How can tax help to fight the climate crisis?

By Charles Seaford, Senior Fellow

The Prime Minister recently announced a new target for UK greenhouse gas emissions reductions by 2030 – 68% of 1990 levels, or 42% of current levels. What role could tax, and especially a carbon tax, play in achieving this? 

Tax can help drive two kinds of change: technological, and consumer behaviour. The former is politically easier, but even here, we need to be careful. Take the transition to electric cars and away from gas central heating. Because the nature of the change is fairly well defined, government can regulate, and, where necessary, invest in infrastructure (e.g. charging points). Tax is not the star of the show, although it may have a part to play. For example, it may be worth increasing taxes on new petrol cars before they are banned. However, we shouldn’t slam on fuel duty or an equivalent: as those we interviewed in our recent research put it – this would ‘punish’ those who have no choice about transport mode, and who can’t afford an electric car. It wouldn’t make much difference to emissions and would be hugely unpopular. 

Tax is likely to play a more prominent role where the technological change we need is less easy to specify in advance than electric cars – and therefore more difficult to regulate. In such cases, tax can stimulate innovation by making carbon inefficient processes and products relatively more expensive than carbon efficient ones. The sugar tax provides a good analogy: its main benefit was to stimulate innovation in fizzy drink manufacturing, which meant consumers got more or less the same product but with less sugar in it. We might expect a plastic packaging tax – which the public is overwhelmingly in favour of – to work in a similar way.

At a recent webinar I spoke at, business representatives were keener on tax breaks on pro-environmental activity than penalising their use of carbon – not surprisingly. But when pressed on the need to raise more tax overall given Covid and the ageing population, they agreed that a fiscally neutral package would work. But tax breaks need to be treated with care: the public are highly suspicious of them, and their track record is mixed. Given the need to raise more tax, they are only justified when carbon taxes or their equivalent clearly won’t stimulate innovation.

In some areas technology won’t deliver what we need, and so the focus is on changing consumer behaviour. Using tax may be part of this process, but it is much more tricky. 

Take air travel. Participants in the deliberative groups that formed part of our research were divided on whether to introduce VAT on flights. A compromise view emerged which was don’t impose it on the first return flight people make in a year, but do impose it on subsequent flights. This might be too complicated – and people may feel that the implicit rationing it involves (one flight a year) is too authoritarian.  However it is worth investigating whether some mix of tax and rationing of this type would both be acceptable to the public and reduce demand. 

Taxes on flights are potentially regressive, hitting those on low incomes hardest, as are taxes on other carbon-heavy products. One solution that has been widely canvassed is paying the proceeds of a carbon tax as a universal citizen’s dividend. Of course the dividend would dwindle as the behavioural objectives of the tax were achieved, but by then, it is suggested, people would have got used to new consumption patterns. 

Clearly this could help,  but it is naïve to think that it is bound to solve the problem. People may resent the fact that something they value and that had felt cheap before had become expensive – even if the extra cost were less than the extra income they received. They would face a change in lifestyle and loss of freedom, not simply loss of income. So while dividends may be useful, their effectiveness at reducing opposition would need to be carefully researched. 

Meat is another tricky area. Changes to farming practices may reduce but will not eliminate associated greenhouse gas emissions. The Climate Assembly – a deliberative process conducted with members of the public earlier this year – suggested that we might get consumption down by between 20% and 40%, and the Climate Change Committee has suggested that we can persuade people to eat less but better quality meat. The Daily Express then reported that ‘fury has erupted’. Perhaps processed food producers could be incentivised to reduce meat content in the way that the sugar tax incentivised fizzy drinks producers. But when it comes to fresh meat, this is probably more like smoking, where a prolonged communications campaign played the main role. There may also be clever ways of designing incentives in the supply chain and for the consumer that would not feel like a burden. Again, this merits more thought. 

Tax will have a major role to play in the transition to zero carbon, but it won’t be a matter of applying a blanket carbon tax, even if accompanied by a dividend. Sometimes the heavy lifting will be done by regulation and infrastructure investment. Sometimes soft rationing and communications may be more important. But tax – and where absolutely necessary tax breaks – can incentivise business innovation, and may be a price that citizens are prepared to pay themselves to some extent.