‘Overlapping’ levies should be replaced with ‘single, simple’ carbon charge

The Zero Carbon Commission has called for the “overlapping” levies on electricity to be replaced with a “single, simple” carbon price across both power and heating.

In a new report, the group said the charge could bring in annual revenues of £27 billion by 2030 and could be used to fund support mechanisms such as the Renewables Obligation and Contracts for Difference schemes, which should no longer be levied directly onto electricity bills.

On the electricity side, the charge would replace the UK’s planned Emissions Trading System (ETS) as well as the Carbon Price Support top-up payments and Climate Change Levy on business consumers. It would immediately start at a rate of £40 per tonne per tonne of carbon dioxide before ratcheting up to £55 per tonne in 2025 and £75 per tonne in 2030.

“Most roadmaps to net zero involve electrifying as much of our economy as possible,” the report explained. “Yet the UK puts more charges on the use of electricity than other fuels. The costs are significant. Consumers and businesses pay more today than our proposed carbon price.

“This is an irrational distortion – especially since we want to encourage the use of clean electricity – and most countries take the opposite approach, accompanying modest electricity charges with additional taxation on gas and oil. Instead, we want a carbon charge that is consistent with other sectors, and which encourages people to switch to renewable sources of energy and reduce their energy use.”

The report titled: ‘How carbon pricing can help Britain achieve net zero by 2050’, therefore called for the same charge to be applied to all fuels used for heating: “If electricity is the sector that is most overtaxed, heating is the most undertaxed. At the moment, households face no carbon pricing on gas or heating oil. Commercial buildings do – but at a much lower cost than electricity.”

The commission said there should be a lag between announcement and implementation to give households time to adapt, adding: “The charge should be supported by complementary policies, such as requiring landlords to implement energy efficiency improvements to EPC band C by 2035 and for the sale and installation of traditional gas boilers in existing housing stock to be banned by 2030.”

The Zero Carbon Commission was formed as part of the Zero Carbon Campaign launched by Ovo Energy founder Stephen Fitzpatrick in 2019. Its members include: Lord Adair Turner, the former chairman of the Committee on Climate Change; Greenpeace UK executive director John Sauven; and Rhian-Mari Thomas, chief executive of the Green Finance Institute.

The group said the revenues from the charges should, among other things, be used to “cushion” the resulting rise in bills, in particular, for the poorest three tenths of households: “The revenues from a carbon tax could, for example, pay for a £1,000 dividend per UK household or more than fund the removal of renewables support costs away from consumer electricity bills into general taxation.”

It said they could also be used to boost investment in innovative technologies and help fund the economic recovery from the coronavirus pandemic.

The commission said the charge should additionally be applied to industry and agriculture but only once a border carbon adjustment or equivalent has been put in place to prevent the offshoring of emissions.

It described the government’s plans for a national ETS to replace the UK’s participation in the EU scheme as “suboptimal” but said they would be combined with its own proposals by doing the following: expanding the new mechanism to cover sectors such as heating and agriculture; strengthening the cap on emissions to align with the UK’s net zero target; and applying a more substantial price floor to ensure emissions do not become too cheap.

“These proposals cannot be summarised in one sentence because the economy is complex, and we are aiming to affect every part of it,” it added. “But what we are proposing is markedly simpler than the current regime, while dealing with a far higher percentage of emissions.

“We have crafted these proposals in a way that can maintain public consent – which is clearly critical to success in any democracy. A government committed to net zero by 2050 needs serious carbon pricing – and this report provides a roadmap for them to deliver it.”

The commission additionally urged the government to take advantage of its presidency of the COP26 climate change to create a “high ambition club”, which would seek to align carbon pricing between members – for example, through an agreed price floor – and then apply a multilateral border carbon adjustment to those outside.

“The aim is for the entire world to adopt ambitious, implementable climate policies,” it explained. “A grouping of major countries would go a long way towards promoting and incentivising that outcome. It would also be the best way – by some margin – of dealing with the legitimate concerns of industry and of agriculture over the impact of net zero policies”.

The report was endorsed by Lord Nicholas Stern, the chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, who said: “A higher, simpler and more broadly applied carbon price is a crucial element in the fostering of a post-Covid economic recovery that is consistent with net-zero emissions by 2050. The Zero Carbon report contains detailed, thoughtful and pragmatic advice which the government would be well advised to heed.”

Octopus Energy Group director of policy Clementine Cowton said: “This report provides an urgent call to action on the need to align incentives if we are to unleash the power of markets to solve the climate crisis.

“It’s ridiculous that we punish people for doing the right thing and subsidise dirty gas businesses by piling policy costs onto electricity bills. Individual action and systemic structures should never be in tension on something that poses such an existential threat as climate change.”