UK Treasury should focus on carbon not energy use

The UK could fall short of its climate change targets if energy taxes continue to be based on the amount used rather than on the amount of greenhouse gases emitted, according to a paper published today (23 November 2015) by the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change of Economics and Policy at the London School of Economics and Political Science.

The paper, which responds to a consultation by HM Treasury, points out that carbon taxes are more effective than energy taxes at meeting climate goals and delivering energy efficiency gains.

The paper states that “the instrument of choice to achieve the Government’s policy objectives should be a price on the carbon content of energy, rather than on the amount of energy consumed, in order to address the greenhouse gas externality.”

The authors of the paper – Samuela Bassi, Chris Duffy, Sam Fankhauser, Bob Ward and Dimitri Zenghelis – argue that, unlike carbon taxes, energy taxes can make low-carbon energy more expensive and hinder efforts to tackle climate change. They note that there is no reason to penalise cheap clean energy in the way that a broad energy tax would.

The paper states: “Carbon pricing addresses a specific market failure: the greenhouse gas emissions from energy use which cause climate change. Internalising this cost in the price of electricity will make users include the real cost of emissions in their decision about how much energy to consume.”

However, the government’s recent decisions favour energy taxes over carbon taxes. For instance, the Chancellor George Osborne announced in the Summer Budget 2015 that electricity from renewable sources would no longer be exempt from the Climate Change Levy (CCL), which is a tax on business energy users.

The paper states: “Ending the CCL exemption for renewable energy generators means that it is now an energy tax rather than a carbon pricing instrument. The justification appears to be a desire to drive greater energy efficiency rather than carbon reduction per se; however, removing the exemption has increased the cost of low-carbon energy and so has hindered carbon reduction efforts.”

The paper calls for a higher carbon price that is consistent across different fuels and different sectors. At present, there are at least eight policies that implicitly price carbon in the UK and they result in significant disparities in how fuels are taxed.

For instance, electricity was implicitly taxed between £37.11 and £65.70 per tonne of carbon-dioxide-equivalent of emissions in 2013-2014. Meanwhile, implicit carbon prices applied to natural gas were much lower in the same period, ranging between £3.45 and £21.77 per tonne. The implicit carbon price applied to coal was even lower, between £2.34 to £6.68 tonne.

The paper states: “This suggests that the current policy regime is providing a perverse incentive for businesses to prefer high-carbon content fuels over electricity. This could serve to discourage further electrification of the energy system, potentially making the decarbonisation objectives set in the UK’s carbon budgets more difficult to achieve.”

The authors call for the government to consider replacing the CCL, CRC Energy Efficiency Scheme, Climate Change Agreements and the Carbon Price Support Rate to be replaced with a single carbon pricing policy that imposes a uniform carbon tax on coal, gas and LPG further upstream, at the point of import or manufacture. This would help reduce administrative costs and limit possibilities for tax evasion.

The authors also argue for the cost of renewables to be funded through general taxation in order to reduce the “disproportionate fiscal burden” that electricity users currently pay.

For more information about this media release, and to obtain copies of ‘Consultation response: Reforming the business energy efficiency tax landscape’, please contact Ben Parfitt b.parfitt@lse.ac.uk, or Bob Ward r.e.ward@lse.ac.uk.

 

NOTES FOR EDITORS

  1. The Grantham Research Institute on Climate Change and the Environment (http://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (http://www.granthamfoundation.org/).
  2. The ESRC Centre for Climate Change Economics and Policy (http://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.