Carbon Tax: Your guide to what is happening in the UK
As governments across the world look to find solutions as to how society deals with climate change, one key issue is that of a carbon tax. The idea behind it is to ensure that polluters are encouraged to focus more on alternative and green energy. At the same time, revenues raised from carbon tax can go towards funding sustainable solutions, such as sustainable transport in towns and cities, or increasing recycling schemes. In this post, we’ll look in detail at the carbon tax in the UK.
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Carbon tax definition: What is it?
The carbon tax is an eco-tax that associates a tax with each tonne of carbon dioxide (CO2) discharged. The purpose of the carbon tax is to encourage individuals and businesses to consume more sustainably to combat global warming.
By imposing a price on carbon, the objective is to divert consumers from products or behaviours with high levels of greenhouse gas emissions because the more greenhouse gases a product emits, the more it is taxed.
The carbon tax is considered to be Pigouvian after the name of economist Arthur Cecil Pigou, the first economist to propose a corrective taxation. The carbon tax is in fact in line with the principle that the polluter pays. It encourages quantifying the costs of negative externalities of products and services.
Who was Arthur Cecil Pigou?Arthur Pigou was an English economist who taught at the University of Cambridge. He is known for his work on welfare economics and wanted to provide solutions to social issues such as poverty and unemployment. In his book, The Economics of Welfare, Pigou introduced the idea of externality and that external issues could be corrected by introducing a charge. That whole basis is still used today for the issue of carbon tax. If someone is creating a negative externality, such as pollution, they are engaging in too much of the activity that generated the externality, and should pay.
How does a carbon tax work?
A carbon tax can be applied in two different ways:
- If it is levied "downstream", the carbon tax is calculated according to the CO2 emissions induced by the production and distribution of the product or service. This collection method is rarely applied because it involves complex carbon accounting.
- The carbon tax can also be levied "upstream", that is to say on the final consumption of fossil fuels. This method of taxation is preferred because the CO2 emissions of the various fossil fuels are known.
Advantages of a carbon tax
The idea behind introducing a carbon tax is to ensure individuals and companies who contribute large amounts of emissions into the atmosphere pay their share to help restore the environment. While there has been much debate about the pros and cons of having such a tax, there are indeed many positives, including:
- It raises important revenue that can be spent on mitigating the effects of pollution and climate change;
- It encourages firms to look for alternative sources of energy, for example solar power;
- Reduces environmental costs associated with carbon pollution;
- Makes the biggest polluters pay their cost of carbon emissions;
- Enables greater social efficiency.
Disadvantages of a carbon tax
There are, however, a number of downsides to introducing a carbon tax that should also be taken into consideration. These include:
- London is a global business hub, and other cities such as Manchester, Leeds, and Bristol are all important for companies and innovation. Introducing a carbon tax could discourage investment and economic growth;
- Firms could decide to shift production to other countries that do not have carbon taxes;
- It could be difficult to measure exactly how much carbon dioxide is emitted, and therefore how much tax should be paid;
- There is a danger that companies try to circumnavigate the rules, thus polluting in secret and avoiding paying tax at the same time.
What is the carbon tax system in the UK?
Prior to the UK’s decision to leave the European Union, the country was part of the EU’s Emissions Trading Scheme (ETS). Since May of 2021, the UK has introduced its own ETS, which applies to energy intensive industries such as aviation and power generation.
What is the EU ETS?Introduced in 2005, the EU ETS uses a cap-and-trade system to help cut greenhouse gas emissions. The idea behind the scheme is to limit carbon emissions to pre-defined levels. Companies involved in the scheme can buy and sell carbon as they need and at the end of the year the participating companies must surrender their allowances to cover their emissions. The EU lowers the emissions cap each year, and since it was introduced, emissions have been cut by 43% in the main sectors: power and heat generation and energy-intensive industrial installations.
The UK government says the new system in place, the UK ETS, takes the best ideas of the EU ETS but offers companies more flexibility. It also reduces the emissions cap by 5% each year, a bigger cut than the EU scheme, something that will help the UK meet its goal of becoming a zero carbon emitter by 2050.
Who does the UK ETS scheme apply to?
Similar to the EU scheme, the UK ETS applies to energy intensive industries, the aviation sector and the power generation sector. According to guidance published by the government, the scheme includes activities that involve the combustion of fuels in installations with a total rated thermal input in excess of 20MW. Under the EU scheme, a third of the UK emissions and around 1,000 factories and industrial plants were covered - and they were all automatically switched to the UK scheme this year.
UK carbon tax ratesWhen the UK ETS was launched earlier this year the rate applied to businesses involved was £50/tCO2e (per tonne emitted).
Carbon tax in the UK: What more can be done?
While the UK ETS system ensures some of the largest sectors must pay for their emissions, if the UK is to meet its ambitions targets to be carbon neutral by 2050, more needs to be done. And the likelihood is that an emission tax will be added to goods and services when we buy them in stores or online. Currently, the UK levies taxes on carbon through duties on petrol and diesel, but for the general consumer, there is little more in place.
However, research carried out by environmental campaigners Zero Carbon found widespread support for the introduction of a UK carbon tax. In a poll involving 2,000 people ahead of the COP26 summit earlier this month, two-thirds said the introduction of a carbon tax would be a fair way to raise money. Almost seven in 10 respondents (68%) said poorer people should be protected from the impact of a carbon tax, and there was strong support using revenues raised to focus on the creation of green jobs, investing more in clean energy solutions, and providing more support to the NHS.
According to the group, if a tax were introduced on goods and services such as flying, food, and other imported goods, the UK could raise up to £27 billion per year by 2030.
Reduce your carbon footprint: Steps you can take
Of course, you do not need to wait for the introduction of a CO2 tax to make changes and reduce your carbon footprint. By making small changes now, you can go a long way to doing your part to helping reduce emissions and better protect our environment. These are just some of the things you can do:
- Opt to walk or ride a bicycle for shorter journeys instead of using the car;
- Share a ride with others if possible when making longer car trips - to and from work with colleagues, for example;
- For longer journeys, do you have to go via plane or is it possible to use trains, busses etc?
Food and water use:
- Buy locally produced food to reduce the distance that products need to travel;
- Cut down on meat intake;
- Boil just the amount of water you need;
- Reuse water from cooking or taking a bath and water the plants in your garden.
- Switch to LED light bulbs;
- Unplug appliances when they are not in use;
- Remember to turn off the television rather than leave it on standby;
- Think about how to use your heating at home. Just 1ºC less can reduce emissions - and save money on your bills.
Read all our guides on how to reduce your carbon footprint and help the environment.