What’s going to happen to the carbon price floor?

There’s a budget tomorrow, and as we reported recently, some energy companies have been putting pressure on the chancellor to increase the carbon price floor, the UK’s carbon tax, currently set at £18 per tonne, which has helped us reduce the proportion of our electricity we get from burning coal, the dirtiest fossil fuel of them all, though if we want to completely phase out coal burning by 2025, something the government has pledged to do, then, according to analysis from Aurora Energy Research, we’re going to need to be putting a higher price on our carbon.

Maintaining the UK carbon price at the current level risks a revival of coal generation in the early 2020s. The competitiveness of coal generation is expected to improve post 2020 relative to gas – as recent restrictions on coal production in China are eased, and the current global glut of LNG gas clears.

If we’re to hit our 2025 coal phase out target, we’re going to need to raise the carbon price to around £40 per tonne, more than double what it is now. As well as driving down coal burning, this higher price would drive investment into our low carbon energy sector.

However, the report suggests increasing the carbon tax to £40 would not result in increased tax revenue for the government, since the higher tax take would be offset by the loss of tax revenue from coal generation.

But what if Hammond decides to scrap the floor price altogether?

That’s what some in our more energy-intensive industries would like to see. According to Aurora’s analysis, this would lead to a surge in coal generation and would make the already tough job of hitting our decarbonisation targets even tougher.

The way to have a carbon tax set at a meaningful rate without harming our own energy-intensive industries would be to apply border adjustments, or tariffs effectively, so imports would be taxed based on their carbon content and on whether that carbon content has already been taxed and exports going from the UK to regions with low or no carbon tax would receive a rebate, thus allowing UK businesses to compete on a level playing field. Such environmental tariffs are allowed by WTO rules, and they may also be allowed by EU rules since they would not be discriminatory but would be applying the same tax equally to domestic and foreign businesses.

Give the money to the people

Another issue with increasing the carbon tax is that it would raise gas and electricity bills, and since just about everything requires energy in its production or delivery, it would result in prices going up. At the levels we’ve talking about at the moment, these price rises would be minimal, but if we’re serious about hitting our 2050 decarbonisation target, as required by the Climate Change Act, then we’re going to need a steadily rising price on carbon and people are going to need help bearing the costs of the transition to a low carbon economy.

The solution then is to rebate the revenue from the tax back to the public. All of it. The whole bloody lot. Every single penny. 100%. A carbon tax should not be a revenue raising tax, and it doesn’t need to be. We have plenty of other taxes for raising revenue, and it’s because it’s not revenue raising that we in CCL tend to refer to it as a fee rather than a tax.

The purpose of a carbon tax is to correct a flaw in the market, known as a negative externality, that means the costs of the damage caused by burning fossil fuels are not borne by the producer or the consumer but instead are passed onto third parties, who, in this case, are those having to deal with the impacts of climate change and for the most part they are the people with the smallest carbon footprints.