Richard Ritchie: The climate crisis – and this pandemic – have made the case for a carbon tax stronger than ever before

15 Oct

Richard Ritchie is the author of a recent history of a secretive group of Conservative MPs called The Progress Trust (Without Hindsight: A History of the Progress Trust 1943-2005). He is Enoch Powell’s archivist and is a former Conservative Parliamentary Candidate. He was BP’s director of UK Political Affairs.

There is something in the air, and it’s not just carbon or virus emissions. Earlier this month, ConservativeHome carried a piece by Rachel Wolf, championing carbon pricing – that is the polite way of describing some form of carbon tax. Then, the influential economist Dieter Helm published in September a new book, Net Zero: How We Stop Causing Climate Change, which explains in detail the rationale behind a carbon tax. And from The Times, we’ve learnt that the Chancellor is considering such a tax for his next, Covid-19 budget.

It’s not a new idea. When I worked for BP and climate change first entered the political agenda – before, the main worry was that oil would run out and become too expensive – thoughts on how to price carbon were already in circulation. The oil and gas industry saw some merit in the concept, but favoured emissions trading over a tax, correctly identifying this as a less expensive, Europe-inspired fudge. Now, the combination of a pandemic and climate crisis gives the idea of a carbon tax real traction.

The political implications are important. Climate change and Covid-19 have much in common. Both require us to “follow the science”, although in neither case is the science unanimous. Both are manna from heaven for those who wish to “shut-down” the economy, and limit personal freedom. Both provide excuses for expanding the state. And in both cases, the cure can prove worse than the disease.

There can be little doubt that, so far, global policies to reduce carbon emissions have failed. This won’t worry those who are sceptical of the causes of climate change. But if one believes a failure to act now is to bequeath a catastrophe to future generations, then those on the “right” should be as concerned as those on the “left”.

Where we differ will be on the remedies. So far, “left-of-centre” remedies have generally been the norm. The Kyoto Protocol in 2007 and the Paris Agreement in 2015 have been little more than an opportunity for governments and lobbyists to parade their compassion. Whatever Trump’s motives may be surrounding climate change, his analysis of the Paris Agreement is basically sound. Some of course think its failure is due to inadequate targets; but their targets would make the economic consequences of Covid-19 seem trivial in comparison.

So the question is whether there is a policy which would reduce carbon emissions effectively, in an economically rational way. This is surely one reason why Rishi Sunak is attracted by the idea of a carbon tax as a means of reducing carbon consumption.

In Dieter Helm’s view, the word “consumption” is pivotal. It is no good concentrating solely on industrial emissions, as these won’t necessarily have any global effect – it simply drives emissions abroad, frequently to China. But a carbon tax which crucially incorporated a carbon border tax on imports would, by targeting attention on everyone’s personal carbon footprint, incentivise many things which probably make sense in themselves anyway.

There will be many Conservatives who will argue that all taxes do harm, and that the introduction of a “new” tax is incompatible with Tory beliefs. But unless one is totally sceptical of the science, and dismissive of the need to balance the books, there is much to be said for taxing “bads” rather than “goods”.

Of course it is open to many objections. For example, does the Treasury regard a carbon tax as an emergency measure to raise revenue, or a longstanding instrument to influence behaviour? If it is to serve its purpose, it will eventually yield less revenue.

Equally, if applied in the wrong way, it could merely make this country less competitive. Without care, it could prove regressive. Indeed, if the Paris riots over fuel duty are any guide, it could also prove politically impossible.

Then, for it to work, there must be alternatives for consumers to choose from. Not many will choose an electric car, for example, if there is no guarantee that it can be charged along the journey. (Although mention of electric cars also serves as a reminder that not everything is at it seems – an electric car takes twice as much carbon to produce than a conventional one. A carbon tax would sort that out too).

On the other hand, if properly devised a carbon tax has the capacity both to raise government revenue and to reduce carbon emissions, and even to incentivise other countries to follow suit. Matters to be decided include how the carbon price is fixed and at what level it should be introduced. Should it be levied on consumption or production? Does the tax provide sufficient time for consumers to adjust?

This is the political danger. Carbon taxes could come to the rescue of a cash-strapped Chancellor, because they hold out the prospect of raising new revenue without breaking a manifesto commitment not to raise existing taxes. But if the carbon tax is set too high at the outset, it will be counter-productive. If the Treasury is following Helm’s advice, “the trick is to start low, but credibly signal that the price is going to go up as high as is necessary to achieve the (carbon reduction) target.”

There is no painless way of reducing carbon emissions. Those on the “left” will embrace a policy which involves “picking winners”, nationalisation, subsidies, exemptions, regulation and illiberal compliance. A lobbyist’s paradise. The alternative is to incentivise new technologies, create new markets and provide practical signals to consumers. This is the purpose of a carbon tax. It will never be “popular” because the costs of transforming the networks, communications and transport of this country to facilitate lower carbon emissions are enormous.

But compared with the alternatives, a carbon tax is at least rational and addresses all the major sources of carbon emissions, namely agriculture, transport and electricity. Moreover, it produces a new source of government revenue at a time when it is desperately needed.

Any new tax is depressing to a free market Tory. But climate change, like pandemics, raises issues which are more important than economics. If it is a whole load of nonsense to claim that today’s climate change is man-made, then we are free to carry on as we are.

But if not, Tories have an obligation to advocate alternative solutions to those of the socialist “greens”. The market is the best way of allocating scare resources effectively. But in a time of war, the market cannot tell us how much to spend on butter or guns. That is a political choice, and it is the nature of the choice presented by climate change, if most scientists are to be believed. On so many levels and for so many reasons, it is hardly surprising if Sunak is pondering one.

Guy Opperman: We are making your pension safer, better and greener. Here’s how.

7 Oct

Guy Opperman is the Minister for Pensions and Financial Inclusion, and is MP for Tynedale and Ponteland.

Over the past decade, Britain has made great progress in boosting pension power and delivering better outcomes for savers.

The introduction of automatic enrolment in 2012 is undoubtedly one of the greatest long-term policy success stories of the Coalition Government, which has now been taken forward by this Conservative Government. More than 10.5 million employees are auto-enrolled into a workplace pension, saving eight per cent a year.

Today, our Pension Schemes Bill returns to the Commons, after clearing the Lords earlier this year. It is a Bill that delivers pensions for the next decade. It will make your pension safer, better and greener. This is how: 

Safer  

Pensions are a life asset, built up over decades. When we save for a pension, we expect that money to be there for us in retirement.

This Bill cracks down on the callous crooks who put people’s pensions at risk through their reckless behaviour. In future, reckless bosses who plunder people’s pension pots to line their own pockets will go to prison.

We have all heard the stories of cruel pension scams, too. I don’t like to call these crooks scammers, because they are thieves who rob victims of their hard-earned savings. Last year, we banned pension cold calling, but this new Pension Schemes Bill strengthens the powers of the Pensions Regulator to prevent scams happening, making your pension safer.

Better  

If you’ve ever tried to check how much you have saved for retirement, it can often involve emptying out draws in the hunt for lost paperwork.

Thirty years ago, many of us had just two or three jobs throughout our entire lifetime. Research shows the average millennial now expects to have an average of 12 jobs, and with auto-enrolment meaning more of us are saving for retirement than ever before, keeping track of pension pots from multiple employers can be tricky.

The Pensions Dashboard aims to change that by creating one single place – just like any other app on your phone – to see all your pension pots.

Dashboards will unite billions of pounds in lost, unclaimed pensions with their rightful owners, and users will be able to clearly see how much they have saved through information that is easy to access and understand.

Privacy is crucial, so dashboards put you in control. You can decide how and when your data is accessed, and who has access to it. This new technology puts consumers in control, and undoubtedly makes your pension better.

Greener  

The 2019 Conservative manifesto pledged to get Britain to Net Zero by 2050. As the Prime Minister made clear yesterday in his brilliant conference speech, we can do it with investment in clean energy solutions, like wind, solar, and hydrogen.

With trillions in assets under management, our pensions have a crucial role to play.

When you save into a pension, your provider invests that money to provide long-term returns on your savings. If your savings are invested sustainably and ethically in green infrastructure and new technologies, your pension can play its part in getting Britain to net-zero. The evidence is also clear that this still ensures a safe and good return on your investment.

Last year, I introduced new Environmental, Social and Governance regulations – ESG. These require pension funds to take due account of climate risk when making investment decisions.

This Bill goes one step further, requiring pension schemes to take the Government’s Net Zero targets into account, as well as the goals of the Paris Agreement. This helps manage climate risk. and makes sure you know if your pension is invested sustainably.

Some have argued that we should simply divest pension funds away from high-carbon stocks. I am afraid this is a fundamentally flawed idea. Selling assets to others without the same environmental concerns is unproductive and will do nothing whatsoever to get Britain to Net Zero.

Instead, a partnership with business is the way forward, so we can deliver the innovative change required. By investing in the right assets, trustees can nudge, cajole and vote firms towards lower-carbon business practices.

I have seen this in practice across the country. Since last year’s general election, I’ve visited inspiring businesses and innovative organisations that are helping lead us to Net Zero.  I met with BP and visited their solar farm in Angus to see how their organisation is evolving from an oil and gas company to a modern sustainable energy company. I’ve also had the opportunity to see how the team from Logan Energy is making hydrogen commercial, working to transform energy systems across the country, including in Teesside under the leadership of its Mayor, Ben Houchen.

The Pension Schemes Bill will transform our pensions system for decades to come, by cracking down on bad pension bosses, utilising new technology to put the consumer in charge, and making sure pensions are playing their part in getting Britain to get to Net Zero. I hope the Bill gets widespread cross-party support from across the Commons at Second Reading later today.

Alan Mak: Reform capital allowances and R&D tax credits to fire up investment and create jobs

1 Jul

Alan Mak is MP for Havant and Founder of the APPG on the Fourth Industrial Revolution.

Improving Britain’s productivity is key to both our economic recovery after Coronavirus and enhancing our global competitiveness post-Brexit. The best lever for firing up Britain’s productivity is incentivising more investment in the latest IT and software, new plant and advanced machinery – all proven catalysts of growth and efficiency. Failure to direct billions of pounds into these fundamental building blocks of our economy will hold back our recovery.

The State cannot be expected to do all the heavy lifting, especially given the Government’s substantial spending commitments to help the country through the lockdown and beyond. Instead, it must be businesses that take the lead, especially SMEs who have traditionally made up the “long tail” of unproductive companies.

Rather than a safety-first approach of hoarding cash, postponing investment and hunkering down, businesses must be incentivised to invest more in the coming months. This must be an economic recovery powered by bold investment decisions that create jobs, upgrade technology and boost productivity.

The dampening effect on capital expenditure (capex) and investment caused by Coronavirus is already large and destructive. One investment bank estimates that £23 billion has been slashed from this year’s capex budgets already, whilst the Bank of England predicts a 26 per cent drop in business investment for 2020. In 2009, as the financial crisis erupted, the fall was 16 per cent by comparison. Some of the country’s biggest employers such as BP and HSBC have already started cutting investment.

In practice this means IT systems and software – now at the heart of every business – being used for longer. Machines normally replaced every decade will have their life extended. Trucks and vans will be allowed to age. Outdated buildings that offer no room for new employees will be kept on. Research and development (R&D) could stall.

Reductions in investment not only have negative consequences for our country’s GDP, jobs and productivity, it also damages our capacity for R&D and our reputation as a nation that innovates for the future – key to our leadership of the Fourth Industrial Revolution.

Reforming and adapting two existing incentive schemes – the Annual Investment Allowance and the R&D Tax Credit – would have a major impact in reversing this decline in business investment and productivity.

Introduce a new Annual Investment Allowance ceiling for green or digital investments

Capital allowances enable a business to deduct the cost of qualifying items from their profits, lowering their corporation tax bill. This incentivises investment in key productive goods from machines to laptops.

The Annual Investment Allowance (AIA) is the annual cap on such deductions and its level has varied dramatically in recent years from £25,000 in 2012 to £500,000 in 2015. Until December 2018, the AIA was £200,000 but it was raised to its current £1M level from January 2019. The £1 million level is due to expire this December.

To encourage a green recovery and investments that focus on digitisation, the AIA could be allowed to fall back to the previous £200,000 ceiling, except for certain types of capital expenditure that achieve environmental or digital goals which would still benefit from the £1 million special ceiling. Replacing a diesel-powered machine on the factory floor with one powered by electricity, or digitising a production line by adding new software powered by artificial intelligence (AI), could be examples of investment that would be rewarded by the new special AIA ceiling.

Alongside the introduction of a special £1 million ceiling, the scope of what can be claimed through capital allowances should also be expanded to take account of the growing digital dimensions of every business. For example, digital tools purchased on a subscription basis (such as monthly website hosting costs) should benefit from relief not just one-off investments in physical goods (such as buying a new machine).

Increase R&D tax relief rates for SMEs and widen the scope of the reliefs

R&D tax reliefs support companies that work on innovative projects in science and technology, and enables the cost of qualifying projects to be reclaimed from HMRC. They’re especially effective for digital start-ups, who get a tax break and much needed cashflow back for critical work.

From April this year the relief rate is 13 per cent, but the lion’s share of R&D tax relief is claimed by large, research-intensive businesses. SMEs can currently claim up to 14.5 per cent in certain circumstances, but incremental increases such as this do not have a dramatic effect on investment appetite.

Often the most cutting-edge innovation, especially in the digital sphere, is carried out by small teams and growing start-ups – not just multinationals. To encourage more micro businesses and SMEs to pursue more R&D, new and much higher rates of relief should be introduced. For example, a rate of 25 per cent for SMEs with fewer than 150 employees, and 35 per cent for SMEs with fewer than 50 employees.

What qualifies for relief must also be broadened to include more of the digital tools that software developers use, including software testing tools and data analytics software. In addition, cloud storage fees, user experience development work and the cost of buying data sets needed to train algorithms for AI-driven start-ups should also be tax deductible.

Britain is currently 19th out of the 37 industrialised nations in the OECD when it comes to R&D investment, spending 1.7 per cent of GDP against the OECD average of 2.4 per cent. To match world leaders including Germany and Japan, who invest over three per cent, we must urgently update and expand our R&D tax relief regime.

This is the second in a three-part series on how to boost our economy after Coronavirus.