A progressive carbon taxation policy motion for the LibDems

A progressive carbon taxation policy motion, including aviation, to reduce both CO₂ and poverty

28^th June 2020, Stewart Reddaway

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Policy motion

Conference notes:

A Reductions in man-made Greenhouse gas (GHG) emissions need to be accelerated, both nationally and globally, to prevent catastrophic outcomes.

B The majority of GHG emissions are CO2 derived from fossil fuel.

C Currently there is an international agreement not to tax fuel for aviation.

Conference believes:

1. That a carbon tax uses market forces to reduce CO2 emissions in a very cost-effective and efficient way, encouraging both energy efficiency and the use of low-CO2 energy.

2. A general carbon tax on all fossil fuel would affect all sectors, including heating, industry, electricity generation and transport. The tax would be technology-neutral, as it does not try to "pick winners".

3. The net increase in tax revenue due to this policy should be paid back as a dividend to all UK residents on an equal-per-head basis, making the policy tax-neutral overall. For people with a below average total carbon footprint, the dividend exceeds the effect of price rises due to the tax. They are subsidised by those with above average footprints.

4. Taxation should be progressive, not regressive. People in poverty have limited spending power but often have poor accommodation with high heating costs, despite having a below-average total carbon footprint. The dividend would almost always reduce both poverty and fuel poverty. (Strong evidence, from the US, that poor people would be made richer is in Office of Tax Analysis Working Paper 115 January 2017 "Methodology for Analyzing a Carbon Tax" John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115.pdf )

5. A tax on all fossil fuel, collected at the point of production or import, would be collected mostly from big companies on goods that are already monitored, and the dividend rate is the same for everyone; hence administrative costs should be low.

6. Subsidies on fossil fuel, for example tax breaks on North Sea oil and gas, are effectively a negative carbon tax. Fossil fuel subsidies should be withdrawn.

7. Some fossil fuel is used for petroleum products, such as plastics, that are not immediately converted to CO2, but taxing such products is reasonable.

8. The tax would cover all CO2, and at a published price, whereas the current EU ETS (Emissions Trading System) covers only about half of emissions, and at an un-predictable price. UK participation in the ETS should be negotiated.

9. The tax should be refunded for CO2 saved by Carbon Capture and Storage. The tax should not be applied to crude oil or LNG exported from either a port of arrival or the North Sea, but should not be rebated for the export of petroleum products or electricity.

10. The new tax will affect some other taxes. As fuel duty on petrol and diesel is effectively a carbon tax, the duty should be reduced as the new carbon tax rises, so the combined tax is stable in real terms. (Governments would not be prevented from raising fuel duty.) The Carbon Floor tax will automatically be made redundant. The Climate Change Levy should be abolished. The 5% VAT rate on domestic fuel can be considered a subsidy; this should change to the standard rate, compensated for by an increased dividend.

11. As well as GHG emissions emitted from its' own territory, the UK is also responsible for emissions abroad due to imports (less emissions due to exports). Consideration should be given to goods imported with significant "embedded" carbon. Assessing goods individually for embedded carbon would be difficult, but higher tariffs might be imposed on imports from countries with a poor record on climate change, such as not living up to their Paris commitments. To keep, as far as possible, a level playing field, we should seek constructive negotiations on the policy with governments, especially the EU, who are willing to cooperate. Technical help and/or partial rebates should be given to carbon-intensive industries to discourage them from migrating abroad. WTO rules need to be considered, but studies have shown that they need not be an obstacle (see https://www.scribd.com/document/155956625/Changing-Climate-for-Carbon-Taxes-Who-s-Afraid-of-the-WTO and also the summary in https://www.carbontax.org/issues/border-adjustments/ ).

12. Taxing CO2 is more effective than some other aviation taxes. A frequent flyer tax (as proposed in policy paper 139 and elsewhere) ignores both distance flown and seat class. For example, a long-haul flight in First class can cause over 100 times more emissions than a short flight across the channel. Air Passenger Duty takes some account of CO2 differences between long and short haul, and of seat class, but is very imprecise. These personal taxes do nothing to increase load factors. A good proxy for an aviation fuel tax is a flight tax based on take-off weight and distance flown.

13. This carbon tax policy is just one of many policies, both financial and non-financial, needed to reduce climate change. In the future this tax might be extended to CO2 not derived from fossil fuel, such as cement production. Over time, the effects of the policy, including unintended consequences, should be monitored and appropriate action taken.

Conference calls for:

1. A comprehensive carbon tax on all fossil fuel collected at the point of production or import, and the withdrawal of fossil fuel subsidies. The tax should start at £25/ton of CO2, rising progressively by about £10/ton/year to about £115/ton after 10 years, subject to review every two years. (Depending on total carbon emissions at that date, after 10 years the dividend is estimated at about £600 per adult per year.)

2. Expected tax rates for several years ahead should be published so investors and others can plan with confidence.

3. Existing carbon taxes to be adjusted by abolition of the Climate Change Levy and raising the 5% VAT rate on domestic fuel to the standard rate, with the increased revenue added to the dividend.

4. The net increase in tax revenue due to this policy to be paid back as a dividend to all UK residents on an equal-per-head monthly basis, with children rated at half the adult rate, paid by adding to Child Benefit.

5. Consideration of the possibility of imposing tariffs on imports with significant "embedded" carbon. International agreement to be sought so as to get a level playing field where possible.

6. New international agreements on the aviation industry that will allow either aviation fuel to be included in a carbon tax, or a flight tax based on take-off weight and distance flown.

Background to the Carbon Tax + Dividend policy motion

A tax on carbon is widely recognised by economists and others as a very efficient way to reduce carbon emissions. (A good, if somewhat long and economics-based, reference, is the World Bank's "Report of the High-Level Commission on Carbon Prices" chaired by Professor Joseph E. Stiglitz and (Lord) Nicholas Stern, 2017, https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59b7f2409f8dce5316811916/1505227332748/CarbonPricing_FullReport.pdf). 81% of UK greenhouse gas (GHG) emissions is CO2 (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/862887/2018_Final_greenhouse_gas_emissions_statistical_release.pdf, see figure 2). Most man-made CO2 emissions derive from fossil fuels, so significantly reducing fossil fuel use with a substantial carbon tax has a big effect on reducing climate change.

Subsidies on fossil fuels are widespread around the world, estimated at $55-90bn. For example, the UK gives tax breaks on North Sea oil and gas. Subsidies are in effect a negative carbon tax, increasing the extraction of fossil fuels from the ground. They should be withdrawn.

Of course, other policies are needed to reduce other sources of GHG emissions, including some that might be increased by a fossil fuel tax; for example, burning unsustainable biofuels, such as wood from clear-felling natural forests, in power stations. Other policies are also needed to further reduce CO2, for example insulating buildings.

Around the world there are about 24 examples of carbon tax implementations, many covering only a limited range of products, and often at only a low tax rate per Ton of CO2. (See https://www.carbonbrief.org/guest-post-what-the-uk-can-learn-from-carbon-pricing-schemes-around-the-world, which gives an average price of £18/ton)

There are also a similar number of examples of "cap and trade" carbon trading schemes applied to some industries. A limit, reduced each year, is placed on total CO2 emissions, and emitters must bid in a market for a share of the total to cover their emissions. This market determines how much emitters must pay. Often the market is based on emitters' historic emissions, so increases are paid for, and reductions rewarded. The best-known example is the EU ETS (Emissions Trading System), which covers about half of all CO2 emissions; historically, it has resulted in disappointingly low prices, but more recently they have increased somewhat.

The best-known carbon tax is British Columbia's, which has been running for over a decade. It has some exemptions but is generally judged a success. Naturally, it also has a range of opponents. See https://en.wikipedia.org/wiki/British_Columbia_carbon_tax#Effects.

Dividend

The policy motion says the Dividend will make most poor people richer. Strong evidence for this, in the US, is in Office of Tax Analysis Working Paper 115 January 2017 "Methodology for Analyzing a Carbon Tax" John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage, www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115.pdf

Some issues omitted, for brevity, from the policy motion

One issue is the re-export of some fossil fuel imports, such as crude oil and LNG. If directly exported from the arrival port, or from the North Sea, these should be exempt from tax (unless there is an agreement with the destination country). Other exports, such as petroleum products or electricity should not be exempt.

Peat contains a lot of carbon. Use should be strongly discouraged, and formation encouraged.

Carbon offsetting should not attract any carbon tax rebate. Indeed, offsetting needs tighter regulation, for example to prevent long-term CO2 reductions, such as from tree planting, being used to offset immediate emissions. (Maybe only reductions in the next 10 years should be allowed.) Industries should also be prevented from using offsetting to hide their actual emissions, such as claims by the aviation industry that present "net emissions" when lobbying against policy curbs on flying. (Greenwashing.)

Aviation

Taxing CO₂ is more effective than some other aviation taxes. A frequent flyer tax (as proposed in policy paper 139 and elsewhere) ignores both distance flown and seat class. Most UK aviation emissions are from long haul, where a First or Business class seat displaces respectively about 5 or 3 Economy seats (see www.seatguru.com ), with corresponding emission increases.

An Economy seat to Los Angeles emits about 20 times more than a flight to, e.g., Amsterdam. With the above factor of 5, a First-class seat to LA emits about 100 times more. For a rate of £100/tonne, tax on a first-class return to LA would be about £1000, and Economy to Amsterdam about £10. A frequent flyer tax may be reasonable for short European flights, but it grossly under-taxes long haul.

Air Passenger Duty takes some account of CO₂ differences between long and short haul, and of seat class, but is very imprecise.

Neither of these personal taxes does anything to increase load factors.

Stewart Reddaway