Lessons from the "carbon stealth tax"

The Spending Review’s biggest surprise on climate change policy was to turn the CRC Energy Efficiency Commitment - an auctioned emissions trading scheme for large-scale commerce and the public sector - into a carbon tax. The money from the worst emitters under the scheme won’t be recycled back to low carbon emitters after all. Instead, the money raised, expected to reach around £1 billion a year by 2014-15, will go straight into the Treasury’s coffers.

The Coalition Agreement promises to “increase the proportion of tax revenue accounted for by environmental taxes”. The same pledge appeared in the Conservatives’ election manifesto. Liberal Democrats have backed a green tax switch for years. In September, the party conference called on the government to set a target for not less than 10% of its revenue from such measures by 2015, compared to about 8% now.

Numerous studies, including the work of the Green Fiscal Commission, have shown that green taxes are one of the most effective and efficient ways to cut carbon emissions and hasten the shift to a low-carbon economy. And taxes on carbon enable the government to set the price of carbon emissions – the carbon price – and leave it up to the market to decide how much to reduce emissions.

Yet ministers are not talking up the changes to the CRC as a major environmental achievement. “Green” NGOs are not exactly applauding either. One reason may be that the changes to CRC Energy Efficiency Scheme weren’t mentioned in the chancellor’s big speech on 20 October. You had to turn to page 62 of the full Spending Review report to find them, along with a vague statement that some money will be spent on environmental programmes. The phrase “carbon tax” was not even used by the government. As a result, the changes to the CRC look like a “stealth tax”, a point that the CBI and the British Retail Consortium have been quick to seize on.

The more important point is, surely, that nearly one fifth of the UK’s CO2 emissions come from the energy used in non-domestic buildings. With CRC reformed as a carbon tax, business and public sector organisations will now receive a clear message that they have to take the energy efficiency of their buildings seriously. A carbon tax should stimulate the innovation needed to cut emissions from the built environment more quickly than ‘recycling revenue’ from the CRC energy efficiency scheme. And the new scheme will be simpler to administer; the costs of complying with the original version were becoming a major bugbear for businesses.

Still, the “polluter pays” argument doesn’t completely settle this one. First, the new carbon tax may not be fair (that word again). Carbon Clear’s James Ramsey has pointed out that bigger emitters, who are covered by the EU Emissions Trading Scheme, are not taxed and can receive free emission allowances, often in excess of what they require. We also need to avoid distortions between domestic measures and the EU ETS. So, future environmental tax measures should be looked at as a coherent whole, rather than as a quick way of raising revenue. One option is to run a comprehensive UK carbon tax alongside the EU ETS, with other taxes reduced.

There will soon be opportunities to consider these questions in detail. The energy and climate change secretary, Chris Huhne, has promised wider increases in green taxes. He has also said they will be offset by cuts in other parts of the tax system.

Second, we need more trust and accountability around environmental taxes. The Green Fiscal Commission and others have found that the public are already highly suspicious of “green taxes”, perceiving them to be revenue-raising measures in disguise. The argument over the CRC Energy Efficiency scheme shows that imposing environmental taxation by stealth only fuels business and public distrust. The government should be open with people about any new environmental taxes and what they mean and, where possible, give those affected time to prepare.

Posted via email from Neil Stockley's posterous