Zero Carbon Commission calls for cross-sector carbon tax

The Zero Carbon Commission has urged the government to introduce a gradually rising carbon tax across most sectors of the economy, growing from £55 per tonne in 2025 to £75 per tonne by 2030.

In its interim report, the commission called for the charge to initially be set at £40 per tonne in 2020 and apply to both gas and electricity. It said there is strong support for decarbonisation in the wake of the coronavirus pandemic, with the public preferring a slower, greener recovery to one which is faster but less environmentally friendly.

The Zero Carbon Commission was created as part of the Zero Carbon campaign launched by Ovo founder and chief executive Stephen Fitzpatrick to lobby for more robust carbon pricing in the UK. It’s members include: Lord Adair Turner, former chairman of the Committee on Climate Change; John Sauven, executive director of Greenpeace UK; and Baroness Bryony Worthington, co-director of the Quadrature Climate Foundation.

“Though significant progress has been made in the power sector, there are many parts of the UK economy where reductions in emissions have been slow or non-existent,” the report stated. “Government policy has been successful in some areas – as evidenced in the latest Committee on Climate Change progress report – but there is not yet a clear roadmap to net zero across the economy.

“Part of that roadmap must be carbon pricing. This is only one of the instruments the government has at its disposal – and needs to use – to reach net zero, but it is a powerful one. Analysis shows that, when used appropriately, a set carbon price is not only effective in driving down emissions but can also generate substantial revenue. This can be used to invest in green alternatives, cushion low-income households from cost impacts, and help fund the Covid-19 recovery.

“A clear carbon price trajectory allows markets to play a full role in the transition to net zero. It is fair – asking those who do the most damage to pay for it. It changes everyone’s behaviour – from multinational corporations to individuals. It allows everyone flexibility in choosing how to shift to a net-zero world and gives confidence to investors to support the development of low-carbon technologies.”

The report noted that the power sector is already subject to multiple carbon costs – EU Emissions Trading System (ETS) allowances, the Carbon Price Support (CPS), and the Climate Change Levy on business customers. These would all be replaced with a single carbon tax set at £40 per cent tonne of carbon dioxide from 2020 – roughly the same as the combined price of the ETS and CPS.  The commission suggested the proceeds could be used to pay for the renewable subsidies currently billed to consumers.

Carbon prices for electricity

The tax would also apply to gas, although initially only to business customers. It would be introduced to households in 2022 at a starting price of £46 per tonne.

The report said this would remove the current market distortion, whereby only electricity is subject to a carbon price. It acknowledged that the tax would be regressive and said it must therefore be accompanied by funding for energy efficiency upgrades and new heating systems as well as compensation for the poorest households.

With regards to industrial emitters, the commission said the government should initially continue with plans to create an ETS in the UK linked to the EU scheme. However, it also warned that this mechanism would not ensure a strong carbon price and should be replaced with its proposed carbon tax from 2025. It said the free allowances available under the ETS should be phased out over the preceding four years.

The report said delaying the introduction of the tax for five years would allow time for the implementation of a border carbon adjustment (BCA) to ensure imported goods are subjected to the same carbon price and prevent the offshoring of emissions.

“We recognise that this is ambitious – and that other mechanisms should be explored in parallel should this not be achieved – but the conditions are unusually propitious,” the commission added.

“The majority of EU members states are now signed up to the introduction of a BCA mechanism, and the UK’s hosting of COP 26 next year is a good moment to foster global agreement about an optimal approach to the most competitively exposed sectors.”

The report said the tax should also be introduced to the agricultural and waste sectors from 2025 but should not be applied to aviation, shipping and surface transport.

In the case of the latter, the commission argued that existing fuel taxes create a sufficiently strong carbon price and should be maintained at their current trajectory. It said electric vehicles are already cost competitive with their fossil fuel equivalents and that increasing fuel prices will do little to drive behaviour. The government should instead focus on lowering the upfront cost to consumers and improving charging infrastructure.

The commission said the coronavirus crisis provides an opportune moment to begin introducing the tax: “People want a green recovery from Covid-19. They support the idea of government placing environmental conditions on the help they provide to businesses, and they think using environmental charges to fund some of our recovery is a good way to kill two birds with one stone.”

The report cited a new survey of 2,000 people conducted by Public First which found that only a quarter thought focussing on the environment would slow down the economic recovery from the coronavirus pandemic. It also found that more people would prefer a recovery that is greener but therefore slower to one which is faster but less environmentally friendly.

The government is reportedly taking a fresh look at the replacement of the EU ETS with a carbon tax after the pandemic caused the price of allowances to fall.

The Zero Carbon Commission is due to publish its full report later in the summer.