Tax carbon and reduce poverty

The 2019 Autumn Conference approved a generally good Policy Motion F29 Tackling the Climate Emergency, listing actions which reduce UK emissions to net zero within a few decades. It included point 2d – “Greening the taxation system to make the polluters pay and to reward progress towards net zero.”

This appears to be a statement of intent rather than a genuine action point. I believe that we should go further, committing to a carbon tax designed to:

  1. reduce carbon emissions – globally
  2. fight poverty
  3. protect the UK economy against unfair competition from overseas polluters

This might sound a classic trilemma (three mutually incompatible goals), but one policy can deliver all three. Here’s how.

We currently have a mishmash of carbon pricing measures (Climate Change Levy, Fuel Duty, etc.) which affect specific sectors.

  • These only exert downward pressure on fossil fuel consumption in some sectors, and prices are generally too low to drive rapid reductions.
  • They are potentially regressive, impacting the poor more than the rich.
  • They risk carbon leakage – when emission reduction policies in one country lead to increases elsewhere.

The solution is a carbon tax, dividend and border adjustment.

First, a steadily rising universal carbon tax is an efficient way to reduce carbon emissions throughout the economy, using competitive market forces to incentivise producers and consumers to reduce their emissions. It is supported by the OECD, IMF and over 3000 economists, including many Nobel laureates.

Second, we should repay the revenue raised as an equal-per-head “Dividend”, so that the policy is:

  • Revenue neutral
  • a “Progressive” climate solution supporting people on low incomes, instead of Regressive taxation
  • popular, because most families are better off

Carbon tax opponents claim that the burden will fall heavily on the poor. Studies show that repaying the revenue raised equally to all should actually benefit people on low incomes.

The dividend also makes this much easier to sell, politically. One of the best known carbon taxes, in British Columbia, has become relatively popular, because it returns most of the revenue raised to the people.

Third, we need a “border carbon adjustment” – a levy on goods imported from countries without carbon taxes proportional to the carbon emitted in the manufacturing process. This can prevent emissions moving other countries, such as industry moving offshore to avoid tax.

We must reduce the UK’s consumption emissions (which include imports), not just territorial emissions (within the UK’s borders). Also, allowing foreign polluters to profit at our expense causes needless economic damage to the UK, and could be exploited in propaganda by climate change deniers and delayers.

Studies show that such a levy can be compatible with WTO rules if done properly and fairly.

Finally, a full carbon tax is a complement for other measures, not a substitute. For example, F29 includes emergency programmes to reduce carbon emissions from buildings and tackle fuel poverty, and to accelerate the rollout of electric vehicle charging points. Carbon pricing provides an effective financial incentive for major technology changes like these.

And some additional details on carbon taxes, and a number of useful references.

* I has been interested in environmental issues and active with the Lib Dems and predecessors since the 1970's, including a stint as a local councillor from 1990 to 1998. I like to cycle regularly and look forward to enjoying more of the British countryside - when ever I can find the time

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8 Comments

  • what you need is ideas that are so good it leaves the govn looking ridiculous for not taking them up (which in politics means they will present them as their own ideas and take credit for them).

    I still fail to understand why the LibDems don’t promote the ending of standing charges on energy which hits the low users the hardest (the post coalition govn managed to all but eliminate the option via Ebico), why they don’t promote smart meters that run backwards so that new installations of solar panels will give the house-holder the full credit for all the energy they generate (a scheme of such simplicity it is beyond the ken of politicians who want layers upon layers of junk admin put on the consumer), and why they are still promoting schemes that encourage people to have babies (wonderful on a personal level but a terrible assault on the planet in the whole)…

    Meanwhile, I enjoy the Green buzz of my cold water wake-up shower and save a couple of hundred quid a year…

  • Julian Hawkins 5th Aug '20 - 7:20pm

    Frank – thanks for your comments. The meter that runs backwards sounds pretty much like the feed in tariff. Technically this has existed for a long time, it’s just that new producers since the feed in tariff ended get paid peanuts. I don’t see any financial barrier to paying people who produce electricity a fee equal to the cost of the gas not burned to produce that electricity, less a small charge for network access. This is hinted at in policy paper 139 paragraph 8.2.4 – https://www.libdems.org.uk/policy-papers-autumn-19

  • David Garlick 6th Aug '20 - 10:21am

    A welcome addition to the debate and I like the ideas here. Hope that this forms part of the new climate and energy think tank that I dearly hope the new leader will establish as one of the first things that they do and which will be charged with an early report back.

  • Peter Davies 6th Aug '20 - 11:58am

    A tax that meets your requirements would be a carbon added tax. It would be taxed on fossil fuels when they are extracted and on goods imported based on carbon content. It would be reclaimable on exports. The structure would function just like VAT but most companies do not add carbon so they would only need to apportion their CAT on supplies between sales. It can be implemented in one country but it is more efficient if many countries do so and accept each other’s assessment of carbon content.

  • Julian Hawkins 6th Aug '20 - 2:14pm

    David – thanks for your comments. A lot of the work on planning to reduce emissions has already been done, and is in the policy paper. We just need to finish the job. This includes overcoming some objections, particularly the concern that it would be regressive. There have been some assessments of carbon tax plus dividend which show it would be progressive, and several non-political organisations are now promoting this policy in various parts of the world.

  • Julian Hawkins 6th Aug '20 - 2:17pm

    Peter – I am one of a small group of GLD members promoting a carbon tax plus dividend in the party, and what you describe is pretty similar to what we want. For more details see https://greenlibdems.org.uk/en/article/2020/1365106/carbon-tax-a-proposal-for-a-direct-tax-on-the-amount-of-emissions

  • Peter,

    A CAT would be an excellent proposition, and given that we already have accounting systems and standards for dealing with VAT it would be relatively simple to adjust for Carbon.

    But, it would add administrative burden to businesses and would therefore be difficult to sell.

    Nonetheless it is an elegant solution and if every business did CAT returns in the same way as we do VAT returns they could break out the carbon on your invoice and the government could see precisely the impact of any carbon saving initiatives in very short order.

    Julian,

    Excellent article, thanks.

    R

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