Decarbonising the economy: the role of carbon taxes in global emissions reduction

This week, Beth fires questions about carbon tax at tax specialist Jamie Younger. With the power to decarbonise industry, turbocharge innovation, and shift consumer behaviour, this topic deserves a long moment in the spotlight. Please let us know your thoughts as we’d love to spark debate and get this topic trending.

For anyone who’d prefer to read the interview instead of watching it, there’s a transcription below.

Important policy makers, thinkers and hashtags around carbon tax include:

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Correction: It is 1.5 trillion tonnes of CO2e into the atmosphere since 1751, and Michael Matheson is the new Scottish Cabinet Secretary for Net Zero, Energy and Transport

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Transcript:

Beth: Jamie, briefly what is carbon tax?

Jamie: It’s a tax on fossil fuel companies based on the amount of CO2e they put into the atmosphere, usually at a set rate. The idea is that the higher the tax, the greater the pricing impact through the supply chain, which ultimately makes it more expensive to burn fossil fuels.

Beth: And what carbon taxes exist around the world?

Jamie: There are two common methods for how carbon tax works; you have what’s called the ‘Cap and Trade’ (which is what we have in the UK) or a direct tax which is what you’ll find in countries like Canada and Switzerland.

Cap and Trade involves credit and limits. The government sets a limit for high emitting sectors, like the energy or mining sectors, and companies have to trade within those limits. If they go over a limit, they either have to buy credits from another company that’s managed to stay within its limit, or they pay a financial penalty. Over time, the government reduces the limit on carbon emissions for each sector, which in theory should reduce the amount of carbon being emitted by that sector.

Direct tax just puts a price on a tonne of carbon which companies must pay based on their emissions.

I personally strongly favour the direct tax principle; it has a much more visible impact on consumers and is more likely to influence behaviour. I believe the Cap and Trade system protects business over the environment; the permits are being issued either for free or very cheaply, so it’s not really having that much of an impact. This at a time when we really need to step up the game.

Beth: Ok, and can you explain what carbon border adjustments are and how they might work?

Jamie: The carbon border adjustment is something that’s actively being considered by the UK government following its announcement of the Carbon Emissions Trading Scheme on the 21st of March. It’s a method of preventing carbon leakage—if we didn’t apply a carbon border adjustment, it would become cheaper to produce products outside of the UK and businesses would simply move themselves or their supply chains to where they don’t have to pay the tax, and then import them in.

In my mind, this is a vital element of an effective carbon tax scheme, but it also has to be done fairly so that developing countries are supported to adapt their infrastructure and economies. It’s no use us meeting all of our Net Zero targets if we are the only ones.
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Learn more about carbon border adjustments in The Zero Carbon Campaign’s white paper, ‘Should the UK introduce a border carbon adjustment mechanism?’. Arvind Ravikumar writes an interesting counter argument to why BCAs are unjust here.

Beth: Absolutely. Climate change is a global problem which will require a global solution…

So, for those watching who want to learn more about this or drive it forward, who should they be engaging with?

Jamie: Well the government ministers, they all have inboxes. You could start with George Eustice, he’s Minister for the Environment. Kemi Badenoch, or [edit: Michael Matheson] in Scotland. Anne-Marie Trevelyan is the Minister for Business, Energy and Clean Growth.

Then there’s the think tanks and policy makers in the academic community; I’d highlight Sir Dieter Helm (@Dieter_Helm), a professor at Oxford University, and Prof. Myles Allen.

Beth: I know The Zero Carbon Campaign has been doing some great work on this too. We’d really like to amplify the messages these guys are spreading, so please if you’re reading this, comment, share, follow on social media or drop into inboxes!

‍Jamie, how in your opinion, should the money earned from carbon taxes be spent?

Jamie: The fundamentals here are, having put [edit: 1.5 trillion tonnes] of carbon into the atmosphere since 1850, we now need to do as much as possible to sequester that back out. Nature certainly has a role to play in this, but unfortunately she isn’t going to deliver 100% of the solution. Carbon Capture and Storage (CCS), which involves drilling down into the earth’s crust and sending liquid carbon back down into the rock, needs to become cheaper and more efficient. This is what the money from carbon taxes should be spent on in my opinion.

Beth: Of course, this can be a bit controversial as no nature-lover likes the idea of drilling and pipes. But there is a big question around whether nature/land-based solutions are going to be able to deliver the kind of storage we need to keep the earth’s temperature below 1.5 / 2 degrees. Cécile Girardin (@cecilegirardin) recently wrote a great article on the importance of long-term planning for nature-based solutions, for those who’d like to learn more about that.

Jamie: Completely agree Beth. But I think we’re going to max out tree planting fairly quickly, so we’re going to have to find—in tandem with nature-based solutions—CCS and other good offsetting measures.

Beth: If anyone watching would like to debate this or has something to contribute, please comment below!

Lastly, besides carbon taxes, what other aspects of the taxation system could be used to drive decarbonisation?

Jamie: Some examples of things I’d like Mr Sunak to look at include:

ISAs: investment in carbon-inefficient companies should be precluded. They ought to meet an ESG-type test before one can invest in such companies.
VAT: a higher VAT rate to high-carbon products, or reduce the amount of VAT on carbon-efficient products (e.g. electric cars or solar tiles for houses)
R&D tax credit scheme: could incentivise investment in greener products
Enterprise investment scheme: could encourage technological innovation in things like CCS

Beth: Ok, 5 key takeaway messages?

Jamie:

This is a race against time, against the 1.5 / 2 degree advice. So we have to get moving.
There might not be enough land to solve our problem solely through nature-based solutions. We need to invest in CCS and other carbon-sequestering technologies, and we need money to do that. Carbon taxes should be used to make businesses (the ones emitting the biggest proportion of carbon emissions) pay for this.
Everyone should audit their personal carbon footprint through something like the Pawprint app and follow all of the good bits of advice that they, and other companies like them, are offering with regards to personal carbon footprint reduction.Those of us living above the global average (7 tonnes CO2e) have the most to do.
It will only be through changing society’s values that we will achieve change. So, do your bit on social media; join the campaigns; have the conversations.
Let us know your views! We want to hear them; did you like our ideas? What would you do? Everyone should have an opinion on this!

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