Economy-wide carbon tax would create ‘level playing field’ for UK businesses

The study suggests that a tax paid by companies that sell fossil fuel would fund a divided to be paid to taxpayers and help to prevent carbon leakage, which refers to a situation where businesses transfer production to other countries with laxer emission constraints.

Such a tax should be structured around border so that companies which export carbon-intensive products into the UK are subject to the same level of carbon tax as domestic producers, it adds, helping industries such as the British steel sector.

The report has received cross-party support, with the foreword co-authored by former Labour Chancellor Lord Darline and ex-Conservative Foreign Secretary Lord Hague.

The pair said the UK had become a “world leader” in climate action through the signing of the 2008 Climate Change Act. “However, as this report by Policy Exchange shows, many challenges remain, most notably that of carbon leakage whereby energy intensive industries move abroad to avoid environmental taxes,” they wrote.

“Cleaning up our own energy system will mean little if we simply outsource our emissions. In the absence of a unified global carbon tax, border carbon adjustments are essential to ensure that British businesses are operating on a level playing field with those that are foreign-based. This is a clear plan for how this would work in practice.”

Power to the people

The report contends that the UK should remain a member of the ETS until the end of the third trading period at the start of 2021, at which point it should introduce the carbon tax. The tax would steadily rise at a rate set by an independent body to give the policy “institutional certainty and bankability”.

Policy Exchange says that the move would harmonise the UK’s carbon taxation structure, bringing 10 direct taxes into a single unified price paid for emitting greenhouse gases (GHG) in the UK. The Climate Change Levy was cited as an example of a mechanism that would no longer be needed.

According to the report, a proposed carbon dividend would send funds from taxation returned directly to the public in an annual lump sum, which would “lock in” political and public support for climate change action.

“In our drive to decarbonise the economy, it is important that we take people with us,” the foreword continues. “If carbon taxes are seen to unduly punish that average citizen, they will fail. That is why Policy Exchange’s idea of recycling the revenue from carbon taxation back to the people in the form of a ‘carbon dividend’ is worth exploring. It would make a carbon tax both progressive and popular.”

Price hikes

The UK Government has previously been informed that a carbon price of £40 per tonne may be required to shut down all remaining coal plants by 2025. According to research, the UK’s current carbon price of £23/tonne was responsible for almost 75% of the decline in coal generation since it was introduced in April 2013.

Reforms to the EU-ETS cap-and-trade system have already seen the price of carbon triple from a low of €4.38/tonne in May 2017 to around €15/tonne, making them the world’s best performing energy commodity over the past 12 months.

Some experts believe that EU carbon prices could quadruple to €55/tonne by 2030 if policymakers align the bloc’s emissions targets with the Paris Agreement.

George Ogleby