Consider a single carbon tax to make net zero work, economists say

The poorest households will also need support in the drive for net zero, a new report suggests

Anna Isaac
Saturday 02 October 2021 00:35
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<p>The UK should rethink how it taxes carbon emissions if it really wants to reach net zero</p>

The UK should rethink how it taxes carbon emissions if it really wants to reach net zero

The government should consider a single carbon tax if it wants to get serious on tackling climate change, according to think tank the Institute for Fiscal Studies (IFS).

Moving the economy to net zero – emitting less carbon dioxide than it consumes – will be messy and expensive unless the government has a radical rethink about how to simplify its approach to taxing greenhouse gas production, according fresh research from the IFS, Nuffield Foundation and Citibank.

It comes as debate rages over how and who the country will pay for its ambitious climate goals. MPs across the political spectrum are concerned that taxes on carbon-intensive products or higher energy bills to support the move to renewables will fall on the shoulders of those least able to afford it.

Yet reforming the tax system and policies to support a more coherent approach to cutting carbon will be a challenge, the IFS said.

“However, the government chooses to incentivise greater emissions reductions, close attention should be paid to the distributional consequences,” said Isaac Delestre, research economist at the IFS. “Compensation will likely be needed for some groups who will inevitably lose out from higher carbon prices.”

Repeated failures to tackle the way households use energy by installing energy-saving home improvements such as insulation had also proved “short lived and ineffective”, the think tank said. These failures have been “exacerbating the problems of the current gas price surge”, it added.

So stark is the potential hit to poorer households from the drive to go green that the government may even have to consider using the revenues from green taxes to boost benefit payments, the IFS said.

Current policies also have “wildly inconsistent incentives”, with end-users let off the hook for their consumption relative to the costs faced by those who directly emit greenhouse gases. An example of this, the IFS found, is how electricity production and road fuel are taxed more heavily than personal flights, where emissions are “effectively subsidised”.

“The government could look to replace the raft of existing policies with a single carbon tax, or with an extended emissions trading scheme that covered all emissions,” said Mr Delestre. “There would be major benefits to moving at least some way towards a simpler set of policies,” he added.

While the UK has made progress on its green targets, with emissions made within the country falling by 38 per cent between 1990 and 2018, aviation’s carbon output has grown fiercely. Emissions from international flights more than doubled between 1990 and 2018.

The offshoring, or carbon leakage effect, of carbon-intensive products from overseas also gives a false impression of what net zero means in a globalised economy.

Like other territories, such as the EU, the UK will have to consider placing a carbon tax on imported goods, something that is politically fraught for its international relations. Such a step is one way to address the inconsistency of trying to cut carbon emitted on UK soil while ignoring the wider environmental impact of the country’s consumption, the IFS said.

“Reaching net zero will require faster emissions reductions in politically challenging areas, where incentives to cut emissions are relatively weak, and where progress to date has been particularly slow, including home heating, agriculture and aviation,” said Peter Levell, associate director at the IFS.

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