The Politics of Climate Change (24 page)

Directly motivated carbon taxes can be of two sorts: those whose revenue, part or all, is spent for environmental purposes; and those whose purpose it is to influence behaviour in ways compatible with climate change objectives. Taxes invested in developing renewable technologies, for example, fall into the first category. Those aimed at persuading people to drive more fuel-efficient cars, or reduce the mileage they drive every year, fall into the second. As with other taxes, they can serve as incentives or they can be punitive.

Carbon taxes should be transparent to citizens rather than presented in some other guise or under some other pretext, as happened with the fuel levies in the UK. They are likely to be most successful where they combine several of the qualities
just noted – i.e., if they are explicitly designed as such; directed at changing behaviour, whether of agencies in society, such as business firms, or citizens as a whole; wherever possible are incentives rather than negative taxes, since incentives draw upon positive motivations; form part of an overall fiscal strategy; and where their environmental consequences are openly stated and visible.

From an economic point of view, the point of carbon taxes is to help eliminate externalities as far as the environment is concerned – to ensure that they are fully costed, including costs to future generations. As in so many other areas of climate change policy, the principle is easy to state, but quite often difficult to apply. For instance, the cost of food produced by large-scale agriculture using fertilizers and pesticides does not include the destructive impact these can have on the soil. Nor does it include the pollution coming from the shipping that carries them around the world. True prices are very difficult to assess, as in many other areas, given the complex nature of modern manufacturing processes.

Taxes on the use of resources should be as near to the point of production as possible, in order to apply to all relevant aspects of manufacturing processes. Such taxes should promote efficiency in energy use and innovation at the beginning of the production cycle, limiting the need for repair and recycling later. There should be trade-offs where carbon taxes are introduced
de novo
. In other words, citizens should be offered tax swaps, basically trading environmental taxes against reductions elsewhere. Sometimes, such a strategy can create a ‘double dividend' – limiting pollution but at the same time producing other benefits elsewhere.

It is a well-established theorem that, as far as possible, we should tax the ‘bads' (the sources of emissions) rather than the ‘goods' (such as human labour, in the form of income tax). This notion fits neatly with ‘the polluter pays' principle. However, once again the distinction is not as clear-cut as one might assume, since, through taxation, we also want actively (via incentives) to encourage ‘goods' in respect of climate change – such as investment in renewable technologies. Taxing the ‘bads' implies that these will be replaced more and more by ‘goods', insofar as taxation produces social or economic
changes; hence revenue from such sources will inevitably decline, even if taxation takes the form of incentives. Hence, once more we must bear in mind the overall tax system, since compensatory changes will need to be introduced elsewhere.

The pioneers of carbon taxes have been the Nordic countries. They were introduced in the early 1990s, so there has been some time to assess their level of success. The task is complicated, however, by the fact that taxes vary from country to country and all have evolved over time. In the early 1990s the Danes introduced taxes on electricity, energy consumption and fossil fuels. These were later complemented by a household CO
₂
tax. In Finland, what is generally seen as the first CO
₂
tax in the world was established in 1990 and applied across industry, transport and private households. Initially, the tax was relatively low, but it was later expanded. Sweden, Norway and Iceland have followed somewhat different paths again.

The level of ambition of such taxes, at least initially, was modest and, judged against that base-line, the results have been significant.
²⁸
In Finland, without the CO
₂
tax, emissions would probably have been 2–3 per cent higher by the year 2000 than they turned out to be; in Sweden, Norway and Iceland the figure was 3–4 per cent. The absolute level of emissions, however, increased across the 1990s in all these countries. Only in Denmark did the absolute volume of CO
₂
emissions fall. The reason is that the Danes directed the tax revenue to environmental ends – it was used to subsidize energy-saving practices.

Given that these are the most advanced countries in respect of carbon taxes, it is obvious that there is a long way to go before such taxes make the contributions we (rightly) expect of them. Most current discussions remain at the level of what ‘could be achieved' – that is, they are hypothetical. The possibilities of tax swaps, for example, have been explored in detail in various national contexts. Thus a study in the US analysed a swap in which a tax of $15 per metric ton of carbon would be balanced against a reduction in the federal payroll tax on the first $3,660 that workers earn.
²⁹
Payroll tax in the US is a flat-rate tax up to a limit (in 2005) of $90,000 and is a regressive tax, hitting lower earners disproportionately. In fact, for more
than 60 per cent of households it is the largest single federal tax they pay. A ‘double dividend' comes into play, since taxes on labour supply can discourage workers from increasing their productivity, or even from entering the workforce at all.

Since the potentially regressive impact of carbon taxes is a worry to many, it is worth looking at some of the strategies that have been put forward to counter it. A research study carried out in the UK by the Rowntree Foundation studied four sectors where such taxes either have been established or are under active consideration.
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These were in energy, water and transport use by households, together with the household generation of waste. The point was to see what ways could be devised to make such taxes at least neutral in terms of how they affect the less well-off.

The study confirmed that, if nothing else changed, in these areas environmental taxes would have a significant adverse impact upon poorer households. People on low incomes may already be inclined to stint on energy consumption, perhaps even to the detriment of their own health, especially where heating is concerned.

A reason why the UK has not followed the Nordic states and other countries in introducing household carbon or energy taxes is that fuel poverty in Britain reflects the peculiarly inadequate thermal characteristics of the country's housing stock. The Rowntree Foundation study mentioned above shows an enormous variation in energy use even among households within the same income band. Within each of 10 income bands used in the research, some households consumed as much as six times more energy than others. There were also large variations in emissions. The research showed that the poorest households pay significantly more per unit of energy than the most affluent ones. Hence, if a uniform carbon tax were imposed, it would be even more regressive than might appear at first sight.

Tax and benefits packages aimed at the poorer households can help reduce this effect. However, some among the fuel poor would become actively worse off, which would be likely to sink such proposals politically.

There is an approach that could work. It involves a combination of incentives and sanctions. By means of incentives,
households would be persuaded to implement energy-efficient measures; a ‘climate change surcharge' would be imposed on all households which, after a certain time, had not taken steps to carry out these measures. A nationwide energy audit would identify cost-effective measures that would need to be implemented by every household in order to avoid the climate change surcharge. The scheme would be put into practice over a given time period – say, 10 years – beginning with those living in the most affluent homes, as measured by existing property tax categories. Those in the highest tax bands would be obliged to carry out the work first, with others following in sequence and the poorest left to last. The latter group would be able to get low-cost loans, paid for from the surcharge levied on households that failed to get the necessary improvements done on time. For rented accommodation, the property-owners would pay.

The researchers argue that a minimum of 10 per cent of household CO
₂
emissions would be saved over the 10-year period. While the cost to householders would be £6.4 billion, they would be saved a net sum of £19.4 billion. The average return to householders would be 23 per cent, with the poorest gaining more than the affluent, resulting in a sharp drop in fuel poverty. The report concludes that ‘the fact that such a scheme currently seems not to be considered suggests the public and political will to mitigate climate change is not yet very powerful'.
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The report suggests that similar results can be achieved in other areas too – household water use, transport and waste management. As far as the first of these is concerned, the study argues that water metering under any scenario would have more positive results for poorer households than the current situation, where households pay a bill partly based on a standing charge and partly on the value of their properties. Taxes on fuel for cars are not regressive, since over 30 per cent of households do not own a car and most of such households are poor. Ways can be found of compensating low-income motorists for fuel duties, for example by abolishing licence duty for those groups. However, for purposes of political legitimacy, it would be crucial to spend the revenue on environmental purposes.

Finally, it would be possible to increase the level of waste recycling without adversely affecting the poor. At the moment, the poor pay more for waste collection in relative terms than do the more affluent. The researchers argue for a reduction in council taxes by the same amount for all households, and the addition of a weight-based charge for waste disposal. The charge would vary according to how far waste material was recyclable.

The Rowntree Study is important, because it goes some way to providing a carbon audit of the tax system, at least in the areas covered. It takes into account existing fiscal instruments and tries to spot the unintended consequences of reforms. All the proposed strategies are fairly complex, suggesting that it is difficult to reach the holy grail of reconciling carbon taxes with greater tax simplicity while still protecting the underprivileged. At present, it seems that no country has attempted a full-scale carbon tax audit, but such appraisals are surely necessary, since virtually all individual taxes will have knock-on consequences.

Do we need carbon taxes at all if and when oil and gas prices rise again? Won't they act like taxes anyway? Won't poorer people have to be given subsidies as the price of energy to the consumer rises? These questions do not admit of straightforward answers, for reasons given earlier. High prices will act as the equivalent of taxes, when compared to previous price levels, and undoubtedly will prompt changes in behaviour in the direction of greater frugality and efficiency in energy use, as well as adding a powerful stimulus to the development of new energy technologies.

The difference from carbon taxes, however, is that they create no stream of revenue to the state, but instead generate large new costs, and hence inflationary consequences, that somehow have to be absorbed; moreover, oil and gas prices are essentially unpredictable. And there is the danger that they will result in a return to the use of coal. So we will need carbon taxes anyway, but in which areas, and how far they take the form of incentives rather than punitive taxes, will certainly be very strongly influenced by whatever happens in world energy markets.

Carbon rationing has some fervent advocates and some equally vociferous opponents. Supporters like the idea because of its apparent simplicity, its universal character and its radical nature. Each member of the population would have an annual carbon allowance for energy use in respect of domestic consumption and travel, including air travel. The allowance would be the same for all adults, with a smaller quota for children. The scheme would be mandatory. Once more, the role of government would be crucial, for it would have not only to determine at what level the quotas would be fixed, but also to be responsible for monitoring its operation.

Each year, the allowance would be reduced by an amount, specified well in advance, tracking the trajectory of national targets for emissions reductions. Individuals who live low-carbon lifestyles could trade their surplus emissions at a market price to those who consume more. Organizations as well as individual citizens could in principle be included. The quotas would be divided into carbon units. Everyone would have a smart card containing their allowance for the year, which would be used every time domestic bills were paid or travel services used. Carbon rationing, it is argued, would do away with many of the more specific government programmes designed to encourage energy conservation; people would be able to choose for themselves how best to meet the quota.

Three different versions have been proposed – involving what their originators call, variously, Tradable Energy Quotas, Domestic Tradable Quotas and Personal Carbon Allowances. The first of these was proposed by David Fleming.
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It would cover organizations (including the government) as well as individuals. A cap would be set based upon national emissions reductions targets. A 20-year rolling budget would be set up at the start of the scheme. For the first five years the quotas would be binding and for the second five years they would be ‘firm'; the final ten years would be a ‘forecast', to allow individuals and companies to prepare over time. Of
the overall ration, 40 per cent would be allocated to adult citizens free of charge; the other 60 per cent would be issued to ‘primary dealers' who would sell on to organizations in a secondary market. The scheme would cover oil, gas, electricity and coal. Individuals could choose to sell their units as soon as they received them, and then buy back from the market as they made energy-relevant purchases. In other words, they could opt for a pay-as-you-go procedure. Those outside the system (such as overseas visitors) would have to use such a means.