Carbon Tax - a proposal for a direct tax on the amount of emissions
Climate change caused by rising Greenhouse Gas (GHG) emissions is a critical threat.
We can limit the damage by reducing emissions quickly, and there are many technologies and behavioural changes available to do this. Technically, it looks as if the world can be saved with limited impact on people's lives. For example, the Committee for Climate Change proposed that the UK could achieve net zero territorial emissions by 2050 at a cost of about 1% of GDP.
| Carbon Taxes were discussed at the GLD 2020 Vision virtual conference 7.00pm - 8.30pm Tuesday 30th June |
Introduction to Carbon Taxes
However, change is far too slow, even in countries that have committed to reduce emissions. So, how can we motivate people and organisations to act in good time?
One possible solution is to apply the Polluter Pays Principle - make those who emit greenhouse gases pay for the impact of their emissions. There are two main ways to do this:
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Cap and trade, such as the EU Emission Trading Scheme (ETS) - assigning and/or selling emission limits ("caps") to individual polluters which can be traded with other polluters
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Carbon tax - a direct tax on the amount of emissions
This article is about the second.
A carbon tax is widely regarded by economists as the most cost-effective way to motivate emission reductions, using market forces to incentivise emitters to change their behaviour. This article:
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explains the theory behind carbon taxes
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summarises the practicalities, problems and solutions
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describes the British Columbia Carbon Tax and its consequences
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gives my own views on how we should proceed
Finally, the GLD 2020 Virtual Conference included a discussion on implementing a carbon tax and re-distributing the revenue to people as a "dividend", so that the net effect benefits people on low incomes. This article is related to that proposal, but includes some additional material.
Carbon Tax in Theory
Tragedy of the Commons
Climate change is an example of the "Tragedy of the Commons", caused by GHG emissions which far exceed the capacity of the environment to absorb them. Burning fossil fuels is a very easy way to generate a lot of power, as the fuels have a high energy content built up over millions of years, but the environment can only absorb some of the CO2 emitted.
A Tragedy of the Commons can occur for a finite shared resource if individual resource users maximise their short term profits by taking more than their fair share, thereby damaging the total resource. The idea was originally applied to over-grazing on common lands, where individual herders put more cattle on a fixed piece of land than it could support, but applies to many environmental issues.
This does not mean that common resource ownership is bad. The original author (William Foster Lloyd, 1833) later remarked that he should have called his pamphlet "The Tragedy of the Unregulated Commons".
Solutions include government actions, such as privatisation, regulation, and internalising externalities ("Pigovian Taxes"). Non-government solutions involving individual and community self-restraint are also possible, such as social rules on exploiting common grazing land and fishing stocks. Informal rules can work well in stable communities where most individuals value long term outcomes, including their own children's future.
Externalities and Pigovian taxes
In economics, an externality is a cost or benefit that affects a third party to a transaction:
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Positive externalities benefit the third party, such as cleaner air when your neighbour switches from a diesel to an electric car, or herd immunity when other people are vaccinated
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Negative externalities harm the third party, such as the people of Singapore breathing in air pollution from burning rainforests in Sumatra, or the impact of your other neighbour's new diesel SUV
A Carbon tax is an example of a Pigovian tax - a tax on transactions that generate "negative externalities". These taxes pass the cost of the externality on to the parties to the original transaction. They were originally aimed at social issues, such the behavioural impact of alcohol, but are now applied increasingly to environmental issues.
These taxes also raise revenues which can be used for desirable goals, such as reducing taxes, increasing welfare spending, and facilitating the transition to a sustainable economy.
GHG emissions are a negative externality which give the emitters a free ride, but harm everyone else. By taxing carbon we make them pay, encouraging emission reductions across the whole economy.
Market Forces and Perfect Competition
The term "free market" is widely used, but in two very different ways:
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Laissez-faire - the minimally regulated "free markets" loved by many Tories
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perfectly competitive market, in which there are no monopolies and perfect information
This discussion is about the second - perfect competition.
Some theoretical analysis shows that a perfectly competitive market can be the most efficient way of allocating resources. These markets have a number of requirements, including:
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Many buyers and sellers - no monopolies/cartels
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Perfect information on prices
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No externalities - costs/benefits don't affect third parties
(More information - https://en.wikipedia.org/wiki/Perfect_competition )
So it could be argued that Pigovian taxes are necessary to achieve perfect competition, by eliminating or compensating for the effects of externalities. In reality competition is never perfect (some fruit and vegetable markets may come close), but it can be good enough to work well.
The tax would be technology-neutral: it does not try to "pick winners", so it encourages business to use the most cost-effective methods. Also, it does not just affect privately owned businesses: social and municipal enterprises should be able to compete on equal terms.
Finally, this is not just a personal view. Note the Economists' statement, the largest ever consensus on economics (more than 3,000 economists including Nobel laureates), calling for a very similar proposal in the US -
Alternatives to competitive markets
There are two main alternatives to using competitive market forces to run an economy:
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State Intervention
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Laissez-faire economics
State intervention can involve giving orders directly in a centrally planned economy, or more indirectly using subsidies, state contracts and so on. The main problems with intervention are incompetence, cronyism, corruption and greed.
For example, the Soviet Union and its client states were run substantially for the benefit of party members, and could be quite unpleasant for most other people. Their inefficient economies often left ordinary people short of food, and created pollution problems such as Chernobyl and the Kyshtym disaster.
Central planning does not always work badly, but abuse of power is a serious risk, and the people keenest on central state control are usually those least fit to wield that power.
Consider Britain's economy during the Second World War. The coalition government intervened heavily to achieve specific goals, and this worked reasonably well. Post-war nationalisations were less successful. The wartime interventions were driven by necessity, later ones by politics.
Laissez-faire free markets can also work badly. There are regular examples of greed in the corporate world, including quite extreme cases such as Enron. Also, look at the way state contracts are handed out by a range of often right-wing governments around the world, such as the current US administration. These are obviously biased towards their corporate friends and political donors, and again are affected by incompetence, cronyism, corruption and greed.
However, even poor markets will sometimes make reasonably good decisions. For example, falling costs are causing renewable energy to displace coal in the US, despite the current administration's pro-coal stance.
The Tax and Dividend proposal, and practicalities
Carbon Tax Mechanics
The tax is based on the amount of carbon used to create a product, which depends on the quantity, type and source(s) of the product. This information has to be captured by the authority that levies and collects the tax at some point in the supply chain:
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upstream - e.g. where crude oil or shale leaves the ground or reaches the refinery
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midstream - further down the supply chain but before it reaches consumer, e.g. when fuel leaves the refinery
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downstream - at point of consumption, e.g. at the petrol pump
One of these approaches should be used consistently throughout a particular tax jurisdiction, to ensure the tax is levied once and only once on each taxable item.
There are several reasons to tax as far upstream as possible. Extracting fossil fuels is generally a closely monitored process run by a limited number of corporations, so it should be fairly easy to get data on the quantities and types of specific fuels. One shipment of crude oil could be split into many components in a refinery, or used in non-fuel ways, but that doesn't matter if the tax has already been paid.
Each fuel has a specific carbon content per unit mass, though exact amounts vary based on source. Once extracted from the ground, we can calculate how much carbon will eventually be released into the atmosphere without having to know exactly how it will be used - apart from a few exceptions such as Carbon Capture and Storage (CCS).
Capturing the tax revenue early also minimises the risk of failing to tax some fuels due to losses during refining and physical leakage, also tax evasion and bankruptcy.
Fossil fuels are not the only source of CO2:
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creating quicklime for cement/concrete releases CO2
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many biomass fuels are not 100% sustainable (discussion on biofuel subsidies later)
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non-sustainable soil management
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deforestation
There are other greenhouse gases, such as methane. However, 81% of UK territorial emissions are due to CO2 as of 2018, according to the latest figures from the BEIS, so taxing fossil fuel is the obvious place to start. Source figure 2 in
Start simple
There are clearly a lot of options for taxing GHG emissions, some quite complex. We need to reduce emissions quickly, so let's start simple.
The proposal is for an initial tax on fossil fuel extraction and imports at a moderate rate of £25/ton of CO2, and then to increase over time. Changes in tax rates would be announced well in advance, so that people can plan for them.
Starting with fossil fuels should be relatively quick and easy, as it mainly involves a few large companies dealing with a limited range of products that are already monitored. They will need to declare the types, amounts and carbon contents of fuels to the tax authority, and pay the tax.
This should change price-sensitive purchasing decisions almost immediately. It should also start to influence long term investment decisions, as investors adjust their plans for the cost impact over project and asset lifetimes.
Example - Steelmaking
Let's consider an interesting example - making steel. There are two main ways to do this:
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A traditional blast furnace uses high grade coal to melt the ore and reduce it to iron (as the ore normally contains a lot of oxygen which is chemically removed as CO2), then the molten iron is purified using oxygen and quicklime, and converted to steel. This releases a lot of CO2.
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An electric arc furnace melts down scrap metal using power from the National Grid. This releases little CO2 directly, but some will have been emitted while generating the electricity.
(For other options, see https://www.green-alliance.org.uk/resources/The_case_against_new_coal_mines_in_the_UK.pdf )
A carbon tax will raise the price of steel from both, but more for the blast furnace, because it uses so much coal. This would incentivise recycling scrap (where available), though by how much depends on what proportion of the electricity was generated from low carbon sources.
A Carbon "Dividend"
One of the obvious problems with new taxes is that there are losers. A carbon tax will sometimes affect the poor more than the rich, because some people on low incomes spend a lot on domestic heating. This is widely used as an argument against carbon taxes.
The proposal before the GLD therefore includes a "dividend" that should prevent or mitigate this problem - an equal per capita redistribution, so that most people with modest incomes should more than recover any price increases arising from the tax. Without going into detailed life style choices, this system is likely to reward the poor, and be fairly neutral for those on middle incomes.
This makes the policy tax-neutral, and would turn the proposed tax into a useful anti-poverty measure. It also makes this much easier to sell. One of the best known carbon taxes, in British Columbia, has become relatively popular, because it returns much of the revenue raised to the people.
Issues and solutions
I identify four main risks in implementing a Carbon Tax plus Dividend:
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"Carbon Leakage"
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transaction costs and administrative complexity
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Unintended consequences
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Adverse publicity
"Carbon leakage" and Border Adjustments
A carbon tax will affect cross-border trade in goods and services. "Carbon leakage" occurs when actions taken to reduce emissions in one country lead to increases elsewhere.
Causes include:
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Industries relocating to countries without carbon taxes
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people switching to imported goods because the tax raises the price of domestic products
We need to reduce global emissions, not just move them around.
The amount of leakage is usually less than the emissions reduction in the country which levies the tax, so the overall impact is a smaller net global reduction. However, it is theoretically possible for carbon leakage to actually increase total global emissions in an extreme case.
One solution is border carbon adjustments (BCA) - taxing imported goods based on their "embedded emissions", less any carbon tax already paid in the exporting country. These are the total life cycle emissions from manufacturing and distributing these goods, up to the point of import. This could include mining the raw materials, transport and leakages, in addition to direct emissions from the factory where the goods were made.
This is particularly relevant to the UK, because we import large quantities of goods with a high level of embedded carbon: our emissions based on consumption are substantially higher than territorial ones -
Other reasons for border taxes include:
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Avoiding damage to our economy
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Not giving polluters an unfair advantage
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Not favouring imports over domestic production, nor appearing to do so
We will need to consider international agreements, in particular World Trade Organisation (WTO) rules. There is an assessment (referenced later) which suggests that a border adjustment could be consistent with WTO rules, provided it was implemented fairly and did not discriminate between domestic and imported goods, nor between different exporting countries.
Transaction costs and administration
Administering a carbon tax could be anywhere from simple to quite complex, depending on its scope and design. Simple administration would not be an issue; complex administration could impair trade and the domestic economy, divert resources from desirable activities, and generate negative publicity.
Imposing excessive costs on trade can cause significant harm, by reducing the benefits of cross-border trade. The law of comparative advantage shows that countries engaging in genuinely free and fair trade can individually and collectively benefit by specialising in what they do best. This is a non-zero-sum game, so one country's gain does not have to be another country's loss. Examples:
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cross-border trading in electricity makes it easier to reduce overall costs when matching supply to demand, such as re-distributing wind power as weather systems move across Europe
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a hard Brexit is widely expected to cause significant harm to the UK economy (and some EU countries), because the resulting tariffs will hinder trade
A direct tax on fossil fuels (domestic production and imports) would require fairly simple reporting of fuel quantities by type and source. These are already monitored in some detail, so the additional effort should not be large.
A border tax could be applied to all goods, but it would be easier to start with high energy products (steel, aluminium, chemicals, paper, cement and bulk glass). This would be a little more complex, but the processes used to manufacture these products are fairly easy to analyse.
Calculating embedded emissions on complex goods such as imported cars accurately would require data on all the components that went into building the cars. However, the border adjustments don't have to be exact to be reasonably effective, just roughly correct, so that they nudge people to make the right decisions. Over time it should be possible to refine them.
Some data on greenhouse gas emissions is already collected internationally, to calculate territorial and consumption emissions. DEFRA publish general statistics on UK embedded emissions, based on data collected by the Norwegian University of Science and Technology (NTNU).
There is a complex set of taxes and subsidies affecting UK energy prices now. A well-designed carbon tax combined with the removal of existing schemes which were no longer needed might actually reduce administrative costs for some businesses.
Unintended consequences
Things don't always go according to plan. This is sometimes known as the law of unintended consequences, and is well known in social sciences and economics.
Here is a relevant example.
Biofuels sound like a good replacement for fossil fuels, because the plants should grow back, re-absorbing the carbon emitted when they were burned. However, some biofuels are, allegedly, not produced from sustainably managed crops and forests. If so, the carbon emitted might not be re-absorbed for decades, if ever.
A carbon tax on fossil fuels alone could give unsustainable biofuels an unfair price advantage.
One solution would be to require accurate reporting of biofuel sources and methods, and then apply the carbon tax to the percentage of carbon that was not re-absorbed reasonably quickly. This would discourage unsustainable practices. It might also encourage genuinely sustainable biofuels - if that is possible.
Tightening up the rules on subsidies is another option.
Adverse publicity
Climate change deniers and delayers are looking for propaganda material, as are some organisations and nation states who stir up trouble for its own sake, such as using social media to incite people on both sides of racial arguments in the US.
If we give the bad guys free ammunition, it could hurt our country through damaging confrontations. The gilets jaunes in France are a clear example of what could happen. Also, the global impact could be negative, by discouraging other countries from implementing effective policies against climate change.
It is worth looking at other aspects of the tax carefully, both the implementation and how it is "sold" to people. We can't guarantee that everything will work perfectly, but careful planning and implementation can mitigate the risk of problems.
It is also worth comparing the likely media impact of a well-designed carbon tax plus dividend against other methods of reducing global warming. This is potentially a popular policy if marketed correctly, whereas policies that impose taxes without any rebate, or that tell people to stop doing things they want to do, are more likely to encounter direct resistance.
There are many studies which show that roughly 70% of the population will be better off from a carbon tax combined with an equal dividend. This is essential for maintaining public support. Both Australia and France tried to introduce carbon taxes without returning the revenue, and these were repealed or halted. Canada (more detail below) has shown that 90%-100% recycling of revenue can build public support.
Case Study - British Columbia Carbon Tax
As of 2019 there were 56 carbon pricing schemes around the world, 28 carbon tax and 28 carbon trading. In summary:
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They can work, but how effectively depends on details like price and exemptions
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These schemes can meet considerable political resistance
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This can be overcome by good design and implementation, e.g. by being revenue neutral
For more details see https://www.carbonbrief.org/guest-post-what-the-uk-can-learn-from-carbon-pricing-schemes-around-the-world
And also
http://www.lse.ac.uk/GranthamInstitute/publication/global-lessons-for-the-uk-in-carbon-taxes
One particular scheme has achieved public acceptance by re-distributing tax revenues. British Columbia implemented a Carbon Tax on fossil fuels in 2008, covering about three quarters of all greenhouse gas emissions in the province. It is charged at the point of sale to retail customers, e.g. at the petrol pump for vehicle fuels. It was originally set at 10 Canadian Dollars (about £6) per tonne (Carbon equivalent), rising to $30 in 2012 and $40 now.
In January 2013, the carbon tax was collecting about $1 billion each year, which was used to reduce other taxes. The tax shift has enabled BC to have one of Canada's lowest income tax rates, though revenues have increasingly been used to support particular industries.
The tax was originally unpopular, but is now widely supported. It has some exemptions, including exported fuels, agriculture and forestry. Greenhouses were exempted because the tax made their operations uncompetitive with the US and Mexico.
There is a survey of various studies on the effectiveness of the British Columbia carbon tax over the period 2008 to 2015 -
https://nicholasinstitute.duke.edu/sites/default/files/publications/ni_wp_15-04_full.pdf
Overall conclusions in the survey based on the amalgamation of multiple studies:
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It has led to 5 to 15% reduction in fossil fuel consumption and greenhouse gas emissions without significant overall impact on economic growth
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There have been no studies of carbon leakage
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Cross-border competition has forced some exemptions, reducing the tax base and effectiveness
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Revenue recycling makes this relatively, but not universally, popular
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Studies on net impact by income come to varying conclusions, between slightly regressive and somewhat progressive (due to the targeted tax credits)
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Some of the revenue has been used to subsidise the film industry
These studies do need to be interpreted with some care. For example, some evidence indicates a moderate drop in fossil fuel consumption compared to the rest of Canada, but there have been suggestions that some of this might be an artefact of cross-border shopping.
My conclusions based on this are:
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Changing the relative prices of fuels through taxation tends to reduce the use of the more expensive fuels, which is exactly what would be expected
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There is no evidence of serious economic damage, though without measurements of carbon leakage we can't rule out moderate economic damage
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The problems with cross-border competition show the limitations of introducing a carbon tax in one country or province without a border adjustment
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It shows the risks of political intervention - using this to fund the film industry makes no obvious environmental sense
The tax appears to work pretty much as one would expect by applying classical economic principles. That is comforting, though there is always a risk with finding what you expect to find.
The lack of studies on carbon leakage is a weakness. Some leakage would be expected from the policy, even just people driving across the border to fill up on petrol. However, this doesn't prove that the tax is a failure - the evidence we have suggests that it is reasonably successful.
Carbon taxes are now being rolled out in other provinces, and nationally: Canada's Greenhouse Gas Pollution Pricing Act is basically waiting for further support to enact BCA via the WTO.
Finally, several references to this tax mention that much of British Columbia's electricity comes from hydropower, and their electricity costs are relatively low. I am not aware of any specific evidence on this point, but it seems likely that this limits any adverse impact on the domestic economy, because the price of electricity from hydropower won't be affected by the tax. This is potentially relevant to the UK, which is steadily increasing the use of non-dispatchable renewable energy.
My assessment and recommendations
This last section has some additional opinions on what we should do, and some extra details on particular subjects.
Objectives
First, here is my view of our objectives:
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Reduce UK consumption emissions quickly and efficiently
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Incentivise our trading partners to reduce their emissions, including emissions embedded in their exports to us
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Transition the UK to a resilient, sustainable economy that will deliver what people want (within reason) in good times, and what they need at all times
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Set a good example of sustainability that will encourage other countries to reduce their own emissions
Some points on these objectives.
We must target "consumption" emissions, which take account of imports and exports, not just territorial emissions as per the existing UK target for net zero by 2050. We must not just move emissions offshore to hit a target.
Without a border adjustment, any substantial carbon tax is likely to lead to significant carbon leakage and other problems. This needs to be done fairly, not as a protectionist measure, in order to provide a reasonable justification under WTO rules.
We also need to make this work well at a technical level:
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A system that works well and delivers a reasonably good life to people will encourage other countries to follow us and minimise adverse media comment.
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A system that works badly can be gamed by amoral economic actors, or manipulated to achieve political rather than environmental goals.
Problem sectors
Some sectors will need sensitive handling, both due to risk of immediate adverse impact when the change is implemented, and to avoid stirring up needless hostility.
This tax will create some losers, but it needs to be the right losers. We don't need to be concerned about people forced to trade down from SUVs to normal sized cars. However, we should identify genuine impairment to ordinary people and legitimate commerce, and mitigate where appropriate.
Any support needs to be well-targeted. So we might choose to adjust fuel duty to leave the price of petrol unchanged when the carbon tax is first introduced. Also some industries facing foreign competition may need temporary arrangements to compete on equal terms. However, these subsidies and other exemptions would need to be phased out over time.
Aviation
The aviation sector represents about 2.5% of global emissions, and this seems likely to grow without some improbable improvements in technology.
It needs to be taxed fairly, to avoid giving mainly well off passengers a subsidised ride. However, aviation taxes are limited by international agreement. We may need to find a proxy, such as a flight tax based on take-off weight, distance flown and type of seats - Premium class seats increase emissions per passenger by displacing multiple Economy seats.
Any unilateral tax must not shift travellers to longer routes that emit more CO2. We will need cooperation with at least the EU, to prevent people from re-routing their journeys via the hub airport with the lowest carbon tax.
Border Adjustment Issues
Relevant issues to be addressed include:
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potential impact on cross-border trade due to increased transaction costs
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how to avoid breaching WTO (World Trade Organisation) rules without losing effectiveness
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other countries' responses - the risks of protectionism and retaliation
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fraudulent reporting and claims for refunds
Border adjustments could also impair international trade through general complexity and specific transaction costs. This can be mitigated in two ways:
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bilateral/multilateral deals which harmonise tax mechanics to avoid double taxation and other technical problems
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Efficient international standards and systems for capturing information which can be used to compute taxes easily, and also to verify the figures supplied
We will need to consider international agreements, particularly WTO rules. There is an interesting assessment in -
https://www.scribd.com/document/155956625/Changing-Climate-for-Carbon-Taxes-Who-s-Afraid-of-the-WTO
Broadly, the report suggests that a border tax adjustment could be levied, provided it did not exceed similar taxes on domestic products, nor discriminate between countries. It would also need to allow for taxes paid in the exporting country. It would also be possible to rebate on exports any tax paid domestically, provided these did not exceed the actual tax paid.
Border taxes applied would need to be computed reasonably, so steel imports from an electric arc furnace using low carbon power would need to be taxed more cheaply than those from a coal-fuelled blast furnace, just as would happen for domestic steel.
Finally, there is a further possible defence under WTO rules, that this is necessary to protect human, animal or plant life, or health. The threat of climate change could be used to argue this point.
How will other countries respond to UK border taxes on carbon?
Imposing a border adjustment on imported goods will provide the exporters with a financial incentive to change their own policies. The best result would be for this to motivate them to impose their own carbon taxes, collecting the tax revenue rather than letting the UK doing so.
Of course, if other countries implement these policies first, it would provide the UK with a motivation to collect its own carbon tax.
However, there are risks of protectionism and retaliation. This risk is lower for taxes that are consistent with WTO rules, but that won't stop countries who really want a conflict. So, how do we respond to this possibility?
The UK cannot stop global warming alone. We should take actions which reduce our own emissions, and encourage other countries to do the same.
We should avoid needless conflict, but must combat global warming by the most effective means available. Countries and corporations who use the environment as a dumping ground to reduce their direct costs are getting a free ride at everybody else's expense, and a carbon tax without a border adjustment can give an advantage to polluters who compete directly with domestic industries.
We should cooperate with interested governments, but be willing to act unilaterally. It would also be easier for a well-organised group of like-minded countries to benefit from cross-border trade which taxes emissions fairly, and to stand up to countries that object to this. The EU and some individual countries are moving towards a BCA.
Finally, a BCA is not essential while the carbon tax rate is still fairly low, but does need to be implemented over time as the rate rises.
The systems will need to include reasonable protection against fraudulent reporting, as individual corporations or entire countries try to evade border adjustments, and possibly also make fraudulent claims for refunds. (This is a major problem with VAT on cross-border trade.) There are ways to make this more difficult, such as linking up claims for refunds to the tax originally paid. It might be necessary to adopt rules and technology similar to those used for detecting money laundering.
Alternative Solutions
Carbon taxes are not the only possible way of incentivising a shift to a low carbon, sustainable economy. Two other options are subsidies, and targeted investment programmes.
I prefer a carbon tax and other competitive market solutions (such as Pigovian taxes on other pollutants and waste disposal) where practical, because they don't require direct state control over people and corporations. Instead, the state sets up a market framework that applies to all people and businesses, reducing the risk of cronyism and corruption. Such solutions require suitable rules such as limitations on monopolies, but these are a good thing anyway.
However, while carbon taxes are a general solution which nudge people towards better behaviour, that doesn't always mean that they are always the quickest and most effective solution to achieve particular objectives. Also this is not an either/or - we can use a mixture of complementary solutions.
Alternative 1 - Subsidies
Several other taxes and subsidies affect UK energy prices now, including the EU's Emissions Trading System (ETS), Carbon Price Support, Climate Change Levy, Fuel Duty, and tax breaks on North Sea oil and gas. Many other countries also subsidise fossil fuels.
Subsidies are not free: they have to be paid for somehow. For example, special levies on banks or utilities to raise money for politically popular causes are indirectly funded, in part, by reducing the value of people's pension plans and the reserves that insurance companies use to fund pay-outs, since both of these invest in such shares.
Subsidies also influence economic decisions in ways that can be good or bad. The carbon tax is intended to encourage sensible decisions based on their consequences, so we should remove existing subsidies when they are no longer needed. Also, energy markets are significantly distorted by existing taxes and subsidies. Replacing these with an efficient carbon tax should make these markets work better.
More generally, a fair carbon tax on all fossil fuels should allow low emission fuels to compete on a level playing field without subsidies, and encourage greater energy efficiency.
Some new technologies such as tidal and wave power may need initial subsidies, just as offshore wind was subsidised before the cost plummeted. Carbon Capture and Storage (CCS) could be encouraged by refunding tax paid on the amount of carbon captured.
We might also implement tax adjustments on any subsidies on imported fossil fuels, so that they compete on a fair basis with domestically extracted fossil fuels or those imported from other countries, provided this can be done within WTO rules.
Alternative 2 - targeted investment programmes
A carbon tax and other macroeconomic policies can't do everything, and it isn't always the quickest way to solve problems. The upside of these actions is that it can motivate actions throughout the economy, and that it avoids trusting politicians to "pick winners", which often turn out to be conmen or their friends (or both). The downside is that changes may take some years to work.
Sometimes it is, in theory, possible to act more quickly.
Consider a programme of targeted heating and insulation improvements to existing UK properties, something often proposed by environmentalists, also by politicians at election time. It is theoretically possible to improve insulation on most homes in ways that will pay for themselves in a few years, sometimes a few months, on an asset with a potential life of centuries (if properly built). So why don't these programmes just happen, given the economic benefits on top of the environmental ones?
There are practical issues to address, such as limited funding, significant up front cost, and payback over a period of years to decades. There are also political issues with organising long term projects, which often work rather poorly. So it is possible but not easy to make this kind of programme work well.
Another possible investment programme with a high potential payoff is electric vehicle charger rollout. Given our dependence on imported oil and growing supply of renewable electricity, it is pretty obvious that rapid growth in electric vehicle usage should have economic benefits in addition to reducing GHG emissions and local air pollution. Lack of charging points is a holdup. But it needs smart leadership to see that one key investment will have multiple payoffs.
This doesn't mean that government interventions will never work, and there is one particularly good example.
The rapid growth in UK offshore wind power over the last decade has led to a massive drop in price. This benefits not just the UK, but potentially windy coastal countries around the world.
This was driven by government-initiated requirements to increase the use of renewable energy: first the Renewables Obligation, subsequently Contracts for Difference (CfD). This created competitive pressures on corporations to reduce costs, which were strikingly effective. Offshore wind projects completed in 2012-14 had a levelised cost of electricity of £131/MWh, but in 2019 the CfD strike price was £39.65/MWh for offshore wind projects, making it one of the cheapest forms of electricity.
This isn't free. The higher prices in the early rounds are paid for by higher electricity bills. However, in this case the benefits appear to far exceed the cost.
Also, this is not an example of direct state control. It is a hybrid solution involving the state intervening in the market structure, but allowing corporations to compete for the available subsidy. This reduces the risk of political interference, and incentivises business to do the right thing.
So we should consider major programmes where there is a clear benefit to doing so, but be hard-nosed about the practical problems in making them work. And this is complementary to a carbon tax, not a substitute for one. In any case, a carbon tax should facilitate such programmes by incentivising emission reductions.
And finally
This article was written by Julian Hawkins. This version (2.0a) is for publication by the GLD, dated 9 July 2020. It has been updated for the discussion on 30th June at the GLD Virtual Conference -
https://greenlibdems.org.uk/en/event/detail/2020-06-30/follow-the-money-do-we-need-a-carbon-tax
Thanks to Stewart Reddaway, Steve Bolter, Russell Ellis and James Collis for their comments.
Some of this article is based on a rather useful report published by the Carbon Pricing Leadership Coalition -
https://www.carbonpricingleadership.org/highlevel-economic-commission-1/
They recommended a Carbon price of USD 50 to 100 per tonne by 2030, in a report published 29/05/17 -
Also, there are several points where I quote from UK government statistics. I plan to publish a separate guide to the information available, which is generally well-organised and useful.
Other references:
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The theory section is mainly based on Wikipedia
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The sections on mechanics and issues also draw on Wikipedia
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The British Columbia Case Study is based mainly on the survey referenced in that section
Finally, there are a number of campaign groups which advocate a carbon tax. For example - https://citizensclimatelobby.org/ (based in the US but operates globally) and related -
https://citizensclimateinitiative.eu/
Julian Hawkins
Updated 15 July 2020