At what price? Zero Carbon Commission backs economy-wide £75 a tonne carbon tax

Cecilia Keating
clock • 6 min read

Carbon tax could generate £27bn by 2030 that could be invested into Covid-19 recovery efforts, emerging green technologies, and cushioning against any rise in household bills, campaign group argues

As the UK prepares to leave the EU Emissions Trading Scheme (ETS) at the end of the Brexit transition period, it remains to be seen how the government will price carbon to incentivise different sectors to slash their carbon emissions in line with its 2050 net zero target.

While the Department for Business, Energy, and Industrial Strategy (BEIS) set out a plan earlier this summer for a UK ETS that broadly mirrors the EU's cap-and-trade system, the Treasury is simultaneously consulting on the potential for a carbon tax.

While advocates of emissions trading systems - which set a cap on emissions within a sector and gradually reduce it over time - argue that the approach allows for a ratcheted reduction in emissions in line with decarbonisation targets, critics counter the mechanism is administratively complex, unfairly benefits politically influential sectors, and results in volatility in prices and weak emissions caps.

The Carbon Commission this week firmly placed itself in the latter camp, arguing in a major new report that economy-wide carbon pricing should be introduced from 2021 that rises incrementally across different sectors before universally settling on £75 per tonne of carbon dioxide by 2030.

The group, which brings together Greenpeace UK executive director John Sauven, former Committee on Climate Change Chair Lord Adair Turner, and Green Finance Institute CEO Dr Rhian-Mari Thomas, said that imposing a tax across the entirety of the economy from 2030 onwards would allow the nation to reach its aim of net zero emissions by 2050, while also offering investors and businesses with a simple price signal that provides long-term certainty and mobilises investment in net zero infrastructure.

The white paper, which collates eight months of public opinion research, expert witness testimonies, focus groups, and independent analysis from Frontier Economics, LSE, the Grantham Research Institute, Vivid Economics, and the University of Leeds, has been endorsed by a stellar line up of climate experts, including climate economist Lord Nicholas Stern, International Monetary Fund policy expert Ian Parry, and UK100 director Polly Billington.

"A higher, simpler and more broadly applied carbon price is a crucial element in the fostering of a post-Covid economic recovery that is consistent with net-zero emissions by 2050," said Lord Stern, who serves as chair of the Grantham Research Institute on Climate Change and the Environment. "The ZeroC report contains detailed, thoughtful and pragmatic advice which the government would be well advised to heed."

The Net Zero Carbon Commission estimates the revenues from the proposed carbon tax would reach £27bn by 2030 - funds that could go towards supporting the Covid-19 recovery, driving innovation and investment in clean technologies, such as carbon capture, electrification, and hydrogen, and cushioning rises in household energy bills, they said.

The report emphasises the charge must be introduced and ramped up differently across different sectors over the next nine years in a way that is sensitive to each sector's respective decarbonisation needs and challenges.

In more trade-exposed industries, for instance, such as agriculture and heavy industry, the carbon price should be introduced later, once the UK's post-Brexit border mechanism is ironed out. Meanwhile, in surface transport, the government should introduce policies beyond a tax to drive electric vehicle adoption, given that fuel duty - in itself a form a tax - has had little effect thus far.

Hannah Dillon, head of the Zero Carbon Campaign, explained to BusinessGreen that a sector-by-sector approach is necessary to account for an irregularity in decarbonisation policies across the economy. "An intention towards uniformity is key," she said. "But that can't happen really quickly, which is why we've said that by 2030, we'd hope to have a similar price over all sectors."

"We have tried to produce a practical, pragmatic roadmap that can work as opposed to something that is academically neat," she added.

The report stresses that BEIS proposals for a UK Emissions Trading System modelled on the EU's existing cap-and-trade system are "suboptimal". It claims its proposals are "markedly simpler" while dealing with a far higher percentage of UK emissions and extending to areas of the economy, such as waste incineration, that have previously escaped any form of carbon pricing.

Furthermore, it argues the proposed carbon charge would allow the government to roll up a patchwork of overlapping price instruments, including the proposed UK Emissions Trading System (ETS), Climate Change Agreements, Carbon Price Support, and the Differentiated Climate Change Levy charges. The Air Passenger Duty in aviation should also slowly be converted into a charge consistent with its £75/tCO2e trajectory, it adds.

"If you want to extend carbon pricing across more of the economy - which we really need to do, some sectors where emissions are not priced produce huge emissions -then a tax would be easier for sectors that have never been involved in the trading system to understand," Dillon explained. "People in businesses know how to pay tax, but they don't necessarily know how to trade carbon emissions."

On top of being simpler, a carbon tax can provide much-needed long term price signals for businesses and industries looking to set out their own pathway to net zero, she said.  "What we are trying to do is to clear up the fact there are so many signals across so much of the economy," she explained. "It is not only easier for investors to respond to something more singular, but it [will be for] consumers too." 

Should the government insist on going ahead with its proposals for a UK ETS, the Commission suggests that its proposals could be introduced into sectors not covered by the cap-and-trade system, such as heating and agriculture. In that instance, the report also argues for the government to apply a more substantial floor price on the ETS system in order to manage uncertainty caused by fluctuations and to strengthen the ETS cap to align with the UK's net zero target and the forthcoming carbon budget.

In addition the white paper argues the UK should show leadership in ongoing discussions about a multilateral carbon border adjustment, noting that any success in this arena would cement UK climate leadership ahead of the COP26 climate summit it is set to host next year.

While it remains to be seen which avenue the government will embrace as it leaves the EU's carbon trading market, it is clear that there is a huge opportunity for the UK to demonstrate real carbon leadership and decisively propel itself on a net zero emissions pathway. The challenge, as ever, is convincing often hostile political and media commentators that a new tax can be introduced in a way that does not lead to significantly higher energy bills for households and businesses. But as this week's report makes clear, the UK's complex and overlapping carbon pricing framework is crying out for reform, at the same time as businesses and investors, especially in high carbon sectors, need to step up investment in the net zero transition.

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