It’s time to tax carbon
A post on why a carbon tax is the answer to both Labour’s economic policy and the climate crisis
Why don’t we tax carbon?
Do you remember, at the election, how the Tories were keen to land the message that Labour planned to increase your taxes?
There were social media posts like this:
And videos like this.
The word “tax” was used 37 times in the final BBC leaders’ debate.
I imagine, at the time, Labour rather wished the Tories would stop going on about tax.
You can’t say you weren’t warned
But, looking from the perspective of Government as opposed to a campaign, it does have an advantage.
Taxes do need to go up. The Institute for Fiscal Studies (IFS) was crystal clear that the forecast tax take was insufficient for either party’s spending plans.
And given Labour ruled out increasing the big three taxes (income tax, VAT and national insurance; at least for employees), this means something else will need to take the hit.
The fact that the public voted Labour despite the unprecedented Tory tax onslaught suggests that, at some level, they know tax rises are needed.
In one week, Rachel Reeves will deliver her first budget. What should she say?
Which taxes?
Tax is a tricky thing. Broadly, there are two rules to raising taxes. Either you need to tax things that people are unlikely to cut back on as a result of the tax (which is why we tax earning money and spending money but not growing beards) or we tax things that we want people cut back on as a result of the tax (which is why we tax smoking and drinking and are considering taxing fizzy drinks, but still not growing beards).
A beard tax would be a bad idea as it would create a disincentive to grow a beard, which would reduce tax take, while not reducing social harm as beards are harmless. (This is, I realise, a controversial opinion).
A carbon tax would be a good idea for precisely the same reason: it would create a disincentive to emit carbon. Burning carbon is bad for wider society, like burning tobacco is bad for wider society. So let’s tax both of them.
It’s not easy being green
Kermit said it first. Boris Johnson chastised him for it. Boris said that it is easy being green.
Both are right. We know what needs to be done and the technology largely exists to do it. But we’re not actually doing it at the scale needed.
It’s an uncomfortable truth that 2023 was the hottest year on record (0.15C higher than the previous record) and the year in humans burned more coal than any previous year on record (1.6% up on the previous year). I think many of us hoped that before the impacts of climate change started to become obvious, we would have - at least - stopped increasing the burning of coal. We haven’t.
It’s clear that the economic system that we have isn’t designed to achieve the goal of decarbonisation.
It’s the economy stupid
TfL gave up trains that burn coal in the 1950s, but I saw the issue first-hand when I was at TfL.
The Mayor of London set us a very clear challenge of achieving the electrification of the bus fleet by 2030. It is obviously the right thing to do. But despite huge amounts of hard work, when I left the decarbonisation date of the bus network remained stubbornly at 2034. Why? Because going faster costs too much money.
The problem is that our entire system uses money as the mechanism by which we decide everything and we don’t have another one. When we want to encourage good customer service, we convert it into money (Delay Repay). When we want to persuade staff to work harder, we convert it into money (bonuses or pay rises). When we want to improve infrastructure, we convert it into money (benefit-cost ratio). Sometimes these conversions can be nonsensical: I remember seeing the business case for the Government’s investment in transport smart cards for South East England and the business case was based on the financial benefits of the aggregated journey time reduction of millions of people saving a split second at each gateline by using a plastic card not a paper ticket. The business case couldn’t just say: we’re doing it because it’s easier and better. It had to be in money.
The problem is that decarbonisation doesn’t fit. You can argue til you’re blue in the face that continuing to burn diesel will warm the planet and make chunks of it uninhabitable to humans. But the Excel continues to stare back at you, glassily eyed, telling you that burning diesel is cheaper in the short-term.
The answer must be that burning diesel becomes more expensive.
Lots of fiddly detail?
Now, maybe the Government could set up some kind of diesel bus levy. But the Government isn’t only interested in decarbonising buses. The Government is interested in decarbonising everything. So it’s much better to create a single levy on everything. The reality is that a unit of carbon emitted from a bus is no different in its impact to a unit of carbon emitted from a heating system or a factory or a cow. It may be that - actually - the best use of resources IS to run diesel buses for longer, with investment focused on lower-hanging carbon fruit. By turning the unit of carbon into ££, these decisions will become automatic.
Why not?
I admit, there are powerful reasons not to do this.
1.
One is that it’s a rubbish tax for the exchequer as it is designed to vanish. You don’t want to fund the NHS with a carbon tax. But if the proceeds of the carbon tax were solely used for pump-priming decarbonisation technologies and offsetting the impact for low income families, then that problem is avoided - with the additional benefit of creating a big economic growth stimulus.
This matters given that the Government is relying on economic growth to solve its wider ‘how to pay for public services problem’. In effect, the carbon tax is the tax that makes tax rises unnecessary. If that doesn’t make sense first time, read the paragraph again.
2.
The second reason not to do this is that it will increase prices.
Well, yes. It will. That’s kinda the point. By making high-carbon products more expensive, we encourage people to buy low-carbon stuff.
But it may not make them as expensive as you’d think. A permanent carbon tax would encourage investment in technology. The tax proceeds would be invested in technology. As a result, the ‘more expensive’ stuff would become cheaper.
To illustrate the point, just look at the price of solar. Solar panels were considered unviable as a mainstream decarbonisation technology until the German Government invested in them in the mid-2000s. That investment kick-started a further wave of investment that caused the price of solar to collapse. For every doubling of installed capacity, the price of solar falls by 40%. The collapse was - by an order of magnitude - greater than forecast.
This graph, from The Economist shows the amount of solar capacity added each year and the predictions of future capacity made each year. The effect of subsidies in the mid-2000s has been to kick start an industry that has caused prices to fall and capacity to rise.
A permanent (underlined, bold, italics) carbon tax would have the same effect. If investors knew the price dynamics had changed, they would invest in the low-carbon alternative and bring the price down.
3.
A third reason not to do this is that Britain can’t act alone. And it is true that it would obviously be better to act in partnership with the rest of the world. But we seemed to develop something of a habit of acting alone in the last eight years. Maybe - this time - we should act alone as a role model.
The danger is that high-carbon goods become more expensive if sold in the UK but cheaper imported so we end up outsourcing the carbon but with extra shipping emissions. But this can be solved by applying the carbon tax as part of border duties. We couldn’t have done this in the EU. I’m not saying I would have voted for Brexit (owing to how it’s crazy) but now we’ve got ‘freedom’, this is the chance to use it positively.
4.
A fourth reason not to do this is that it’s difficult. Well, yes… But it’s only difficult until you’ve done it. With hindsight, it was easy. Obviously there are lots of horrible, fiddly questions that people reading this article are about to start throwing at me. Or putting in the comments. Probably on LinkedIn where everyone can see them. And, they’re right, I don’t have all the answers. But teams of civil servants will be able to find the answers. There’ll be some assumptions and some modelling and - in places - some perverse incentives. But will those perverse incentives be greater than the global extinction-level perverse incentive of not doing this? I would argue not.
5.
A fifth reason not to do this is that the Labour Party promised not to raise taxes. But we all know that position is unviable. As do the electorate. Moreover, the Labour Party pledged not to raise three specific taxes but - as the Tories kept pointing out - didn’t pledge not to create new ones. What would have been the point of painfully retaining that optionality if not to use it?
Just do what the Swedes do
When it comes to public policy, it does feel like “just copy Sweden” is something of a shortcut.
Whenever anyone publishes a global ranking, if it’s a ranking of ‘good things’ (happiness, health outcomes, etc), you can expect to see Sweden at the top. While for ‘bad things’ (social distrust, sexual discrimination, etc) Sweden tends to be at the bottom.
(Clearly no-one has published a league table of decent food. OK, personal opinion, I admit, but there’s a reason why IKEA made its signature dish hot dogs not pickled fish).
Anyway, Sweden introduced a carbon tax in 1991. That’s a very helpful date, as the benchmark date in all the various international agreements for emission reduction in 1990. So how has Sweden done compared to the rest?
Well, it’s done very well.
Actually, no better than the UK, though, as you can see, but Britain is a global leader in decarbonisation.
Interestingly, though, we’ve both done well but for opposite reasons.
One of the main criticisms of Sweden’s carbon tax is that it only covers around 40% of their emissions, as it’s riddled with carveouts to protect their manufacturing industries. By contrast, Britain saw a real shift in its economy from manufacturing to services during this period, which pushed down our carbon emissions. While the Swedish and British curves look similar, the drivers are quite different.
What Sweden does show is that when people list all the terrible things that could happen if we introduced a carbon tax, very few of those things have happened in Sweden. It’s continued to see strong economic growth (stronger than in the UK) and maintained a highly cohesive society. And it’s the fourth happiest country in the world.
Get transport off the naughty step
Britain is a global leader in decarbonisation. But transport is the big outlier. The heavy lifting has been done by de-industrialisation and taking coal out of the energy grid. Despite huge progress in energy efficiency of car engines, transport emissions haven’t fallen. Why? Because we now have many more cars, which are typically much larger. That has offset the benefits of efficient engines.
If we carry on like this, we’re not going to hit our goals.
One solution is road pricing. I’ve spoken - many times - of my enthusiasm for this as a solution. But it has proved politically toxic.
Maybe carbon pricing is the more palatable alternative.
Framing
The wider carbon tax can help prompt a potentially useful conversation in the world of transport.
There’s a negotiation technique known as ‘framing’. This involves starting the conversation with a figure that’s much higher than where you expect to land so as to set expectations. Where you always intended to end up feels like a ‘win’ or discount for the other side.
In my day job, I support leadership teams with innovation, change and (increasingly) revenue strategy. If I opened a negotiation with a potential client by saying “So, a McKinsey Partner will typically charge £10,000 per day”, it’s not because I’m expecting to be paid £10k per day. It’s framing - it means the rate we actually settle at will feel reasonable.
In the same way, if a total, across-the-board carbon tax is explained as essential, there can be all kinds of carve-outs and exceptions that make people feel good.
In the case of transport, we could start from the premise that a carbon tax is essential but make exceptions for people driving older cars in areas with poor quality public transport. Then the tax can be used to fund the transport improvements. Road pricing may also be more attractive if it’s presented as a carbon charge, rather like the congestion charge was more attractive because it was explicitly linked to solving a specific problem.
Now, as a road pricing zealot, I obviously don’t like the idea of making it a carbon charge. While electric vehicles do have a lot of embedded carbon and the charge should reflect this, it would mean that car trips would gradually become cheaper as electrification progressed. But - equally - it might be better to have something than nothing and doing this as part of carbon tax might prove easier to sell.
What’s the point?
One of the most common reasons given for not taking climate action is that Britain’s emissions are only 1% of the total. When I talked earlier in this post about burning coal, I said “we”, but I wasn’t referring to we Brits. Britain has already largely eliminated coal. But we can be a role model. If we can prove that taxing carbon is the way forward, we can set an example for others.
A carbon tax has downsides. But we’re not on track to hit our climate obligations. We don’t have a means of making decisions on what to prioritise. And decarbonisation feels like a cost to everyone and a benefit to no-one.
Let’s make use of a system that is robust, proven and integrated into every organisation in the country: money.
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