Written evidence submitted by the Zero Carbon Campaign
Info on organisation:
The Zero Carbon Campaign was launched by entrepreneur and founder of OVO Energy Stephen Fitzpatrick in July 2019, following the introduction of the UK’s 2050 net zero commitment. It calls for the government to introduce stronger and more consistent carbon pricing across more of the UK economy, to help drive a fair and just transition towards net zero and catalyse a ‘green recovery’ from COVID-19. Zero Carbon Campaign has set up a Commission of leading scientists, business leaders, environmental and academic experts to work through the practical challenges of how such a policy might be structured and implemented. The Commissioner includes:
● Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking & Chair, Energy Transition Commission
● Nick Butler, Energy Commentator, The Financial Times
● Professor Paul Ekins, Professor of Resources and Environment Policy, Bartlett School Environment, Energy & Resources
● Professor Sam Fankhauser, Director, Grantham Institute at LSE
● John Sauven, Executive Director, Greenpeace
● Dr. Rhian Mari Thomas, CEO, Green Finance Institute
● Baroness Worthington, Founder, Sandbag & co-author of the UK’s Climate Change Act
● Georgia Berry, Director, Sustainable Business and Communications, OVO Energy and former Downing Street adviser on energy policy
Rachel Wolf of Public First is acting as the Commission Secretariat. She authored the Commission’s interim report, which was published in June 2020. The final White Paper is due for release in September.
Reason for submitting:
With the Treasury’s net zero review due in the autumn, now is the perfect opportunity to consider how the existing tax system might be revised so that it prices environmental harms, supports green and just economic growth, and drives investment in a zero carbon future. Reforming how we price carbon and equivalent emissions across our economy - and using the revenue to further environmental gains, whilst mitigating cost impacts on households - is a fair and effective catalyst for achieving these objectives. This is the premise of our consultation response, and the primary lens through which we have responded to each question.
The Committee is seeking evidence on:
o What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?
Accounting for long-term pressures on our tax base:
COVID-19 has wrought significant changes to the way we live and work, which has brought long-term pressures on the tax system to the fore by rapidly widening the gap between tax receipts and required levels of public sector revenue. The aftereffects of the lockdown and long-term restrictions imposed by the pandemic will shrink the pool of available public funds even further, as disruptions to demand damages business revenues and creates a crisis of jobs and employment. This is a trend that will be further aggravated as the direct costs of greenhouse gas (GHG) production (ecosystem destruction, health impacts, food shortages), and the indirect costs associated with the transition away from fossil fuels (job losses, threats to competitiveness, and loss of revenue from traditional forms of taxation), become more urgent and apparent.
It is therefore imperative that - if we want to successfully mitigate against further pressures on our tax base - we begin to account for the cost of GHGs by pricing them wherever they occur, and that we use the revenues to help individuals and businesses manage the costs of switching to a zero carbon future. This is absolutely key, not least because the same factors that have driven the erosion of our tax base during the COVID-19 pandemic (loss of economic output, creative destruction, public sector deficit) will be exacerbated by the climate change risks outlined above.
The need for tax reform:
The Government can protect itself from revenue shortfalls - and increase the resilience of our society and economy to future environmental shocks - by taking immediate action to reform the inefficent forms of environmental taxation that persist across the UK economy.
The current landscape of green taxation fails to properly account for the negative externalities of fossil fuel use; in fact, it actively encourages high-carbon consumption. For example, the natural gas and electricity used for residential heating are both priced at 5% VAT, in spite of natural gas being a more polluting energy source. Further to this, multiple costs associated with decarbonisation - such as renewable obligation certificates or ‘ROs’ - are placed onto consumer electricity bills, whilst gas has been left relatively alone. This has resulted in heating gas being priced at approximately ¼ the cost of electricity, in spite of it’s negative environmental impacts.
What is more, revenues from environmental taxes make up around 2% of the UK’s total GDP, but almost half of that comes from energy taxes on households; with taxes on pollution and resource use making up just 0.2% of overall tax revenue. This is not only inefficient in terms of our climate and environmental goals - because it saddles consumers with the cost of decarbonisation, whilst creating a perverse incentive for high carbon consumption - but it is also a missed opportunity to target environmental and social harms as a source of public revenue.
A new approach towards carbon pricing:
By pricing the production of greenhouse gas emissions across the economy, we can target the source of this inefficiency, and raise revenue from economic activity that has negative impacts on both people and planet. In doing so, we can incentivise low-carbon behaviour change amongst investors, businesses and consumers, and provide the government with a substantial source of public money.
These funds could be used to help alleviate both short and long-term pressures on the tax base. For example, a proportion of the revenue could be used to pay down the debt from COVID-19, and be invested to support the implementation of the low-carbon transport, building and heating infrastructure required for us to achieve the Government’s net zero goal. Revenue could also be used to de-risk investment in low-carbon technologies of the future (such as CCUS and hydrogen), and to encourage the scale and up-take of relatively high-cost low-use products such as Sustainable Aviation Fuels (SAFs).
This would constitute a much more fair and efficient use of taxpayer funds than the previous practice of unconditional bailouts to high polluting industries that are failing to account for their climate impacts.
o Do these pressures need to be met with tax reform, and if so, is this the right time for reform?
Now is the right time for future-facing tax reform. Not only existentially - because of the risks that COVID-19 and climate change pose to our economy and public services (and therefore to our security, health and wellbeing) - but also politically - people are currently reaping and recognising the benefits of a taxation system, and they expect new taxes to be introduced.
Our polling has shown that there is growing support for a long-term, systemic reorination of monetary policy toward our social and environmental goals. 74% of respondents agreed or strongly agreed that the Coronavirus recovery period provides a good opportunity to change many aspects of the UK economy. Other polling has also revealed support for increased taxation rates, with 47% now backing tax rises as a way of reducing the deficit (up from 30 per cent in December 2009), according to a recent YouGov poll for Times Radio.
Further to this, the public want to see money invested in 'greening' the economy; with 48% of our polling respondents supporting investment in a green recovery from the pandemic, even if it means the recovery is slower. However, we cannot just layer on additional costs, we need to look at the taxation we currently have, identify where the flaws in design lie and restructure it holistically, so that it functions more simply, transparently and efficiently.
In practice, this means taking an approach to tax reform that:
A) Replaces (i.e. changes the emphasis and simplifies) existing forms of emissions pricing that are inefficient or unfair.
B) Introduces new forms of pricing as both a behavioural incentive and a revenue raiser.
C) Protects/compensates those less able to bear a large tax burden (through targeted rebates).
We have applied this approach to our own proposals for changes to environmental taxation, which we should be a core focus of the Treasury’s tax reform agenda. The inefficiencies we've noted in relation to carbon taxation are outlined in the questions below, as are the details of our proposed reforms.
o What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?
We are not best placed to comment on the overall level of taxation that the economy can bear. However, we can comment with authority on the level of environmental taxation that would be commensurate with growth, whilst driving emissions reductions, and avoiding negative distributional impacts on least able-to-pay households.
Our Commission, drawing on research from the Grantham Research Institute on Climate Change and the Environment and Carbon Pricing Leadership Council, have recommended introducing a carbon pricing escalator that begins at £40 per tonne of CO2e in 2021, rising to £55 p/t in 2025; and to £75 p/t in 2030. Studies by Grantham have projected that revenue receipts from such a tax could amount to between £5-£36 billion annually before compensation; depending on its design, and associated complementary policies.
We have recommended pursuing a phased approach to the introduction of these price signals across the UK economy, ensuring charges are only introduced once preconditions have been implemented that enable such costs to be either absorbed, or avoided through behaviour change. For example, before placing a ‘carbon charge’ on household gas, we recommend making a comprehensive programme of attractive energy efficiency finance available to consumers, such that they can install low-carbon heating options in their homes and reduce their overall energy usage requirements before a new price signal is introduced. This phased, considered approach towards environmental taxation reform is essential for ensuring that carbon pricing is made manageable and fair for businesses and consumers, and that it maintains public and political support as a source of public sector finance.
o Which areas of the tax system are most in need of reform, and which are best left alone?
In the context of the COVID-19 recovery -and the UK’s net zero commitment - we believe that the UK’s system of environmental taxation is the area most in need of pressing reform.
While carbon pricing has been introduced and strengthened in some areas of the economy, the trajectory across different sectors remains piecemeal and uneven; creating economic distortion, adding complexity and storing up problems for the future. We need to start accounting for these costs by pricing them wherever they occur, and using the revenues to help individuals and businesses manage the costs of switching to a zero carbon future.
Predominantly, this can be achieved through simplification - as outlined in the final section of our response to this consultation - but there are some areas in which new charges must be introduced if we want to ensure that GHGs are priced wherever they occur.
Carbon pricing requires wholesale restructuring across the economy, but that does not mean applying a uniform approach to each sector. In some sectors - such as Surface Transport and Electricity - the price signal is already strong, and adding additional pricing signals is unlikely to help us achieve net zero emissions by 2050. In this instance, simplification with the support of other policies is of more importance, as outlined later in this response.
Conversely, in the Agricultural and Land Use Sector, as with Heavy Industry, carbon price signals could do a lot more to incentivise emissions abatement. In Land Use particularly, we need to ensure that the byproducts of agricultural practices - such as methane (MH4) and nitrous oxide (N2O) - are effectively priced, but also that carbon removal is also financially incentivised. We also need to ensure that - in advance of raising domestic pricing on trade-exposed industries - effective border measures are put in place to ensure domestic producers do not ‘offshore’ their emissions elsewhere. This would not only be bad for the UK economy, but it would not have the desired effect of total emissions reductions.
Carbon pricing reforms should also anticipate the loss of revenue from traditional environmental taxes that will occur on account of increased uptake of low-carbon technologies. In such instances where the system is struggling to capture revenue, there is a case for transitioning to new types of pricing that targets other forms of potentially taxable economic activity. Fuel duty is the most obvious example of this and the government should follow European neighbours’ example in piloting road pricing in the coming years, as fuel receipts continue to decline with the uptake of Electric Vehicles.
The different sectoral carbon charge pathways we have alluded to above - and the complementary policies required to make these feasible - are summarised in our Commission’s interim report.
o What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?
Tax reliefs and subsidies have a role to play in stimulating businesses and individuals to rebuild; but they need to be restructured so that the demand incentive they provide corresponds better to the Government’s social and environmental goals.
This problem is particularly acute in regards to emissions pricing. There are currently too many exemptions available to businesses that are failing to curb their emissions. This is unfair - because it leads to large imbalances between different sectors, inefficient - because the exchequer loses out on funds, and counterproductive - because it disrupts the innovation and investment that is required for businesses and manufacturers to become competitive in a low-carbon economy. That the Government should allow businesses to access tax relief and public bailout funds without environmental conditions attached is especially ill-judged, given the opportunity it has to influence the low-carbon transformation of hard-to-abate sectors. This amounts to a wasted opportunity to stimulate green growth.
Given this context, it is disheartening that HMT’s recently announced carbon tax consultation takes as its starting point the provision of subsidies via the allocation of ‘free allowances’ - i.e a volume of emissions that can be produced free of taxation - and provides free allowance increases for those actors who continually fail to meet their emissions targets. This is a further instance of the Government failing to effectively price pollution where it occurs and, whilst we acknowledge the need to prevent trade-exposed industry from re-locating elsewhere, we do not accept this as an excuse for failing to bring environmental ambition in line with net zero ambition. As the Committee on Climate Change has argued, industrial competitiveness can be maintained without free allocation of permits (and therefore emissions).
Government should instead consider border tax policies to enable a level playing field with other countries, whilst encouraging action to reduce emissions in other juristictions. It should also review its tax relief policy as it relates to environmental charges, removing subsidies where they weaken price signals to the point of disincentivising abatement (as in the case of Climate Change Agreements) - and introducing them where they can be utilised effectively to change behaviour and remove barriers to entry (by lowering the rate of VAT on electricity, for example). The latter offers an opportunity to better target consumption taxes upon pollution and waste, while removing the ‘green premium’ that people currently pay to make more sustainable purchase choices; as Green Alliance and the Ex’Tax Project have highlighted.
o What are the areas for simplification?
With regards to environmental taxation, the biggest opportunities for simplification lie in the pricing of energy within the power sector. Currently the range of price signals is too complex, and there is a substantial imbalance in price between gas and electricity, with all the costs attached the low-carbon generation of the latter lumped on to electricity bills. This leaves consumers without a price incentive to move away from more polluting heat sources, opens the door to misleading claims that green charges on energy bills are the cause of bill price rises, and does little to explain the environmental benefits of such policies.
Government can address these issues by amalgamating the three different existing carbon prices on electricity into a single, simple charge on energy companies, explicitly included on energy bills. This shift to penalising pollution directly would even out pricing between gas and electricity; and help to drive much needed investment in the electrification of sectors that are trailing progress in decarbonisation. It would also help to promote behaviour change by creating transparency regarding where consumers are being charged, and what they are being charged for; and could help promote public acceptability of carbon pricing, especially if a portion of the revenues were recycled into the provision of attractive energy efficiency finance. Not only would such an investment entail a range of economic, health and wellbeing benefits for households - including energy bill savings - it could stimulate the creation of up to 150,000 skilled and semi-skilled jobs across the entire UK construction supply chain.
There are also opportunities to promote simplification in sectors where charges already exist, but could be made more effective. In the Waste sector, for example, the current approach of taxing landfill has been very successful at reducing emissions; so it makes sense to retain this charge in line with inflation and extend it to cover other emissions intensive activity in the sector, such as incineration. In Aviation too, there is a case for using the current primary tax instrument - Air Passenger Duty - as an instrument for carbon charging. While APD in its current design does not function effectively as a carbon price, it could be adjusted to create disincentives for carbon intensive flights, and incentives for the development of low-carbon alternatives. Specifically, the Government could increase APD rates to better reflect carbon dioxide emissions intensity - including of different ticket classes - and apply charges in proportion to a company’s use of zero carbon aviation fuels. This would make APD’s function as a carbon charge more explicit, and improve its impact as a price signal.
 OECD (2020). Green growth challenge: Shifting the tax burden in favour of environmentally related taxation. Available here.
 ONS (2017). Five facts about environmental taxes. Available here.
 Public First (2020). Public Insights Briefing. Available here.
 The Times (2020). Support grows for tax rises over more years of austerity. Available here.
 Public First (2020). Ibid.
 Grantham Research Institute on Climate Change and the Environment. Distributional Impacts of a Carbon Tax. Available here.
 Annex: The Future of Carbon Pricing. Available here.
 Green Alliance (2020). Let’s stop tinkering with tax and make it a force for environmental and social good. Available here.
 Generators also pass the cost of low carbon electricity subsidies (Contracts for Difference and the Renewables Obligation) onto consumers.
 The CCC has shown that other factors - primarily wholesale gas prices - are primarily responsible for rising bill costs. CCC (2017). Energy Prices and Bills. Available here.
 The power sector already has extensive, and complex, carbon pricing instruments. Power generators pass charges to households, who pay a combination of a fluctuating EU ETS cost; an additional cost (the Carbon Price Support (CPS)) of £18/tCO2e.
 Figures based on estimates by the Green Finance Institute. Available here.