Liberal Democrats want a new tax on coal, oil and gas to cut value added tax across the board or to reduce employers' national insurance contributions.
Party strategists believe that their latest version of a "carbon tax" on fossil fuels could create hundreds of thousands of new jobs, while curbing Britain's emissions of the greenhouse gases which have begun to alter the earth's climate.
The tax would be levied according to how much carbon dioxide gas each fuel produced when burnt. Thus coal, the most polluting fuel, would be the most heavily taxed, gas the least and crude oil in between.
According to the Liberal Democrats' new energy paper, approved by the main policy committee, the tax would be applied "at the point at which fossil fuels enter the economy - extraction or import". The tax, which will be debated at the party's autumn conference, would be introduced gradually. Matthew Taylor, the party's environment spokesman, said: "Our aim is to create an expectation of rising prices rather than a price shock. At the moment prices are falling, so the incentives to save energy and cut pollution are reducing too. We want to reverse that."
Eventually the carbon tax could raise more than the entire pounds 14bn a year from VAT on all goods, but the party says it would take more than the lifetime of one Parliament to reach that level. There would be special measures to help low- income households.
Any damage to the economy from higher fuel prices would be more than offset by the extra growth and employment resulting from cuts in VAT or employer's national insurance payments. Several computer models have backed this view. Such studies have shown that a carbon tax would lift gas and electricity prices by about the same percentage, but have a smaller impact on vehicle fuel prices because these are already taxed more heavily.
uclear power and renewable energy sources, such as wind turbines and hydroelectricity, would not be taxed because they produce no global warming carbon dioxide.
As for the existing VAT on household gas and electricity, the Liberal Democrats could propose keeping it at the existing 8 per cent or cut it to 5 per cent - the minimum allowable under European Union rules.
The European Commission has been proposing a carbon tax for the last five years but has made very little progress towards implementation - largely because of strong objections from the British government. The Liberal Democrats have been the only mainstream British party in favour of such a tax since 1990.
The party wants Britain to go it alone with a carbon tax if Europe-wide agreement cannot be reached. Four other EU nations have already done so.
t The left-leaning Institute for Public Policy Research will next week propose a radical shift to "green taxes" which, it says, could create up to 700,000 new jobs. The package includes commercial and industrial energy taxes, higher road-fuel duties, higher waste-disposal taxes and a quarrying tax.Reuse content