Carbon Taxes – a Vital Part of the Armoury, but Not a Silver Bullet

Net Zero

Carbon Taxes – a Vital Part of the Armoury, but Not a Silver Bullet

Commentary
Posted on: 4th February 2021
Tim Lord
Senior Fellow | Net Zero

News that Whitehall is considering new measures to put a price on carbon is encouraging news for those wanting the UK to up the pace of decarbonisation. 


It’s absolutely right that carbon pricing – and by implication carbon taxation – is being actively considered in Whitehall.  The economic argument is clear: climate change is the greatest market failure of all time; that market failure is largely because carbon is a negative externality; therefore put a price on it, and the market will help to solve the problem in the most efficient way.


And carbon taxation in the UK is inconsistent.  The Energy Systems Catapult have set out the plethora of different carbon prices across the economy – we are taxing carbon heavily in some areas, and effectively subsidising people and companies to emit in others.


But while it’s right that carbon pricing is being considered, it’s an area fraught with political risk.  Anyone who remembers the “green crap” days of 2013 can see how it can become a political football; and mere mention of carbon taxation is often met with a cautionary reference to the gillets jaunes, killing the conversation stone dead.


Nowhere is the risk of such a backlash greater than in domestic energy use.  At the moment, the vast majority of our 28 million households live in energy inefficient housing, using high carbon heating.  We need to transform that in less than 30 years.  Current policy on carbon pricing for households creates the wrong incentives: electricity, our lowest carbon energy source, faces a high carbon price; and gas, a high carbon fuel, does not.


So how can the government approach implementing any kind of carbon tax?


First, we need to be clear on the objective of carbon pricing / taxation, and explain it to consumers (who are also, of course, voters).  The purpose of decarbonisation policy is not to have people shivering in their homes; it is to improve energy efficiency and switch to low carbon forms of heating.  That objective, and a positive consumer experience, need to be at the heart of both the substance and communication of any policy approach. 


It flows from this that we need to front up with the public.  We know people in the UK are increasingly concerned about climate change, with 81% believing that it constitutes a global emergency.  But public understanding of the contribution home heating makes to climate change is low; awareness of the technologies that can address it minimal; and few people are considering investing in it.  The government and energy industry need to rapidly increase consumers’ knowledge and understanding to create the conditions for action.


Second, any tax is only part of the solution – it’s not a silver bullet.  The government cannot be painted into a corner where it is perceived as trying to solve the problem of emissions from homes, or any other sector, through tax alone. Any carbon price must be part of a coherent strategy of which taxation is a part, operating alongside other measures – regulation, other fiscal incentives (for example on mortgages or stamp duty), and support for the less well-off.  The government’s forthcoming Heat and Buildings Strategy provides the opportunity to set this out.


Third, we need to give people stability and time. The objective isn’t to get people to switch their heating off; it is to invest in energy efficiency and boiler replacement.  None of that happens overnight.  That means people need time and foresight to plan.  A tax of (say) £100/tonne on domestic gas would immediately put bills up by over £200 per year and undoubtedly trigger a backlash; but a steady pathway to a carbon price, with support to make the transition, could be more politically sustainable.


Fourth, we need to invest in the supply chain to ensure economic benefits accrue to the UK.  Our success in offshore wind has been in large part because there is a strong economic case in terms of jobs created here in the UK.  We need to create a similar case for the transformation of domestic energy use.


Finally, it needs to be fair – and perceived to be fair.  A tax on domestic energy use could be revenue neutral if it moves costs away from low carbon electricity, and on to high carbon gas.  It needs to be supported by measures for those who are least able to pay a tax or (more importantly) invest in low carbon technologies – potentially through hypothecation, with tax revenues used to invest in decarbonisation measures for the fuel poor, or by rebates in areas where the tax burden would be new.  And it needs to form part of a wider narrative on a fair tax system – not just for carbon, but across the board.  Our report this week sets out how that might be achieved.

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