I posted this article on the Linked In Citizens’ Climate Europe page on the 22nd January and have been asked to reproduce it here. I hope you find it a helpful ‘take’ on the current crisis.
The current fuel crisis is creating problems for governments in the UK and Europe. The conundrum is based on the combination of underlying energy costs, environmental taxation, poverty alleviation and climate policy, all overlapping in a complex mix. Finding a solution that keeps advocates of each policy and it’s raison d’etre supportive is challenging. Here we look at how leaving the EU offers the UK a simpler approach. Climate Income can be used to address the short term imperatives of the rising gas prices, “levelling up” the inequality in the UK, provide a clear pathway to NetZero and make the UK economy more competitive.
Some of the main elements in the mix …
Gas prices are rising, and will continue for up to 2 years. Average household energy costs are set to rise by around £600 p.a. in 2022. Energy costs impact everyone, but while low and middle income families use less energy it’s a higher proportion of their income, hence why governments implement policies to address this.
To protect the vulnerable, old and poor, there have been various means tested financial supports introduced roughly every decade: in 1988 Cold Weather Payments; in 1997 Winter Fuel Payments; and in 2011 Warm Home Discounts. All essentially aiming to reduce the number of people suffering from cold or hunger in our first world economy.
In 2013 the UK Gov introduced the “Environmental and social levies” to fund energy efficiency, encouraging low carbon generation and reducing fuel poverty. The levies are 10x higher for electricity bills than gas bills. At the time 35% of the UK’s electricity production was from coal, the most harmful fossil fuel for the climate and air quality.
Consequently in 2013 the UK Gov also introduced the Carbon Floor price, initially at £16 (above the EU-ETS at the time) and set to rise to £30 by 2020 (which would now be below the EU-ETS). This has seen Coal reduced to 2% or less (20x smaller) for electricity production. The UK established (EU approved) measures to protect industry and now the EU itself is driving international dialogue on Carbon Border Adjustments.
Whilst prices fluctuate over time, these policies raise prices for things that pollute (or used to pollute), and at the same time try to alleviate the financial burden on the poorest. The apparently conflicting problems of poverty and climate change. Ironically most of the people living a lifestyle compatible with 1.5ºC are the poorest in society, with the richest 10% causing as much pollution as the other 90% combined.
Climate Income – the solution?
Climate Income is a revenue neutral, steadily increasing price on pollution fully rebated to all citizens. Revenue neutral means there is no cost to the government, and, significantly, no revenue for the government. The steadily increasing Carbon Price follows the polluter pays principle embedded in UK legislation for nearly 50 years. The key part is returning the money to all citizens equally in a fair monthly payment, much like how child benefits or pensions are paid. Despite the rising costs, the poorest 20% could be £500 better off, enough to match the one of the current UK government suggestions.
London School of Economics data from 2019.
The rest of society would be proportionally affected depending on the pollution they cause. Once the gas price spike settles over half the population would be better off. The exact amount depends on the level of price introduced. LSE modelled a £40 /tCO2 charge, above the current £18 and the planned £30 level, though significantly below the current UK ETS price circa £75.
This type of approach is intrinsically fair, sharing the responsibility and rewards equally on everyone. In Canada a form of Climate Income has been operational since 2019 and the public increasingly understand and support it, re-electing in 2021 parties in favour.
Above all, it must be clear to the public that this represents a rebalancing of the tax base, in order to incentivise greener technologies and activities, and not simply a backdoor way of the Treasury taking more cash from their pockets.
What does this mean for the Net Zero goal?
A clear path to NetZero is supported by aligning the steadily increasing price to the data from the IPCC 1.5ºC report and the latest International Energy Authority report which suggest most (70%+) of NetZero can be achieved with such pricing. What this illustrates is that the long term NetZero objective actually helps clarify how the UK Gov might proceed with other related policy options currently under discussion.
- Subsuming the current Environmental and social levies – reducing the bias against cleaner electricity and shifting the costs more to polluting gas, whilst delivering on the environmental and social objectives.
- Removing VAT from household energy bills would be a cost to the treasury that would enable a higher Carbon price, reinforcing 1 above.
- Both above measures reduce pressure on the various means tested support programs over time. As the Carbon price rises each year the policy is increasingly progressive, enabling simplification and reduced bureaucratic burden on people and the state.
- Windfall taxes might also reduce the immediate financial burden on the treasury enabling more of the existing carbon price (via the UK ETS) to be returned to citizens.
- Rebating the money to citizens gives industry the confidence to pass costs on to consumers regardless of how the price rises domestically.
- The ETS (copied from the EU) could be replaced by a simpler and more predictable economy-wide carbon price that allows industry to plan and invest with more certainty.
- Such pricing strengthens the UK economy to exploit the international trade advantage that already exists in the eyes of this US assessment as the EU and others pursue Border Carbon Adjustments. It also helps create the investment case for industry in the inevitable green revolution the world needs over the next 30 years.
It could be argued, however, that the current path, with various different ways to raise energy prices and tax revenue whilst only offering minimal and creeping support for the most vulnerable mirrors exactly what unfolded in France with the Yellow Vest movement. Indeed the parallel is further matched by a spike in prices being the trigger to public discontent to such policy creep. In France it was an oil price spike after 4 years of gradual price increases that drew public anger, today it’s gas.
So to round up here’s a summary other expert opinions that endorse some or all of what is proposed in Climate Income:
- All living Nobel Laureate economists
- The Policy Exchange in 2018 (backed by William Hague and Alistair Darling)
- Centre for Policy Studies in 2021 (backed by Stanley Johnson)
- Scottish Citizens Assembly on Climate (77% public backing)
- Our World in Data (carbon pricing support)
- The Canadian Government
- The Swiss Government
- The Carbon Pricing Leadership Coalition (UK Gov is a member)
- World Economic Forum (carbon pricing works)
None of these experts are saying this is a magic bullet that fixes everything. They all broadly agree that it is the single most important tool to address climate change. It can also show us how to navigate the short term energy price spike and re-align our worthy intentions in other areas. As Our World in Data summarises:
“What’s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have. “