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Bright Blue, the independent think tank for liberal conservatism, has today published a major new report commissioned by its high-profile cross-party, cross-sector Tax Commission, entitled Green money: a plan to reform UK carbon pricing, proposing a new carbon pricing system for the UK to provide a fair and credible path to net zero emissions by 2050. 

The report, authored by former Number 10 Energy and Environment Adviser Josh Buckland, argues that the current carbon pricing system across different economic sectors in the UK is inconsistent, regressive, unclear, and cannot put the country on the path to reach net zero emissions by 2050. 

The report argues that a new approach is needed. At its heart, this approach would mean that every unit of carbon emitted across the economy is subject to a similar carbon price, with a portion of the tax proceeds raised recycled to support those on low-incomes and help businesses switch to green technologies.

Ahead of COP26, the report proposes a three-part plan to deliver a more comprehensive approach: place a consistent price on all emissions; take effective action by 2030; and, help build a lasting public and political consensus on carbon pricing.

The new carbon pricing plan from Bright Blue would transform how we tax carbon emissions, delivering not just additional revenue for the exchequer, but also ensure the pathway to net zero is fair, helping to retain public support on the need to tackle climate change. 

Ryan Shorthouse, Chief Executive of Bright Blue, commented:

“Once we control Covid-19, the Government has three immediate priorities – restoring the public finances, achieving net zero emissions by 2050, and levelling up. More consistency in the taxation of carbon across different economic sectors can help with the first two. But to support the third, those on modest incomes and from poorer regions of the UK cannot be overburdened by the cost of the net zero transition – in fact, they need to really feel they will eventually benefit, through increased living standards and job opportunities.”

Josh Buckland, Former Energy Advisor to the Prime Minister, and report author, commented:

“Reaching net zero emissions by 2050 is a monumental challenge, one that will require the Government to utilise every possible option for driving down emissions in a fair and economically productive way. Carbon pricing is a critical tool in its armoury, but the current system is inconsistent and in places regressive. Significant reform is needed, but any changes must be accompanied by a plan to deal upfront with the political challenges that taxing carbon properly will create. Ahead of COP26 in November there is an opportunity for the UK to show that it is indeed possible to take effective action on climate change in a way that promotes economic growth and creates a more equal society.

Bright Blue’s key recommended reforms of the UK’s carbon pricing system are:

Establishing an economy-wide carbon pricing framework:

  • Government should set a ‘target price range’ for carbon taxes across the whole economy by 2030, reviewed and reset every five years thereafter. The target range should include a 2030 ‘floor price’ that each economic sector would have to achieve at a minimum. The ultimate target of a coherent carbon taxation framework should be to put a price on carbon that reflects the societal cost consistently across the economy, increasing over time. Based on the current values used to appraise climate policy by the UK Government, a price range of between £40-£120/tCO2e for different economic sectors would be appropriate for 2030, and should be set in the upcoming HM Treasury Net Zero Review,. Government should also set a ‘price floor’ that each sector must meet initially set at the bottom end of the target price range, with the option of increasing it as we near 2030. Further target ranges could be set on a five yearly basis. 
  • Government should publish an annual assessment in the Budget for how each economic sector and sub-sector performs against the carbon tax target. Alongside setting a 2030 target range for each economic sector, the Government should be required to publish a set of metrics for forecasting how each sector and sub-sector of the economy performs against the carbon pricing target. This assessment should be updated on an annual basis as part of the annual Budget.
  • The Committee on Climate Change (CCC) should be required to assess whether effective carbon prices are in line with the UK’s Carbon Budgets and the 2050 net zero target at each Budget. An annual independent assessment of whether carbon pricing policy is adequate to support the UK’s climate targets should be established, delivered by the Committee on Climate Change (CCC), modelled on the independent assessments of economic policy currently delivered by the Office for Budget Responsibility (OBR).
  • Government should introduce and establish in the HM Treasury Net Zero Review core ‘Carbon Tests’ to assess changes to any policy that impacts the effective price of carbon paid by businesses or households. Government should introduce a set of ‘Carbon Tests’ against which must be applied to any policy or tax decision that has an impact on effective carbon prices across the economy. At a minimum they should assess: impact on the effective carbon price facing producers and consumers; the credibility of the trajectory to the 2030 target price; whether those subject to the charge are able to respond effectively; the distributional consequences of the effective carbon price within specific sectors; and whether the measures minimise or mitigate any risk of carbon leakage. These tests would offer a practical guide to policymakers to assess and rank individual options and should be part of the government’s formal Impact Assessment process for policy and tax decisions.
  • The Chancellor should launch a ‘Net Zero Tax Review’ in the Autumn Budget, reporting in 2022. This review would consider the full tax framework and risks associated with climate change, and not simply be limited to carbon taxes. The wider framework of general business and consumption taxes needs to be better aligned with the 2050 net zero target. A comprehensive review should go beyond just carbon taxes and consider how other tax measures impact the ability for households and businesses to go green as well as the fiscal risks created by the net zero transition and set out how the Government will address them. The Review should conclude within the next 12 months and lead to tax changes that drive investment over the 2020s.
  • Establish a cross-government Carbon Price Unit housed in HM Treasury bringing in other key departments, with a responsibility for leading carbon tax and policy development. The Unit would be housed formally in HM Treasury and report to the Chancellor, but also bring in officials from all key relevant departments across government and would have responsibility for the operation of the carbon pricing framework and would lead the regular review and publication of the target price range. This would ensure there is effective collaboration and consistency across carbon pricing in all sectors and provide an official means for external stakeholder engagement with sector representatives. 

Taking effective action by 2030:

  • Government should use the upcoming Net Zero Strategy being led by BEIS to outline a set of sectoral ‘Action Plans’ that outline how to achieve the 2030 target price range for effective carbon prices. The Net Zero Strategy should include an articulation of how the Government will approach carbon pricing across each economic sector, and offers a chance to set out a detailed set of interventions that will be made across each economic sector to build towards the 2030 target price range. Government should publish sector specific ‘Action Plans’ that outline the process for establishing a stable and consistent carbon price in each sector over time, including whether a direct tax or a trading scheme is more appropriate, given all sectors are unlikely to be suited to the same mechanism. While this doesn’t necessitate immediate introduction, it will provide much needed certainty for sectors over the likely framework under which they will eventually be required to respond to a price signal.
  • Government should immediately pilot a voluntary road pricing scheme ahead of a national rollout from 2030, including ‘Green Miles’ that offer a discount for a period to those driving Electric Vehicles (EVs) and on low incomes, as well as surge pricing in congested areas. The most viable replacement for fuel duty is a road pricing scheme that applies to all vehicles, charging road users on a per-mile basis, which the Government should immediately pilot. Such a trial scheme could be done voluntarily in exchange for an exemption from fuel duty, potentially in partnership with intermediaries such as car insurance companies to trial new customer propositions. An immediate set of pilots would lay the groundwork for a national rollout of road pricing schemes from around 2030. Government could also trial the introduction of a ‘Green Miles’ scheme that offers a certain proportion of discounted or free miles to those in EVs. Such a scheme would be phased out over time, with the potential to continue with a targeted scheme that supports those on low incomes on an ongoing basis. Any road pricing scheme should also include a surcharge for non-residents in urban areas to reduce car use and promote public and active transport. 
  • Government should reform Air Passenger Duty (APD) so it delivers a more consistent carbon price, and offer discounts for ‘Green Miles’ based on the proportion of sustainable aviation used. A frequent flyer surcharge could also be considered to make the measure more progressive. APD should be reformed so it is more directly linked to emission reduction, such as through removing the lower effective rate on short-haul flights or linking charges more directly to distance travelled. There could also be a surcharge introduced for frequent flyers, effectively placing an additional ‘rate’ of carbon tax predominately on business travellers. A ‘Green Miles’ scheme could also be introduced meaning passengers receive a tax discount for the proportion of the fuel that is sustainable aviation fuels.
  • Work to bring shipping under the remit of the UK ETS, ideally coordinated with international action. The EU has stated that shipping will be bought in scope of the EU ETS by 2023 and the UK should follow this example. Given zero-carbon options in the transport sector remain novel, there would be a strong argument for hypothecating the revenues collected through a carbon price on shipping to support innovation and pilot projects. 
  • Continuing to include power generators in scope of the UK ETS, but at the point that coal is phased out from the UK, phase out the Carbon Price Support element of the Carbon Price Floor. The ETS scheme and the Carbon Price Floor (CPF) have both played an important role in decarbonisation so far. The phase out of coal by 2024 will reduce the role of carbon pricing in supporting coal to gas switching, but it will remain important given it helps to reduce the running time of gas plants and will reduce the effective cost of new technologies such as carbon capture, utilisation and storage (CCUS). As such, the power sector should continue to be included within the UK ETS scheme for now. Once coal has been phased out, the Carbon Price Support element of the CPF should be phased out on a timeline that removes it completely by 2030 at the latest.
  • The Climate Change Levy should be reviewed again in light of the 2050 net zero target to ensure it fully reflects the carbon content of the fuel being used by businesses. Government should consult on extending carbon pricing further across energy usage in non-residential and public buildings. Government should review the Climate Change Levy again, making further changes to ensure the effective carbon prices the scheme delivers are sufficient. The Government should also regularly assess whether the reduced rates that are available under the Climate Change Agreements are effectively ensuring businesses invest in measures to reduce their energy usage. There is also a case for exploring whether a greater proportion of commercial energy usage should be captured by a carbon taxation framework, potentially through an extension of the UK ETS. Government should consult on the most viable option for extending carbon pricing across a greater proportion of energy usage within the non-residential and public sector.
  • A consistent ‘Climate Change Duty’ should be introduced linked to underlying UK ETS prices that applies across both electricity and gas use, offset by removing low-carbon levies from bills and introducing exemptions for low-income households. To reduce the effective carbon price on electricity and incentivise electrification, low-carbon levies should be removed from electricity bills and placed into general taxation, cutting the average household energy bill by 12% in 2030. Alongside this, the Government should introduce a ‘Climate Change Duty’ across both electricity and gas, linked to underlying UK ETS prices. The Government should also consider what support can be provided to those on low-incomes and at risk of fuel poverty, such as a mandatory social tariff with costs socialised across the rest of the consumer base, or exemptions from the Climate Change Duty for a defined group. 
  • Link the new farm payments scheme more directly to the delivery of carbon-based reduction projects. In addition, before 2030, trial the introduction of tradable credit markets based on carbon sequestration allowing a long-term route to land-use being included in a cap-and-trade model. After the initial pilots, the Government should specifically link a proportion of farm payments to carbon-based reduction projects, with requirements rising steadily over time. Government could set specific percentage and monetary targets to support this progression. As well as measures like afforestation, the Government should include more innovative measures, such as habitat and peatland restoration. The Government should also accelerate its pilots to create carbon credits based on nature-based climate solutions, allowining for the introduction of a cap-and-trade model within the agricultural sector beyond 2030. 
  • Reform the Landfill Tax so it is based on a carbon metric. Over the medium-term, include the waste and recycling sector in the UK ETS. As a first step, the Landfill Tax should be linked directly to the carbon content of waste, followed by eventually including the sector within the UK ETS over the medium term. 

Building a lasting political consensus:

  • Create a Green Dividend Framework, made up of the various carbon pricing schemes that contribute to the Exchequer. Based on a £75/tC02e price applied across the economy, uniform carbon taxation could raise as much as £27 billion. To ensure individuals feel the value of revenue generated more directly, the Government should establish a Green Dividend Framework in the upcoming HM Treasury Net Zero Review, allowing for a total figure to be set for what has been delivered to the public purse. Setting out in personal tax summaries the total value of the Green Dividend Framework and how it is being utilised should also be considered. HM Treasury could identify specific percentage targets for how revenues will be utilised under the Green Dividend Framework on an ongoing basis.
  • Identify a specific portion of the funds from the Green Dividend Framework to be utilised to reduce the impact of rising prices on those on low-incomes and vulnerable customers. The Government should identify a specific portion of the Green Dividend Framework to be redistributed to them, either on a proportional or absolute basis, channelled as close to the point of consumption as possible. For example, based on a uniform carbon tax of £75/tCO2 in 2030, the Government could offset the cost of any additional burden on the bottom income decile by recycling around £1.1 billion in carbon tax revenue on an annual basis, saving each household £404 a year, less than 5% of the total tax raised. If the Government wanted to go further, offsetting the impact for the lowest five income deciles would cost around £7.4 billion a year, around 30% of the total raised.
  • The UK should establish a ‘Green Import Tax’ for industries at high-risk of carbon leakage, ideally linked to a series of ‘Carbon Clubs’ to continue to promote free trade. This should not be a blanket charge on consumer or agricultural goods, but a targeted levy on certain tradable commodities, such as steel, aluminium, cement, that are subject to a meaningful domestic carbon price and at high risk of carbon leakage. The revenue from the tax would be folded into the Green Dividend Framework, identifying targeted support for industries to invest in green technologies. In exchange for the introduction of such a tax, free allowances within trade exposed industries would be gradually phased out, in line with the tax rising. To limit disruption to trade caused by this, the UK should use the run up to COP26 to establish a series of ‘Carbon Clubs’ made up of countries that are committed to a domestic carbon pricing mechanism that is broadly consistent with the UK’s and would allow for full or partial exemptions from the Green Import Tax. Over time, as more countries adopt domestic carbon pricing schemes, there would be scope to remove any import taxes that have been created globally. The world’s least developed countries could be exempt from the tax altogether to avoid the measures having a disproportionate impact on the world’s poorest. 

The Rt Hon David Gauke, former Lord Chancellor and Treasury Minister, commented:

“If we are serious about meeting our net zero target, taxation is going to have to play a role in changing consumer behaviour and encouraging green investment. This report is a timely and valuable contribution to the debate on how this can be done, recognising many of the political challenges.”

Sam Fankhauser, Professor of Climate Change Economics and Policy at the University of Oxford, commented:

“The UK will not meet its statutory emission reduction targets without a meaningful price on carbon that is fair and covers all emissions. This report sets out clearly the reforms on energy, transport and pollution taxation that are needed now to make this happen.”

To arrange an interview with a Bright Blue spokesperson or for further media enquiries, please contact Joseph Silke at joseph@brightblue.org.uk or on 07948 420 584.