18 June 2010: Taxes better than targets

Once again, European governments have been debating whether the EU greenhouse reduction target should be increased, from 20% below 1990 levels by 2020 to 30%, also by 2020. 20% will be easier to achieve than expected, given the recession, but is not enough of a reduction, so the target should be increased to 30%. This would also inject some momentum into the international negotiations, which is much needed.

Targets have some value, but are not the most important thing. Delivery is more important, so more political and campaigning effort should be put into promoting policies to achieve emissions reductions. Regulations such as Emissions Performance Standard – which would prevent filthy coal generation – are essential and have been promised by the new UK government. Also needed are higher, and better designed, carbon and energy taxes.

Several European countries have introduced carbon and energy taxes, including all the Scandinavian countries, Germany, Netherlands and the UK. Before the current recession, revenue was used to reduce taxes on income or employment. This was often referred to as an Environmental Tax Reform (ETR) and was done to deliver a ‘double dividend’ – lower levels of pollution and higher employment. 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, reliable assessments show that green taxes can be effective. Good examples include:

  • 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 the 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.

(See Green Fiscal Commission: ETR in Europe: experience to date by Stefan Speck.)

Notably absent from this list of assessments is the UK. This is partly because the UK ETR was very small – 0.06% of GDP, compared to 0.8% in Germany and 4.6% in Sweden. The new government has promised to increase revenue from green taxes (this fell as a proportion of total revenue under Labour). Effective, and socially progressive, ways to do so were suggested last year by the Green Fiscal Commission, which had among its members the Liberal Democrat Chris Huhne, now Energy and Climate Secretary, and the Conservative Greg Barker, now Climate Minister.

Central to an effective and progressive response to the climate crisis is to increase taxes on flying. This week, the think tank Green Alliance has published a report Making aviation pay its way – the case for raising more revenue from plane journeys. This argues that the aviation industry in the UK:

… enjoys historic tax exemptions worth £10 billion a year, because it does not pay fuel duty and VAT is not payable on airline tickets.

Green Alliance says that taxation should be increased to raise an additional £2.5 billion a year – a relatively modest quarter of the current exemptions – and the revenue used to reduce income tax. It is somewhat academic to discuss which taxes might be reduced, since many taxes will go up in next week’s Budget. A more politically-relevant way to put the argument would be to say that increasing taxes on aviation would reduce the need to increase other taxes, notably the standard rate of VAT, which is widely expected to be increased, but is socially regressive.

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