When polluters pay

Thursday 27 August 2020

Dodge the carbon pricing challenge and nothing will get us to net zero. Solve it, and anything is possible


Gavin drives electric because it’s cheaper than petrol (much cheaper). Alice’s employer is now one of the big six energy suppliers because wind power is cheaper than oil or gas (much cheaper). And Dina doesn’t mind doing her taxes because the new “citizen dividend” generated by the drive to net zero means she always comes out ahead.

Behind all these small but life-changing developments in the world of 2030 lies one big one: CO2 emissions at last have a price that reflects their impact on the biosphere, and emitters pay it.

Proper carbon pricing incentivises good climate behaviour and disincentivises bad. As Dieter Helm writes in his new book, Net Zero: How We Stop Causing Climate Change, “It is hard to imagine any coherent decarbonisation strategy without a price of carbon at its core. If something is not priced, the pollution it causes is not taken seriously in everyday decisions by governments, companies and individuals.”

So how should carbon be priced? The most straightforward and least controversial method available to the UK or any government is a sector-specific carbon tax to nudge consumers away from carbon-heavy products. This is what economists would call a Pigouvian tax model and it’s been used to great effect already with taxes on sugar, tobacco and booze.

The UK already has a form of carbon tax in place. Established in 2013, a carbon tax on power generation has reduced the amount of electricity produced by coal from 40 per cent in 2012 to 5 per cent in 2018. In Sweden, the use of fossil fuels in domestic heating fell by 80 per cent after the introduction of a similar but more radical tax. In Australia, a two-year experimentation period saw emissions fall while the economy grew.

Ratcliffe-On-Soar coal-fired power station, UK

Carbon taxes work and the UK is beginning to take notice. The Zero Carbon Campaign has brought together academics, activists, policymakers, and businesses to put forward a series of recommendations on what such a tax would look like if more broadly applied. A vital principle is to let the tax “pick the low-carbon winners,” while preserving freedom of choice for consumers, says the campaign’s Hannah Dillon. Different prices for different sectors ensure that the transition away from high-emitting industry can be smooth and measured – even if, with a 2030 deadline, it would also have to be steep and decisive.

Sweden leads the world in carbon pricing. In Britain there’s still a long way to go. The effective price of carbon was capped at £18 per tonne in 2014 and will remain at that level until 2021, missing an original target of £30 by 2020. An LSE study on carbon pricing suggested that £50 per tonne was necessary to reach net-zero by 2050. Chris Goodall, an economist and energy technology author, believes £80 ($100) per tonne is the right target because at that level the oil industry would cease to make sense. This much is clear: to reach net zero emissions by 2030, the UK government would have to raise the carbon tax, and fast.

Who, in that event, would foot the bill? Many people reasonably object to a flat tax that pools revenue into a multi-purpose bucket. Poorer families are hit hardest while the wealthy easily withstand the shockwaves – but it doesn’t have to be like that.

Last year Carbon Brief, the UK-based climate news website, posted an analysis of carbon pricing models from around the world that showed the best way to make carbon taxes acceptable to taxpayers was to pay the taxpayers back. Ideally much of the money raised goes on green infrastructure but in some progressive models, notably British Columbia’s, part of it becomes a “citizen dividend” that can leave poorer households better off. Implemented cleverly, carbon taxes can make life better for everyone.

Ecological sustainable green building, electric cars in front

They can also encourage greener decisions in the supermarket and the boardroom. At the moment, sustainable products are more expensive than their polluting counterparts. Hannah Dillon says this prevents poorer households making green decisions when they shop or fuel / charge the car. Worse, it risks reducing sustainability to a mechanism for alleviating middle-class guilt.

A well-structured carbon tax would force large corporations, especially in the oil and gas sector, to reassess where their profit margins lie. As their traditional carbon-intensive products become more expensive to bring to market, they will in principle turn to more sustainable practices – and products. Which leads in turn to greener shampoos, burgers, cars and clothes at more affordable prices relative to those that now have to absorb carbon taxes. Sustainability becomes a process everyone can take part in.

The price of carbon in 2020 varies from $25 to $55 per tonne. Goodall believes a price of $100 per tonne would disincentivise greenhouse gas pollution enough to achieve net zero by 2050 (not 2030, but it would be a start). The LSE has released a report proposing a 2020 price of $50-$125 depending on the sector. The only company on track was Equinor, formerly Norway’s Statoil, which uses an internal price of $55.

Most companies did not provide a proposed carbon price for 2050. Shell, which uses country-specific estimates, forecast a 2050 carbon price of $85 per tonne. Repsol forecasts $70 by 2040 in a select number of sectors that importantly excludes oil. The biggest polluters are starting to address the true cost of their operations, but not yet with enough ambition. Until government begins to set the terms of trade, markets will continue to dictate carbon prices. Put another way, the market won’t pick green over growth until it’s told to.

Photographs Getty Images. Illustrations by Lizzie Lomax

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