Report: Fair CO2 pricing could boost economy and tackle deficit after Covid-19 crash

Fair and efficient carbon pricing that encourages a shift from fossil fuels to green investment can help deliver a more resilient Covid-19 recovery, as well as raising up to £15bn a year in crucial revenues for the Treasury over the next decade, an LSE research paper claims.

A policy briefing by LSE's Grantham Research Institute on Climate Change and Environment today sets out the case for placing carbon pricing and a reduction in fossil fuel subsidies at the centre of economic recovery packages, arguing such moves would help accelerate the net zero transition and make society less vulnerable to future climate, ecological, and public health risks.

With the UK facing potentially its deepest recession in three centuries, businesses and entire industries have sought assistance from the government to stay afloat and safeguard jobs, prompting growing calls for state support be contingent on strict climate and environmental conditions.

Today's LSE paper argues that as the government focuses on tackling the coronavirus crisis and building a pathway towards recovery, it should be careful to avoid delaying progress on carbon pricing or phasing out fossil fuel subsidies. It also cautions against imposing "any kind of 2010's style austerity".

"Carbon pricing is fair and efficient and sends a clear message that the polluter must pay," said Grantham Institute policy fellow and lead author of the paper, Josh Burke. "But if carbon is not priced and fossil fuels are subsidised, the post-Covid-19 recovery will be distorted in favour of a high-carbon economy which will leave society more vulnerable to future risks and lock in a high-carbon path that is more costly to reverse later."

"Putting a price on carbon can achieve both economic and environmental objectives as carbon pricing with complementary measures will encourage the substitution of high-carbon goods and services with lower carbon technologies, stimulating sustainable growth rather than driving down economic activity," he added

At present less than five per cent of global greenhouse gas emissions are covered under carbon pricing initiatives that are priced at a level consistent with achieving the goals of the Paris agreement, while fossil fuel subsidies of various forms remains significant, the paper points out.

The paper follows similar suggestions from Chris Stark, CEO of the Committee on Climate Change, who has highlighted the potential for the UK government to take advantage of the historically-low oil prices to raise taxes on fossil fuels without harming consumers.

But today's LSE paper also argues that carbon taxes could be moved from people to polluters "as carbon pricing raises revenue in a better way than labour or income taxes", in order to help head-off any criticism that introducing CO2 pricing would increase the tax burden on households during a recession.

Moreover, Burke suggested a citizen dividend "akin to a modest version of the universal basic income", whereby some of the funds raised from taxing emissions are handed directly to households, could help build popular support for carbon pricing, while also helping to boost consumer spending in the wake of the pandemic.

"A carbon tax or permit auctions are a temporary revenue source because the tax base is eroded over time, but structurally they can provide a large source of revenue," explained Burke. "In the UK, this could be in the region of £15bn a year over the next 10 years, equating to roughly three-quarters of annual public spending on adult social care."

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• Topics
• Policy
• Investment
• LSE
• Grantham Research Institute on Climate Change and Environment
• Coronavirus
• carbon pricing
• Green stimulus