Should the UK introduce a carbon tax?

Earlier this month, President Sarkozy announced plans to introduce a carbon tax in France. The UK could follow suit. A widely applied new tax, justified on environmental grounds, could prove popular with politicians seeking to address unprecedented levels of government borrowing.

Yet there are strong economic objections. In particular, given the economic and scientific uncertainty on the effects of climate change, together with the essentially individual and subjective character of environmental costs, the setting of a carbon tax rate would be almost entirely arbitrary.

Nevertheless, in the context of the government’s broad objectives on climate change (however misguided), a carbon tax could be a rather less harmful way of reducing emissions than the sector-specific tinkering that has characterised recent British policy. Examples of the latter include the renewables obligation in the energy sector, bus and train subsidies in transport, higher motoring taxes, forced recycling and tight regulation of the waste sector, as well as draconian planning controls. The current approach has imposed enormous costs on the affected sectors, subjecting them to a high degree of bureaucracy and central planning.

In theory, a carbon tax could avoid this kind of damaging micro-intervention and help ensure that cuts in emissions took place in a relatively cost-effective manner. But such benefits would require the tax to be applied evenly across all sectors responsible for greenhouse gas emissions and for the existing mish-mash of climate change policies to be phased out.

In practice, however, implementation is likely to be driven by interest-group politics and the tax-raising imperatives of the Treasury. Accordingly, a new tax would almost certainly be overlaid on existing taxes and subsidies.

Motorists would therefore continue paying high rates of fuel duty on top of any new carbon tax, as well as additional costs resulting from the forthcoming inclusion of road fuel in the EU Emissions Trading Scheme. In contrast, bus and train operators would probably require additional government support to help them pay the new tax burden – a case of taxpayers subsidising emissions.

The position of domestic energy consumers is a particular problem for policymakers. In another example of inconsistent policy, they currently enjoy a reduced rate of VAT on fuel. Indeed, If there is the political will to introduce a carbon tax, then it would be better to charge full VAT on domestic fuel consumption (and public transport) instead. However, in the context of concerns over “fuel poverty”, abolishing the concession could be politically difficult and imposing an additional tax almost impossible.

In conclusion, the politics of energy and transport mean that a carbon tax would probably not be applied consistently and that existing bureaucratic control would remain in place. Thus the new tax could end up aggravating existing distortions and would perhaps do little to ensure that emissions reductions were achieved at low cost.

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