What is a carbon price and why do we need it? Is it coming?
It’s a price charged to fossil fuels to take into account the cost of their pollution. Basically it makes them more expensive so clean energy is more attractive. Fossil fuels emit greenhouse gases which raises the temperature of the climate.
To keep the climate at a liveable temperature we need to stop burning fossil fuels, but we can’t without having an affordable alternative. A steadily rising carbon tax and dividend is the way forward favoured by over 3,600 US economists, including 28 Nobel laureates. The group has stated that “a carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary”, continuing “all revenues should be returned directly to citizens… to maximize fairness and political viability”. This is the largest public statement of economists in history. The Citizens Climate Lobby US website details the economic and social benefits such a tax could bring to the US, including preventing 4.5 million deaths from air pollution over 50 years.
The International Monetary Fund (IMF) also supports a rising carbon price as well as green stimulus packages (Oct ’20). Despite stating the case for huge green stimulus packages they estimate that 80% of the emissions reductions will be achieved by the carbon pricing element. The IMF reiterated their position in June ’21. Climate Interactive has produced an online climate change solutions simulator which can be used to simulate and test different climate change mitigation policies. It can be used to compare the effect of carbon pricing against other mitigation policies.
- Current projections indicate the planet is on track for a baseline global warming 3.6ºCby 2100.
- Ending fossil fuel subsidies made no material difference: 3.6ºC
- Subsidizing renewables barely budged the global temperature: 3.5ºC
- Subsidizing renewables + aggressively taxing Fossil Fuels: 3.0ºC
- Pricing greenhouse gas (carbon) pollution as per IPCC recommendations: 2.6ºC.
In 2021 the idea of Climate Income has gained ground across the political spectrum, from the left leaning IPPR report to the right wing Centre for Policy Studies.
How will Climate Income make a carbon price fair?
Climate Income would be fair because the carbon fee is not treated by the government as a source of income. All or most of the fee which is collected from Greenhouse gas (GHG) emitters is returned to the population as a ‘dividend’. This enables the fee to gradually rise to price fossil fuel based products out of the market whilst cushioning the effect of the rising prices to consumers.
After it was introduced in British Columbia in 2008 the policy was approved by 63% of the public; only 17% didn’t like it. The study on impacts on the US economy published by REMI in 2014, predicted that people on a low-income would actually receive more in the dividend than they pay out in the rising prices of carbon intensive goods. In Canada since the Climate Action Incentive Payment policy was implemented in 2019 the majority of households actually receive more in payments than they face in costs. In October 2021 the Austrian government announced that it was planning a Climate Income policy.
The Grantham Institute did a study on the UK scenario in 2019.
Won’t companies just move to China instead if we increase business fossil fuels charges?
A Climate Income policy works best with a Carbon Border Carbon Adjustment Mechanism (CBAM), known in the UK as a Border Carbon Adjustment (BCA). Border Carbon Adjustments prevent what is called ‘carbon leakage’ where cheaper, ‘dirtier’ imports gain market share…….. Imported fuels or products would be liable to a fee based on the carbon emitted in their production, unless they can show they have already paid a carbon price – either way there is an incentive to reduce the carbon intensity of the product. Exports from this country would have their carbon fee refunded.
The EU are introducing a CBAM from January 2023, Canada are at the planning stage of implementation as of 2021 and a bill has been proposed in the US. Turkey exports a lot of carbon intensive products like metals to Europe, it would have to pay 580 million euros in CBAM tariffs and lose 1.125 million jobs in the heavy industry sector. Consequently it is considering implementing a carbon pricing ETS to prevent it having to pay the tariffs and possibly raise revenue of about 13 billion euros, (as of July 2021).
The concern shown by countries such as Turkey, Russia, China and the US in 2021 shows that a CBAM policy will be effective.
How much more expensive would my energy bill get?
The prices of energy such as gas would rise but the costs will be offset by the dividend. Currently in the UK electricity is more expensive for domestic heating than gas, (6X more expensive per kwh), despite the growth of renewable sources. This is in part because tariffs to pay for renewables were added to electricity bills.
Under Climate Income green electricity wouldn’t incur the carbon fee so would become cheaper than gas, as it should be. The steadily rising price of fossil fuel based heating such as gas central heating would also make the cost of insulation and retrofitting more cost effective, as the ‘pay back’ time would be cut. A Swede is 35 times more likely to buy a heat pump than a Brit – because electric heat pumps provide the cheapest form of heating in Sweden.
The government should also have measures to help people retrofit their houses as well as the dividend, as is the case in Canada and Switzerland (the two countries which have implemented Climate Income as of 2021). In Canada 10% and in Switzerland 33% of the dividend funds the retrofitting of public buildings.The 2018 Policy Exchange report The Future of Carbon Pricing (p.75) suggested that consumers could be incentivised to future proof their homes by borrowing against the carbon dividend for energy efficiency investments (presumably interest free).
What’s the point of taxing people and then giving the money back to them?
People aren’t directly taxed, the producers of fossil fuels have to pay the carbon fee, this is called ‘upstream pricing’. The consumer will pay the rising cost of the product as the cost to the producer increases, but the dividend will offset the costs. Greener alternatives to gas and petrol will become cheaper to produce and for the consumer to buy. The policy should also be accompanied by support to help consumers retrofit their homes, as in Canada.
I live in a rural area and have to drive every day. Will a Climate Income cost me a lot of money?
The Government has pledged to ban the sale of new petrol and diesel cars in 2030. In the meantime Climate Income would reduce the cost gap as running a petrol car becomes more expensive, the policy would increase sales and lessen the cost of EVs.
How do we protect vulnerable people in society from rising energy costs?
The dividend protects vulnerable people by returning more to them as a dividend than what they pay in rising fuel costs. In Canada the majority of households receive more in payments than they face in costs.
Climate Income would help make policies such as insulation and retrofitting more cost effective as costs are set against the rising cost of remaining with gas or oil heating, it should not be the only policy to encourage retrofitting, and is not in Canada and Switzerland,see previous question on energy bills. For further information read “The Myth that Carbon Taxes hurt the Poor“
Why not invest money from the carbon tax in green projects?
A proportion of the dividend in Canada and Switzerland goes to retrofitting projects. As in these countries, Climate Income should not be the only means of incentivising decarbonisation. The effectiveness of Climate Income is reduced, however, if most of the fee is given to green projects which will only benefit certain areas of the country or income groups. It also renders the policy unfair, see A People’s Dividend would be welcome but transparency is preferred and What is the IPPR report suggesting.
Why are you just tinkering around with capitalism when capitalism is what got us into this mess in the first place? We need to change the system!
Changing the system would not happen soon enough even if the collateral damage was considered acceptable. This is a realistic plan which can be implemented in the here and now. The 2014 US Remi report estimated that a climate income policy would cut GHG by 33 percent in ten years. The Canadian Government’s estimated results of the federal carbon pollution pricing system: states that Carbon pricing alone will prevent 80-90 MT of Greenhouse gas emissions by 2022 (from 2019)! A useful explanation for non experts was published in August 2021. What is Canada’s National Carbon Tax and how does it affect us?
A universally applied and predictably rising carbon price sends the message that it’s not business as usual. It is also incentivises Carbon Carbon Capture and Sequestration to offset the carbon fees, which whether we like it or not will have to be utilised even if we stop emitting GHG right now!
Other countries need to do their bit and are far worse offenders
The UK could be said to have a moral duty, as kickstarter and beneficiary of the Industrial Revolution, to be at the helm of the new revolution. It is often argued that we are small fry in the global emissions stakes but that is in part because we have subsequently exported our industrial emissions so that countries like China and India are now the big emitters.
Promoting an efficient and fair carbon pricing system with a Carbon Border Adjustment Mechanism in the UK would send a clear message to other countries of the benefits of such a system. Countries such as the Turkey, the US, China and Russia are already concerned about the effect of EU CBAM.
Is there evidence that CF&D has changed producer and consumer behaviour?
The Climate Income policy adopted by the Canadian Federal Government in January 2019 was inspired by the results of a revenue neutral carbon tax policy implemented in British Columbia since 2008…….
Greenhouse Gas emissions fell by 5 to 15% from what they would have otherwise been. The policy increased the purchase of more fuel-efficient cars, decreased consumption of natural gas use and there was a rise in employment rates rather than job losses. Analytical Advisors, an Ottawa-based firm that monitors Canada’s clean technology sector, reported in CCL news in (20/9/16) that sales in British Columbia’s clean technology industry increased by 48 percent in two years after the introduction of the province’s revenue neutral carbon tax in 2008.
Nice in theory but what kind of sums are we talking about?
CCL has calculated what revenue and dividends Climate Income could raise in the UK. The Carbon price revenue is based on the Office for National Statistics data on carbon emissions. ONS data could be used to determine what each fossil fuel producer will pay. The calculation has been based on commencing in 2022 using the 2020 carbon emissions figure of 400m tonnes, with the carbon price levied at $20 per tonne, this will rise by $20 pa to S180 by 2030, reaching the IMF suggested Carbon Price Floor of $75+ by 2025 (a barrel of oil produces 0.48 t of carbon). The calculations given assume that the price rises will encourage decarbonisation with a subsequent fall in emissions of 10% pa.
The dividend is based on the current adult population of 56 million and children of 11 million, this is not an exact science as it is likely that the first two children will get the dividend (half of adult dividend) as in Canada. Using this data adults would receive $130 in 2022 and $504 in 2030. It is likely that the carbon price may start at a higher rate than the one used in these calculations as the UK ETS carbon price is currently over £50.
We do not envisage that Climate Income alone would cover the cost of retrofitting and it does not do so in Canada or Switzerland (where it is given as a return on health insurance fees), there would need to be other government incentives for retrofitting. The predictably rising price of fossil fuels will however ensure that both industry and households will find decarbonisation worthwhile and the ‘pay back time’ will be much sooner than is currently the case. In 2018 Policy Exchange suggested retrofitting loans could be taken out against future dividend payments. Also see our UK-household climate-income calculator.
Predicted carbon fee and dividend revenues.
|Year||C02 1000s tonnes||Change on year||Fee($)||Tonne Total Revenue ($m)||$ Per Adult (56m)||$ Per Child (11m)|
Last, but certainly not least, the Government has already acknowledged the merits of Climate Income……..
Advocates of the approach highlight that a well-designed scheme would have social and environmental benefits, equitably distributing the revenues and stimulating investment in low carbon technologies……..emissions to be reduced in a cost effective and technology-neutral way, while mobilising the private sector to invest in emissions reduction technologies and measures.