In 1991, Sweden put a levy on greenhouse gas emissions, one of the world’s first carbon taxes.
Initially, the tax was focused on motor fuels and on domestic and office heating. Fuel producers paid about €24 for each tonne of CO2 that their products emitted to the atmosphere when burnt. That cost has risen steadily since and is now about €114 a tonne. If that sounds like a big bill, it is: the price of gas supplied to British homes today would go up by more than 50 per cent if the Swedish tax rate was applied.
The effect on behaviour in Sweden has been dramatic. The use of fossil fuels for heating has fallen by 85 per cent since the tax was introduced. Homes in Sweden are now heated by electric heat pumps, biomass stoves or hot water piped in from community heating schemes. The government says the revenue from the carbon tax has been used to cut income tax, especially for lower earners. Sweden has also subsidised the costs of switching to renewable sources of heat, such as wood.
Since 2013, the UK has had a carbon tax on fuels used in electricity generation, operating alongside the wider European carbon trading scheme. The principal effect of the UK levy has been to reduce dramatically the amount of coal burnt in power stations. In 2012, coal provided the fuel for 40 per cent of UK electricity generation – by 2018, that had fallen to five per cent, largely as an effect of the tax, about £18 per tonne of carbon dioxide emitted. Electricity producers switched to burning gas, a much less polluting fuel, and started turning to wind turbines.
Carbon taxes work.
When fossil fuels get more expensive, consumers and industries are encouraged to switch to less polluting alternatives, or simply to reduce their energy consumption. Manufacturers have an incentive to reduce their use of oil, gas and coal – perhaps by becoming more energy efficient, or by developing new processes that avoid using carbon-based fuels entirely. Both companies and individuals can choose exactly how to change their behaviour without any direct intervention from government.
A good taxation plan may even inspire innovation, incubating effective schemes for removing carbon dioxide from the atmosphere; if a business cannot avoid greenhouse gas production it may be able to counterbalance its emissions by collecting equivalent amounts from the air.
The most obvious way of capturing CO2 is by planting more trees. A yet-to-be published study by Forest Research, the research agency of the Forestry Commission, shows that reforestation may make financial sense already. The report indicates that a carbon tax of no more than £73 per tonne would certainly be sufficient to incentivise the conversion of land to woodland, allowing manufacturers to offset the emissions from hard-to-decarbonise industrial sectors.
Putting a price on carbon – another way of describing taxation that increases the price of activities that add to greenhouse gases – is probably the cheapest, simplest, most reliable and quickest way of pushing down emissions.
It doesn’t necessarily help my case to say this, but we would struggle to find an economist anywhere in the world who doesn’t fiercely believe in the central role of carbon taxation in the fight against climate breakdown. A global levy, if set at a high enough level and applied to fossil fuels at the same rate all around the world, would hugely improve our halting progress against greenhouse gases. Properly designed and implemented, it would increase the price of all goods and services with a high greenhouse gas footprint, including steel, cement, electricity from coal or even beef, the food with the greatest climate impact.
Perhaps surprisingly, many fossil fuel companies also strongly support the imposition of carbon prices, although they are shy about saying exactly what level they think is appropriate. We can only guess whether they want the €114 per tonne of Sweden, or the £18 of the UK.
So why is progress so cripplingly slow in developing carbon taxes across the world? Despite the success of the Swedish model, only about 13 per cent of the world’s emissions are currently within any CO2 pricing framework. The reasons are easy to list:
- Higher prices. By its nature, carbon taxation increases prices. But even if we understand the aim, few of us like paying more for the things we buy. This is probably the major reason why a carbon tax in Alberta, Canada was recently rescinded.
- The regressive impact of some taxation. The spending habits of better-off people generally result in greater carbon emissions than average, yet a carbon tax could weigh more heavily on the poor. In particular, the share of income required to pay gas and electricity bills tends to be higher for poorer Britons. Energy costs are more than eight per cent of expenditure for the bottom 10 per cent of UK households compared with three per cent for the top 10 per cent.
- Carbon leakage. A global carbon tax would require almost unprecedented international cooperation. Unless China and other major exporters joined in, their goods would be cheaper on world markets than those made in countries which did enforce a levy on greenhouse gases. The manufacture of energy-intensive materials such as steel would shift to countries with no carbon taxation – often called carbon leakage.
- The rate of tax. What is the right rate? Does ‘net zero’ by 2050 require a tax of the level used by Sweden for heating fuels or by the UK for electricity generation?
There’s an answer, albeit partial, to each of these points.
- Higher prices. The money collected by a carbon tax can be used to reduce other taxes and boost wages.
- The regressive impact of some taxation. Although it would be complex, we might choose a system where households get a basic allowance of goods and services free of carbon taxation. The government could give one the right to one carbon tax-free return flight each year, or it might exempt the first 10,000 kWh of natural gas supplied to a home. A carbon tax rebate paid as a single identical lump sum to all citizens would favour the less well-off.
- Carbon leakage. Countries with a carbon tax could impose import tariffs on goods arriving from states not covered by the taxation regime. The EU Commission recently recommended the setting up of a ‘border adjustment mechanism’ that will impose taxes on imports of some manufactured goods with high carbon footprints which are untaxed in their country of manufacture. Exporters from the EU would receive a rebate of their carbon payments to avoid disadvantaging them in international markets.
- The rate of tax. We can’t know the best rate in advance, but one way to find it would be to start low, perhaps at $20 a tonne, then gradually increase until it was clear the tax was working. A tax of $100 would likely result in a rapid achievement of ‘net zero’, not least because I believe carbon dioxide can be captured directly from the atmosphere for less than this. However this level of tax would cause significant disruption in some economies, partly because it would multiply the price of coal by three.
A widely applied carbon tax would probably be the most effective single measure in the fight against global climate breakdown. It might well turn the large fossil fuel companies into active participants in the rebuilding of the world’s energy economy around low carbon sources. Difficult to implement it may be, but we should still work to design an effective universal carbon price.
Join us in Birmingham for a ThinkIn on Wednesday 5 February at 6.30pm when we’ll be asking: Can trees save the world?
All photographs Getty Images