Harry Truman wasn’t a fan of nuance: “Give me a one-handed economist. All my economists say ‘on the one hand...’, then ‘but on the other...” The President was being unfair as his economists were presumably just pointing out the trade-offs that exist in every policy decision. But he was also wrong. Some policies have near-universal agreement among economists.
One such policy is a carbon tax.
We agree with the experts on this one, which is why our Adviser Eamonn Ives pushed it in our influential Green Entrepreneurship report last year. Today, Eamonn makes the case for a carbon tax in more detail in his Pricing Pollution Properly report for the CPS, arguing that market mechanisms such as carbon pricing are most successful at delivering decarbonisation cost effectively.
The reasoning is simple enough: “A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.” This doesn’t require anyone to know or predict which particular technology will work best. Instead, price signals tell entrepreneurs where to invest their efforts.
The UK already has a hodgepodge of policies that put a price on carbon. For example, carbon pricing has already played a role in decarbonising the UK, with the collapse in coal-fired power generation explained in large part by the adoption of the Carbon Price Support. However, these should be rationalised. We should price emissions at their source – a flat tax per tonne of emissions from a barrel of oil or unit of gas. This would lead to fewer distortions, such as the fact that while we currently tax household electricity consumption, household gas consumption is effectively subsidised as a result of a VAT discount on electric bills.
One common objection to the idea of a carbon tax is that we would simply offshore our emissions, with the tax displacing industries abroad. The solution to this is a carbon border adjustment mechanism (CBAM) to prevent carbon leakage and retain a level playing field between domestic and foreign goods. It’s something that the EU is phasing in.
The government could raise a lot from a carbon tax. Eamonn’s paper recommends the government rebates the revenue raised from a comprehensive carbon tax back to individuals on an equal basis, through a system of ‘carbon dividends’. But there are other options. Austria, which recently announced it’s implementing a carbon levy of 30 euros per tonne (by 2025 it will be 55 euros per tonne), will put the revenue towards radically overhauling its tax system: corporate tax rates will be cut from 25% to 23%; income tax will be cut for some; family "bonus" allowances will rise from 1,500 to 2,000 euros per child; and health insurance contributions for people on lower incomes will be cut.
A carbon tax isn’t the whole solution for all environmental challenges – and it probably shouldn’t be the only lever for reducing carbon emissions. Eamonn, for example, argues for continued support for British innovators who are researching and developing the clean technological solutions. But one thing is for sure: a carbon tax should be the main policy lever.
We care a lot about this ensuring that Britain’s entrepreneurs are at the forefront of fighting climate change and wider environmental and social challenges. That’s why we’ve recently set up the Green Entrepreneurship Forum with Mischon de Reya, which was launched with Danny Kruger MP earlier this week. Our next event is on how to raise next stage funding for green business and we have more events you might be keen to attend on our website.
Funding the Future
How to Raise Next Stage Funding for Green Businesses
21 October 2021
10am to 11am
Complimentary
Find out more
Great ideas should not cost the earth. During this Roundtable we will explore how sustainable businesses and businesses working for social good can scale through debt and equity fundraising.
Sir David Amess
“All our hearts are full of shock and sadness today at the loss of Sir David Amess, killed in his constituency surgery in a church after almost 40 years of continuous service to the people of Essex and the UK.” – Boris Johnson
"David and I came into parliament together in 1983. Though on opposite political sides, I always found him a courteous, decent and thoroughly likeable colleague who was respected across the house. This is a terrible and sad day for our democracy." – Tony Blair
"This news is a punch in the face. I worked with David on maternity safety & mental health for young people about which he was passionate. He was kind and fun – & you always left him with a smile on your face. Today we are left with nothing but grief. RIP dear friend." – Jeremy Hunt
More tributes here.
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