. The whole idea, after all, is to encourage a switch to low carbon alternatives, so firms would need to know potential carbon tax savings.

There is also the question of international competitiveness. We are clearly nowhere near a global tax, and in my view never will be. Any domestic carbon tax would simply make our industries less competitive.

Interestingly, of course, we already have one very significant carbon tax – fuel duty. But has this had any effect on reducing fuel consumption or encouraging a move to electric cars? The evidence suggests otherwise. People still need to drive, so demand tends to be very inelastic – higher fuel prices do very little to reduce demand.

Equally, despite the swingeing level of fuel tax, sales of electric cars remain miniscule. despite the massive subsidies on offer for them.

I strongly suspect that pushing up household energy bills will also have a negligible effect in either reducing usage or encouraging adoption of low carbon alternatives, such as solar panels, heat pumps and insulation.

Wolf talks about the creation of green jobs, but it well established that “new green jobs” merely destroy more jobs elsewhere in the economy. If renewable energy and other low carbon technologies really are cheaper and more efficient, as we are continually told, they will quickly establish themselves in the market, without the need for taxation of competing technologies.

The last thing the UK economy needs, when it is battling its way out of the current crisis, is to replace cheap, reliable energy with expensive, impractical alternatives.

She finishes by referring to COP26. Whether Britain emasculates itself with a carbon tax or not, China, India and indeed most of the world outside of Europe will carry on with business as usual.

Surely we have learnt this lesson by now? One of the main planks of the UK Climate Change Act was that it would encourage other countries to follow suit. We have found out to our cost since that this was mere wishful thinking.

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July 19, 2020 at 05:36AM

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