A progressive carbon tax policy to reduce both CO2 and poverty

Not taxing carbon is a bit like trying to reduce smoking without taxing cigarettes.

Raising the cost of carbon with a comprehensive carbon tax on all fossil fuels, collected at the point of production or import, uses market forces to reduce CO2 emissions in a very cost-effective and efficient way. Both energy efficiency and the use of low-CO2 energy are encouraged.

It applies to all sectors, including heating, industry, electricity generation and transport.

Fossil fuel subsidies, for example, tax breaks on the North Sea oil and gas, are a negative carbon tax and should be withdrawn.

If the money raised is paid back as a dividend to all UK residents on an equal-per-head monthly basis, then people with a below-average total carbon footprint (i.e. those for whom the dividend payments exceed the effect of price rises due to the tax) are subsidised by those with above-average footprints. Children can be rated at half the adult rate, which can be added to Child Benefit. The dividend, a form of UBI (Universal Basic Income), makes the policy progressive. Poor people’s limited total spending power means their total carbon footprint is almost always below average, even including increased home heating costs, making them winners; as will nearly all people in fuel poverty. Overall, poverty is reduced.

An international agreement prevents taxing aviation fuel; a good proxy is a flight tax based on take-off weight and distance flown.

The tax is collected from big companies on goods that are already monitored, and the dividend rate is uniform; administrative costs should be low. The dividend makes the policy tax-neutral overall, which helps sell it politically. The tax is also technology-neutral; it does not try to “pick winners”.

All CO2 is covered, and at a published price; the EU ETS (Emissions Trading System) covers only about half of emissions at an un-predictable price.

The tax should start at £25/ton of CO2, rising progressively over ten years to £100, subject to biannual review. This might produce a dividend of about £600 per adult per year. So people can plan with confidence, tax rates for several years ahead should be published.

To keep a level playing field, the policy should be negotiated internationally, at least with the EU. (But it could start unilaterally.)

The tax should be refunded for CO2 saved by CCS. Fuel duty on petrol and diesel – effectively a carbon tax – should be reduced as the new tax rises, so the combined tax is stable in real terms; this will help politically.

Fossil fuel is used for petroleum products such as plastics. Taxing such products is reasonable.

Consideration should be given to the problem of goods imported with significant carbon “embedded” during manufacture. Although not emitted in the UK, these substantial emissions are our moral responsibility.

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

Policy Summary
Enact a comprehensive carbon tax on all fossil fuels, collected at the point of production or import. Withdraw fossil fuel subsidies.

Payback money raised as a dividend to all UK residents on an equal-per-head monthly basis, with children rated half.

Aviation to be included.

An international agreement should be sought to get a level playing field where possible.

* Stewart Reddaway is a Liberal Democrat member, living in North Hertfordshire.

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6 Comments

  • A comprehensive carbon tax raised gradually seems like a good way forward. However, I am not sure it would be more than a temporary funder for UBI. Presumably the aim is eventually to make the carbon tax so high that almost no-one pays it because they have found other solutions?

  • Stewart Reddaway 11th Jun '20 - 11:32am

    Thanks Mark. I said the dividend is a form of UBI to make clear it is universal and uniform. The amount will be the result of an increasing £/ton and a reducing number of tons; it will not be high enough on its’ own to be a serious UBI.

  • Peter Hirst 11th Jun '20 - 1:43pm

    It will need to be implemented gradually to tackle sudden changes in household and company budgets, iron out anomalies and be progressive. I suspect the money will go into general government coffers. The important thing is that there must be political commitment to it, something this administration lacks. We would have to be prepared to go it alone as necessary, something that is more likely with Brexit and would lessen its effectiveness.

  • Stewart Reddaway 11th Jun '20 - 7:38pm

    Peter calls for gradual implementation. The suggested start rate is £25/ton of CO2 which is fairly small for individuals, but less so for some industries. Of course the aim is to change behaviour to reduce emissions.
    What sort of anomalies do you have in mind? It is a general carbon tax, so there is little that is arbitrary about it.
    Peter is concerned the money will disappear into government coffers, but returning it to the people is fundamental to the policy.
    I agree that the Johnson government is unlikely to adopt the policy.

  • David Garlick 13th Jun '20 - 9:40am

    Thoughtful idea. Can’t see it gaining a slot on a Lib Dem Conference Agenda sadly.
    Chucking a statue into the harbour raised more comments than anti Poverty and pro climate measure. Important as BLM is the lack of attention to these issues says it all really. LD Party needs to take a lead on Climate change and now. Not to do so will further exacerbate

  • David Garlick 13th Jun '20 - 9:41am

    … the suffering of ALL deprived communities.

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