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A new report has been published jointly by WTO and UNEP on Trade and Environment. This has sections summarising the science of climate change, an economic analysis of the links between trade and the environment and a review of climate change policies at the international and national level.
Interestingly the report is positive about the acceptability of border measures to level the playing field between firms subject to national carbon or energy taxes and importing firms subject to less stringent environmental regimes.
The report provides clarification on the conditions under which border tax adjustments may be compatible with trade rules and therefore opens some interesting areas for further development which previously appeared to be stalled in policy terms. The Green Fiscal Commission will be publishing a briefing paper on Border Tax Adjustments later in the year as a contribution to this debate on the issue, which may perhaps now be reinvigorated following this WTO/UNEP contribution.
Voters in British Columbia’s provincial election provided a boost to carbon tax advocates yesterday, by re-electing the party that introduced North America’s first carbon tax last year. The election has been closely watched by the environmental policy community as a test case of voter support for carbon pricing and green tax reform.
The provincial result follows last year’s federal election in Canada, in which a party proposing a national carbon tax suffered spectacular defeat, receiving its lowest share of the popular vote since 1867. This electoral disaster was widely interpreted as a popular rejection of the carbon tax, despite endorsements for the carbon tax proposal from many of Canada’s leading economists. After the federal election, carbon taxes looked like electoral suicide in Canada, a view that the British Columbia election may overturn.
The BC carbon tax was introduced by the governing Liberal Party of British Columbia, under Premier Gordon Campbell. The tax was set initially at $10/tonne, climbing to $30/tonne by 2012, and applies to the majority of fossil fuels burned in the province. Revenues are recycled back as personal and corporate income tax cuts. Despite the government’s insistence that the tax is ‘revenue neutral’, there was significant opposition to the tax when it was introduced in July 2008 amid record high oil prices. Although the tax remains unpopular in rural communities, opposition appears to have subsided.
Indeed, in yesterday’s poll the carbon tax was not the electoral liability many had expected. Far from providing the opposition New Democrat Party with political ammunition to defeat the Liberals, campaigning against the carbon tax may have been the New Democrat’s downfall. The New Democrats, who have historically been seen as the greener of the two parties, ran an “axe the tax” campaign, describing the carbon tax as a ‘gas tax’ that would hurt the poor and let ‘big polluters off the hook’. The campaign was denounced by prominent environmentalists as populist electioneering, and many commentators have suggested that the ‘axe-the-tax’ rhetoric backfired, with green-minded voters turning to the Liberals or staying away from the polls.
Whether the electoral survival of North America’s first carbon tax will embolden other jurisdictions to implement similar policies remains to be seen. What is clear is that carbon taxes dodged a political bullet yesterday, and the prospects for carbon taxes across Canada look brighter today than they have for some time.
There is much to welcome in this Budget from a green and low-carbon point of view, while recognising that to meet its ambitious stated objective of making the UK a leader in green manufacturing and low-carbon technologies, the Government will have to do much more, and go much further, in PBR 2009 and Budget 2010. Not surprisingly, the Government has accepted the recommendation of the Committee on Climate Change to commit to a 34% reduction in greenhouse emissions, from the UK economy rather than through foreign credits, by 2020. Independent projections and forecasts confirm that the Government will need to implement far more stringent policies to meet this target than are in this Budget – but the Budget can be seen as a start in the right direction.
Most positively this Budget contains a limited environmental tax reform (shift of tax from goods to bads), with the fuel duty increase being the single most important addition to revenues in 2009-10 and 2010-11. This and other environmental taxes will increase the proportion of tax revenues from environmental taxes for the first time since 1999. Much research has shown that a tax shift of this kind is one of the most effective ways of improving the environment, while simultaneously supporting employment. The tax shift does not go far enough, and certainly does not establish a robust price of carbon across the economy, as is required if the UK is to meet its carbon targets. But it is a welcome start, and not an expected one, that can be built on in future years.
The other single most important recognition in the Budget is that without further support offshore wind power will not be installed in anything like enough quantity to enable the UK to meet its renewable energy targets for 2020. It remains to be seen whether the support announced has the desired effect – the UK has not been good at stimulating private investment in renewables to date, lagging far behind other European countries. The effect of this support must be monitored carefully to see that it really does stimulate the step change in deployment that is required.
Similarly, the Strategic Investment Fund for low-carbon technologies, and the extra commitments in relation to CCS, are most welcome, but not enough details are given to permit a judgement as whether they will actually work to get the investments on the ground.
The further expenditure on resource and energy efficiency in buildings is likewise a step in the right direction, but it still barely scratches the surface of the problem, which will need a comprehensive and much more ambitious approach if carbon savings from buildings are to make the contribution to meeting the carbon targets in 2020, without which the carbon targets will be missed.
In summary, in the past this Government has been very long on rhetoric about the need to reduce carbon emissions and deploy renewable, but very short on delivery. This Budget is similarly long on rhetoric – this time the delivery must match it by following through on the welcome starter measures and initiatives that have been announced.
The TaxPayers’ Alliance (TPA) claimed yesterday that ‘The public are paying a fortune for green taxes and regulations that do little to reduce emissions but massively push up the cost of everything from driving and flying to heating our homes.’
This statement seems to fly in the face of the evidence on the effectiveness of green taxes that the Green Fiscal Commission has recently reviewed in detail. This shows that green taxes are an effective means of reducing environmental impacts. They also have other benefits such as raising revenues that government needs to operate in the public interest and increasing jobs through allowing other taxes, such as those on labour to be reduced. This evidence is summarised in the Commission briefing How Effective are Green Taxes?
The TPA may not like green taxes, but they are wrong to claim they are ineffective. The TPA seems to be developing a track record of coming to unjustified conclusions on green taxes. A previous report from the TPA on green taxes came to similarly questionably conclusions. This was reviewed by Prof Paul Ekins of the Green Fiscal Commission who viewed, ‘its analysis to be flawed’ and that it contained, ‘a number of examples of quotation out of context and misrepresentation to the extent that it is positively misleading.’
Interestingly the Daily Mail coverage quotes Philip Hammond, shadow Chief Secretary to the Treasury, who said, ‘Conservatives have always said they support a gradual shift in the tax system away from taxes on incomes and savings towards taxes on pollution.’ This quote highlights the need to consider green taxes in the broader context of overall tax policy and environmental objectives. Green taxes need to be increased if we are to have any chance of addressing climate change, but they can also be used to reduce taxes on other activities we consider desirable, such as income and profits.
Exxon Mobil coming out in favour of a carbon tax to combat climate change, after so many years funding denial that climate change even exists, sounds like King Herod belatedly announcing his support for child protection policies. The shift happened after pressure from the Rockefeller family and a change of CEO, but sceptics have noted that Exxon had this change of heart just as the US is looking to enact a domestic cap-and-trade scheme. It has been suggested that Exxon is simply attempting to derail cap-and-trade, not to bring about a carbon tax.
Exxon has no credibility on this issue, but there are genuine reasons to think a carbon tax may be a better policy than emissions trading. A tax gives certainty of price for carbon, allowing companies to make investments on that basis, rather than the wild fluctuations in the price of carbon we’ve seen in the EU Emissions Trading Scheme. The trade off is that it doesn’t give the certainty of the level of annual emissions that an emissions trading scheme brings. A carbon tax should be more economically efficient than emissions trading because fixing the price helps decision makers to plan for investments, although it means that the environmental outcome is less certain. The real objective is to ensure a long-term transition to a low-carbon economy, not to make sure that the target is exactly met every year. All that is necessary is to adjust the progress of the tax if it is reducing emissions too slowly over a period of years.
However, emissions trading has political advantages. One reason is that the word ‘tax’ is politically toxic. A second reason is that the higher costs involved in emissions trading are not so obvious as with a tax, so do not arouse so much opposition. A third reason is that it is fairly easy conceptually to grasp how emissions trading with a cap reduces emissions, while it is harder to understand how a carbon tax reduces emissions.
Emissions trading with auctioned permits, as President Obama proposes, raises revenue in the same way a carbon tax does and allows taxes elsewhere to be cut. Both represent green fiscal reform. The choice is between the policy advantages of one and the political advantages of the other.
Once again Denmark appears to have responded intelligently to the collapse in global oil prices, and reductions in gas prices. As in the 1990s, its government has seized this opportunity to introduce a green fiscal reform, raising taxes on carbon-based energy while cutting other taxes, in this case income taxes. The benefits of this policy will be several. Most importantly, it represents probably the cheapest way of reducing carbon emissions, helping Denmark to reach its carbon reduction targets at a lower cost than would otherwise be incurred. But its economic implications are hardly less positive. The overall effect on the macro-economy will be small, though some models suggest that it is likely to be marginally positive because of the extra employment that is likely to be generated (when income taxes fall at a time of high unemployment, workers may be prepared to reduce their wage, to leave their take-home pay unchanged, and this can stimulate labour demand). But the main economic effect will be to stimulate the development of low-carbon technologies, both in energy supply and energy demand. To the extent that such technologies become attractive globally, this will enable Denmark to develop new competitive industries, as it has done already with wind (partly on the back of the previous green fiscal reform). Denmark has shown again that it can respond to the opportunities, as well as the challenges, of climate change. When will the UK show the same?
At last, in its Heat and Energy Saving consultation, the Government has recognised the scale of the challenge in retrofitting existing UK homes to help meet its challenging CO2 targets and make the UK housing stock part of a low-carbon economy instead of a fuel-consuming, carbon-emitting liability. The problem is that at this stage it says that it will only ‘make available’ to 7 million homes by 2020 the necessary financial package to address the challenge. On past experience, only a very small proportion of households will take up this offer, so that progress on improving home energy efficiency will remain far slower than the carbon-reduction targets demand. This is one of the most difficult areas in which to achieve carbon reduction (as well, paradoxically, as being one of the cheapest when the energy efficiency measures are actually installed). It will require a sophisticated package of measures involving contractor-training, builder and householder obligations, and the promise of high and rising prices of carbon-based energy, through a revenue-neutral carbon tax, as well as a sizeable subsidised loan, for the necessary carbon reductions to be achieved. The consultation raises most of the relevant issues, except the necessary rise in carbon/energy prices, but completely fails to make proposals that will address the problem. As a result, unless the strategy to emerge from this consultation is very considerably strengthened, we can be sure that only few of the 7 million homes will have received the envisaged level of energy efficiency improvement by 2020, and more rhetoric about the necessity of reducing carbon emissions will have failed to generate appropriate government action to meet its stated objectives.
Sweden’s energy policy objectives (ecological sustainability, competitiveness, energy security) are not dissimilar from those of the UK. Its approach to achieving them is, however, rather more realistic. Its recent policy statement states unequivocally: “General economic policy instruments are fundamental for long-term energy policy; these include carbon dioxide tax, international emissions trading and certificates for renewable electricity.”, and the policy instruments to go with it include a significant increase in the already substantial Swedish carbon tax. Fuel taxes and other energy taxes will also be increased, in order to contribute to its 40% emission reduction target (from 1990’S level) by 2020. This is not only a higher emission target than the Climate Change Committee has proposed for the UK, but the willingness to use taxation to drive up the price of carbon means that Sweden has a much higher chance of achieving it.
Martin’s careful academic work should be required reading for policy makers at this time of economic crisis and government stimulus to try to avoid the lower depths of recession. The stimulus spending should be used to lay the foundations of a low-carbon economy; and the tax increases that will be used to pay for it should be in environmental, rather than labour, taxes. Martin writes: “Rather than taxing people for being productive it would make vastly more economic sense to tax damaging activities such as pollution instead. In economic equilibrium this must be good for jobs and bad for pollution. Thus, it would be the ideal policy to implement now in an effort to boost employment. But even better, it is also a sustainable stimulus package that does not require any extra borrowing.” This is no-brainer economics. Could someone please tell the Treasury?
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Ben Shaw
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Six million new jobs and we meet our carbon targets
17 July 2009 in Commissioner Activities, Competitiveness issues, Environmental effectiveness, ETR News, GFC Commentary | Tags: Europe-wide | by Ben Shaw | Leave a comment
Six million new jobs could be created across the EU – an increase in employment of 2.7 per cent – if a programme of green fiscal reform was introduced. A green tax shift would also enable the EU’s carbon dioxide reduction targets to be met.
This was the message from new research presented at a major international conference held in London on 15th and 16th July organised as part of the Anglo German Foundation’s PETRE project in conjunction with the Green Fiscal Commission.
Commenting on the research findings the conference chair, Professor Paul Ekins, said, “This research shows that a really strong programme of green fiscal reform across Europe will benefit the economy as well as reduce carbon dioxide emissions. It is not clear that Europe’s targets for reducing carbon dioxide emissions can be met without such a tax shift, but achieving them in a way that also increases employment makes the arguments for this policy absolutely compelling.”
The conference also presented evidence to show how a green tax shift can increase innovation in key environmental industries, and give results for its impacts on countries outside Europe. The conference concluded with a discussion of the political issues related to the implementation of the green tax shift with MPs from the major political parties.
Presentations from the conference will be made available shortly on the Green Fiscal Commission and PETRE project websites. The final report from the PETRE project with full details of the research will be launched in October.