26 October: Green tax shift could reduce emissions and create jobs

This morning the Green Fiscal Commission is publishing a report based on extensive research and economic modelling, which demonstrates that increasing taxes on energy use and other environmental ‘bads’, and reducing them on labour and income, would have both climate and economic benefits. Such a tax shift could reduce UK emissions by 34.4% by 2020 and create 455,000 new jobs.

The Commission includes members of the three main political parties, leading energy industry figures and environmental groups. It is administered by the Policy Studies Institute (where I am a Visiting Fellow). The report models the following scenario:

  • The UK industrial and commercial energy tax, the Climate Change Levy (CCL), is increased 25% a year, beginning in 2010.
  • A new household energy tax is introduced at similar levels to the CCL.
  • Fuel duty on petrol and diesel is increased by 10% a year.
  • Revenues from industry are used to fund a reduction in the labour tax (employers’ national insurance contributions).
  • Revenues raised from households are returned by means of lower income taxes.

As well as modelling a scenario for the UK, the report outlines the impact of green taxes in European countries. Of course, it is difficult to be certain about the impact of a tax among all the other policies, industrial trends and wider political and economic developments However, this report summarises several other, reliable assessments, which show that green taxes can be effective. Good examples include the following:

  • Finland’s carbon/ energy tax has meant that carbon emissions have been 7% lower than they would have been without the tax.
  • Norway’s carbon tax has led to a reduction of 21% in CO2 emissions from power plants. The tax is said to have reduced total Norwegian carbon emissions by 2%. Carbon emissions per unit of GDP have reduced 12%.
  • Denmark’s carbon and energy taxes have reduced emissions from affected sectors by 6%.
  • In Sweden, emissions would have been 20% higher than 1990 levels without the carbon and energy tax.
  • The Netherlands’ emissions are 3.5% lower than they would have been without the carbon and energy tax.
  • Germany’s CO2 emissions were 2 to 3% lower by 2005 than they would have been without the carbon/energy tax.

There is an administrative/bureaucratic objection to a green tax shift in the UK – the Treasury objects to allocating (which it calls “hypothecating”) particular revenue streams to specific spending streams or reductions in other taxes. While he was Chancellor of the Exchequer, Gordon Brown managed to overcome this objection. When he introduced the CCL, he linked it to a reduction in the employers’ national insurance contributions. However, the debate in the UK now is not about which taxes will go down, but which will go up. In this respect, it is better to increase green taxes, particularly carbon taxes to help the low carbon transition, than to increase other taxes.

The most serious problem with energy taxes is that they can be regressive, placing a heavier burden on the poor than on the rich. Conservative leader, David Cameron, is well aware of this – he was an adviser at the Treasury when the previous Conservative government put Value Added Tax (VAT) on domestic energy. Labour strongly opposed VAT on fuel, defeated a Conservative proposal to increase it from the initial 8% to 15%, reduced it to 5% (the minimum allowed under EU rules) when it came to office and introduced an industrial and commercial energy tax instead. The CCL is not regressive and should certainly be significantly increased.

Household energy taxes are much more difficult, as the Green Fiscal Commission report acknowledges:

The problem really lies in the effect on those low-income households in energy-inefficient homes. A scheme to identify and improve the thermal efficiency of their homes would be required to make the carbon tax politically acceptable.

The Climate Change Levy, despite its name, is not a carbon tax. It is a ‘downstream tax’ on energy use and does not differentiate significantly between different forms of energy. Labour did consider introducing it as a carbon tax, but decided not to do so as this would have been – and been seen as – anti-coal. There are some CCL reliefs for renewables and combined heat and power plants, but the CCL could and should be transformed into a carbon tax, to help the low carbon transition. The Conservatives have said that they would do this if they win next year’s General Election.

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