I was asked my thoughts on carbon taxes yesterday. I prepared this rather quick note, which explains why I am unenamoured of them and think they have little part to play in a green transition which also seeks social justice and tax fairness:
- Carbon taxes exist to change behaviour
- They cannot do so by themselves
- They need explanation
- And in some (maybe a great many) cases regulation on carbon use may be more effective than carbon taxes
- The argument made by the IMF and others, that carbon taxes as repricing, might be the best tool to bring about a change in carbon usage is not true
- Regulation is better
- And unless alternatives to the products subject to carbon taxes are available at the time that those taxes are introduced it is very likely that the result of introducing the tax will be profoundly negative outcomes that might harm the objectives of the tax
- This means that before any carbon tax is considered a full appraisal of consequences is essential and investment in alternatives is essential
- Carbon taxes have to raise revenue or they will not work, but the consequences have to be appraised with care or the impact may be highly undesirable
- The problem with taxes is that their ‘incidence' is not the same as the people who necessarily pay them. Incidence is on the end user who actually bears the cost.
- In the vast majority of cases the incidence of carbon taxes is on consumption.
- Those on lowest incomes in society have the highest marginal propensities to consume i.e. they spend a greater part of their income on consumption than anyone else. This means that almost all carbon taxes, however superficially constructed, will be regressive in nature: there is almost no way round this.
- What this means then is that any carbon tax has, then, to be balanced by deeply redistributive measures on other taxes to ensure that the price of saving the planet does not fall on those least able to bear it.
- This, then, requires, the introduction of multiple tax measures that will increase liabilities owing for the most vociferous in society - the wealthier middle class. Whether this is possible is open to question. It must also be questioned how the payment to compensate those on lower income will be managed, what the take up will be, and whether the linkage will be understood. The risk of backlash is very high.
- There is another issue: if the demand for the products that will carry the carbon tax is very inelastic - partly because of consumer preference and partly because of the lack of viable alternatives - then imposing a tax may only raise revenues and not change behaviour at all. All these issues have to be taken into account in considering any such taxes.
- The result is that the range of viable carbon taxes, as such, is very small.
- We already have airport taxes, and landfill taxes which are proxy carbon taxes. We tax hydrocarbons, significantly (but maybe not enough). We do not tax domestic energy, much.
- So what can we do?
- First, hit the really big targets:
- Aircraft fuel
- Bunker fuel
- This is possible: either in the UK or by imposing a tax on aircraft / ships landing if they have fuelled in low tax jurisdictions, but international cooperation would probably be required
- Effectively we impose a tax via variable landing fees dependent on tax on fuel already paid. These have the advantage of being capable of being ramped up quite easily over time.
- Then remove the subsidies for existing carbon usage e.g. investment reliefs for investment in these sectors. This may be one of the most useful things we could do.
- I personally believe in what I have called a CUT - a carbon usage tax that would be a financial transaction tax on flows through private bank accounts that would impose little or no charge on median earners (and maybe a bit above that) but which would be quite progressive and charge those with substantial flows to an additional tax that a) compensates for the lack of VAT that they pay b) is intended to redistribute income and wealth and c) is not hypothecated for green purpose (because I oppose all hypothecation because you cannot fund a good from a bad, by definition, because if the bad ends then so too does the good and that might be undesirable) but is broadly indicated to be available for this purpose.
- Thereafter I suggest regulation be primarily used on this issue. I simply don't see a role for carbon taxes in most cases.
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Rationing is a better solution. Why isn’t it discussed?
Rationing answers a lot of the problems explored above. In particular, it is progressive. Especially if trading in the ration is permitted.
1) The “right to pollute” isn’t one that is proportionate to the ability to pay! Giving everyone the same allocation is fair.
2) The size of the total allocation cane be set, guaranteeing the policy level is not exceeded
3) The market can adapt to the allocation.
4) The government does not have an interest in maximising the receipts. i.e. Encouraging the very behaviour it should be curtailing. ( Did tobacco tax delay banning?)
My guess is the elite know they can pay for the tax, so using less carbon impacts only those with limited means.
Hence my reference to regulation….
And I am not interested in tradeable carbon allocations
I think we have carbon allocations
Ah,
I am suggesting rationing at the citizen level. Allocations at the production level merely shifts the revenue from shortage to the producers from government! ( Yes see how carbon trading in big industry is now as profitable as their normal trade!!!)
I think one salient point is that you can’t change behaviour without providing an alternative to that behaviour,
a massive improvement of the public transport infrastructure seems the best way to make private cars mostly superfluous,
rail travel nationally and europe-wide needs to be cheap, easy and efficient enough to displace short hop aviation,
support and promotion of domestic production with the intent of providing import substitution could undermine shipping,
the three suggestions above open up a plethora of spin-off enterprises that would stimulate domestic economic activity and employment,
any purchase tax is going to clobber the consumer, I think this was the root of the discontent in France with the Gilet Jaunes, it would be foolish to reproduce it here,
once alternatives were in place you could think about restructuring VAT,
a lower rate for many current items that are now considered almost necessities and a higher rate for ostentatious over consumption items,
I suspect it would be near impossible in the current climate to tackle anything at an international level, neo-liberal globalisation has raised trans-national corporations to such a level of power and influence over nation states that any efforts to force change would be thwarted by their armies of lobbyists, lawyers and flying monkeys,
if we could do something within our national borders that was seen to work it could inspire other western countries to follow suit, once you reach a critical mass then the TNC’s would be obliged to fall into step.
start at home where we still have some sort of control and then lead the world by example.
Agreed
This is why spend comes before tax
And why we need a GND
yes we do need a new deal,
and it’s screamingly obvious that it should be fundamentally green,
but it could extend further, into a vehicle to create alternatives to those currently imposed upon us by TNC’s
to achieve an ecological balance across all aspects of society we need to break the stranglehold of TNC’s that have herded us into such destructive, short term behaviour,
a national investment bank that retains capital and investment within our borders instead of letting it be syphoned off by rent seeking investors abroad,
repaying PFI loans to Wall St hedge funds really irks me,
I’ve said before we need a UK IT strategy, our own silicon valley, an open source operating system, browser and server software that can be used by business, private individuals, government, even military,
we need UK based social media services, a facebook, twitter and youtube, that we have control over, that we can regulate, because frankly the US tech giants are beyond our regulatory control,
in many respects the UK is an occupied country, there has been a creeping, soft coup during the neo-liberal era,
the Brexit slogan of ‘Take Back Control’ is half right, we do need to take back control, not from Europe, but from TNC’s that are mostly based in the US,
and Europe needs to take back control too,
With that I have a lot of sympathy – buit it requires action as much, if not more, than dogma to make those changes
Of course a massive expansion of rail transport is needed but how long will it take? We need polices for the next decade and we can’t roll-out rail fast enough – as HS2 and Crossrail show.
We can make a modal switch from cars to active travel by introducing lots of Low-Traffic Neighbourhoods and we can increase and improve bus services.
Not to mention that stopping carbon-based financial instruments would remove a big temptation for fraudsters and banksters. https://www.thebureauinvestigates.com/stories/2019-05-07/how-major-banks-turned-a-blind-eye-to-the-theft-of-billions-of-pounds-of-public-money.
Many of the comments focus on the individual – what about companies. What about a steel company – Tata @ Port Talbot – primary steel production. There is a pathway to zero-carbon primary steel (uisng hydrogen from renewables). The process works & projects are taking place to scale it. Who funds the capital investment? The Eu’s carbon tax – the ETS is inadequate. One supposes government (via a GND?). What about steel from places that have not converted their primary steel production systems? Given that H2 steel will be more expensive (it will), would there be a role for a border carbon tax on steel from e.g. China? such that once the tax is levied Chinese steel and zero-carbon Euro steel tend to have the same price? would you have a border carbon tax on all products that compete with those produced in Europe & which have a very low or zero carbon footprint?
By the way, I have a July 2009 WTO report on BCTs – which gives them the green light.
But what is the incidence of a tax on Port Talbot? That is the reason I asked the question
At the moment EU ETS rules mean that (for the most part) some industry sectors get “free” EUAs (which is the ETS unit of account – 1 tonne of carbon) . That said, the company running the steel works @ Scunthorpe has been provided a government loan of £100m to meet its ETS obligations. By extention, there will be some emissions costs/carbon tax for Tata running its Port Talbo operations. Instead of making soft loans to steel companies to pay for EUAs, the gov could fund (via the GND) the conversion of Uk steelworks to zero-carbon. In my view (& I think yours) a better route than imposing a carbon tax. But the problem would remain of imports of (much cheaper) steel produced through carbon intensive processes. This steel (and aluminium for the matter) should be hit with a BCT.
I agree with you entirely: real action and not faux markets are what we need
There was an earlier question today on personal carbon trading. Would you consider doing an entry on it?
If I get time
And it comes into my thought first thing in the morning when most stuff here is written….
Are there any examples in history of what you want here being delivered?
You would like a programme that achieves two things:
1. Deals with an impending crisis ( climate, world war, arms race, epidemic, or some similar thing that could wipe most of us out ). Climate in this case.
2. Re-engineers society to reduce inequality of outcomes between richer regions and poorer regions and between richer people and poorer people.
There’s two hundred or so independent countries and two hundred and fifty years of history since the industrial revolution got going. There have been many more devolved governments and micro states. Are there any examples from all of that history where the sort of dual outcome you would like has been delivered.
I doubt it, but as a ‘tax expert’ and ‘political economist’ you may know better.
I would prefer the decoupled Nordic approach of high consumption taxes, of which a CO2 tax is one, and separate programmes of redistribution that mean good quality welfare.
What are you actually asking?
I’m asking if there are any examples from the last 250 years or so , from anywhere in the world, of the sort of double action solution you want being put forward and delivered.
I ask this because you clearly do not want to decouple dealing with climate change from dealing with inequality of outcome.
I am not sure, to be candid
But so what? There have been other changes that have never happened before
For example massive increases in social well being and growth and reduced inequality post WW2
Are you saying we cannot innovate
Why?
@ Johnson Matthey “I ask this because you clearly do not want to decouple dealing with climate change from dealing with inequality of outcome”
I think the yellow vests movement in France shows clearly that we have to tackle climate change and inequality at the same time.
[…] Cross-posted from Tax Research UK […]
Richard,
Aircraft fuel and and bunker fuel for ships are not the biggest targets, They account for only about 80 of our c500 M tons CO2e pa.
Fuels for heating, electricity generation, industry and road transport make up the bulk of the problem and they ALL have to be reduced a lot to get the reductions we need by 2030 and beyond.
I agree – but they can only happen with other investment first
Aircraft and bunker fuel are not taxed now and so are easy tax targets
“Those on lowest incomes in society have the highest marginal propensities to consume i.e. they spend a greater part of their income on consumption than anyone else. This means that almost all carbon taxes, however superficially constructed, will be regressive in nature: there is almost no way round this.”
Is this also true for the carbon fee and dividend? See https://en.wikipedia.org/wiki/Fee_and_dividend
The idea is that the fee on fossil fuels will be taken not from consumers but from producers. Of course, producers will pass on the fee in form of higher prices. But the money collected from the fee is handed back to citizens. So this should be the opposite of regressive, if we assume that people on higher incomes have a larger carbon footprint than people on lower incomes.
Why not regulate the carbon out of existence instead?
Ultimately the costs of regulation must still fall on someone. If we ban old cars from city centres, we ban the people that can’t afford new cars. If we ban gas central heating, the cost of more expensive electric heating will fall disproportionally on the poorest, especially those that cannot afford capital investment in insulation or heat pumps.
If taxing carbon is regressive, will regulating carbon not also be regressive? But the addition of the dividend part of fee and dividend makes it overall progressive?
It may well be
And we will need to tackle that
But again, not necessarily with tax
Although it is more effective here
Ration at production, rather than consumption
Surely it is easier to restrict fossil fuels by limiting production.
1) The sites where production occurs are easy to identify and monitor
2) As supply gets restricted, the price should move, thus the producers do not lose as much as they might think
3) The existing market than allocates the carbon as best it can
4) The competitiveness of alternate energy is improved
5) The wasted Investment in new sources of fossil fuels stops immediately
We could have a UN Carbon Limitation Executive to set, monitor and police the limits
(U.N.C.L.E.) !!!!
Those promoting carbon taxes (it seems to me) have two objectives.
1) To create a new market to trade. (This I think is where the enthusiasm come from)
2) To be able to continue with BAU by use of ‘creative accounting’ methods while somebody else picks up the tab. For example exporting all our manufacturing base to China means we can cut our national carbon footprint and blame the Chinese for the carbon emissions. Without genuinely pan-national accounting and policing of carbon emissions I don’t see how we can set about this carbon reduction and produce even remotely fair allocation of costs and outcomes.
Since the US, the largest global economy (for the time being and possibly a good while longer) doesn’t ‘do’ international agreements, pan national accounting and policing is hardly going to be possible is it ?
I can only see carbon reduction working by adopting the positive insights of MMT to create vibrant national economies from the Greening of industry. An important element of this process will have to be withdrawal of all the tax subsidies on polluting industries (taxation on aviation and bunker fuel is as you suggest is an obvious place to start making immediate incremental changes) and allocation of government funding to sustainable industries. MMT says we can do this.
As David Flint above points out “Fuels for heating, electricity generation, industry and road transport make up the bulk of the problem” All of which can be addressed by incremental tax changes and investment in newer clean technology.
Although we are making inroads into the social ‘climate’ of climate change denial, we have a long way to go before we get past climate change complacency , or climate change fatalism. The only way to start the process rolling has to be to manipulate/regulate the markets so that the financial advantages of doing the right things are sufficient to motivate the big private sector corporate players.
We’re going to need a very different calibre of politician to see these changes even begin to take shape. And we will have to be prepared to start without waiting for the US to join us, because they won’t. (Bernie Sanders is saying some of the right things but he’s not even likely to win the Democratic Party nomination let alone get into the White House.)
Brexit will undoubtedly not be at all helpful in ensuring Pan European cooperation. Not to mention we’ve wasted another three years and still seem to be no nearer reaching a conclusion. 🙁