Josh Buckland is the author of Bright Blue’s Green money: a plan to reform UK carbon pricing and a former energy and environment special adviser to the Prime Minister.
Beyond simply raising funds for the Treasury, the tax system has long been used by governments of all colours to deliver other political and policy objectives. It has been used as a lever to drive social policy, as well as to stoke economic growth.
More recently, it has been used to improve public health, such as through the introduction of the sugar tax last decade. The tax system has always had to serve many masters.
One such alternative master is to tackle climate change. Despite the recent popular surge in political interest in green issues across the political spectrum, this is nothing new. At his final Budget in 1993, Norman Lamont introduced VAT on domestic energy bills, linking it to honouring the country’s commitment to stabilise emissions by 2000 made at the 1992 Rio Summit.
Ever since, chancellors have seen the potential of putting a price on carbon emissions. A combination of carbon taxes now delivers around £50 billion annually to the Exchequer, around seven per cent of total tax receipts and equivalent to 2.3 per cent of GDP.
While by no means a silver bullet, there is a strong free market case for taxing carbon emissions. The environmental damage done through emitting carbon is not automatically factored into the price of the goods we buy and sell, whether it be a plane ticket or a product online.
Just a small change in the price of a carbon-intensive goods to reflect this true ‘cost’ can potentially have a significant impact, as we have seen through the reduction in plastic bag use driven by the 10p charge on the same. If done well, it can allow market competition to take the lead in finding the green technology solutions needed, avoiding the need for costly public subsidies and continual state intervention.
However, any tax is fraught with political risk. While there is general support for government taking action to cut emissions across both the right and left, the majority of the public favour being incentivised to do so, rather than government acting to restrict choice or increase prices. Ministers are rightly all too aware of a basic political rule – people never vote for tax rises.
Notwithstanding this obvious political challenge, since the passage of the Climate Change Act in 2008, government has taken steps to align the tax system with the need to reduce the impact we all have on the natural environment. A tax on carbon emissions in the power sector has driven down the use of coal power to the point that it now meets less than two per cent of annual power demand. Businesses and households also pay a range of carbon taxes across what they buy and sell, incentivising companies to make products that use less energy.
Despite numerous examples of successfully mobilising private investment through taxing emissions, the Government’s approach to doing so has been piecemeal. There are significant inconsistencies – the tax we all pay for using electricity in our homes is three times what we pay for using gas for heating. Much of the tax system is effectively ‘carbon blind’ and many pro-environmental measures effectively place a flat tax across all consumers, putting the greatest burden on those on the lowest incomes.
With the UK hosting the climate conference COP26 in November, there is an opportunity to champion a free market approach to tackling climate change. In order to do so, the independent think tank Bright Blue has today published a report, Green money: a plan to reform UK carbon pricing, setting out how government can turn the tax system green.
The report recommends that the Government should leave no hiding place for carbon by placing a consistent price on all emissions. This would be done through tailored measures across each sector of the economy which ensure the market can adequately respond, rather than simply increasing the prices consumers pay. It also argues that the revenue generated through green taxes should be recycled back into UK green innovation to cut the costs of tackling climate change, as well as reducing the energy bills of those least well off to ease the green transition.
The political and economic challenges in reaching the UK’s goal of net zero emissions by 2050 are significant and public backing must be achieved to make it possible. While some on the left argue that this means we must revert to an overbearing state, unlocking the power of market competition remains our best hope. We can only do so if we get serious about putting a proper price on carbon emissions.