Carbon Tax: rethinking our approach to climate change

David Cowan 6.06am

Extremist views on either side of the climate change debate put policymakers in a difficult position. How do we balance the needs of the planet and our children’s futures with a competitive economy and individual liberty today?

Labour had an interventionist solution - the Climate Change Act 2008 - which pledged to cut greenhouse gas emissions by 80 per cent by 2050. The relentless focus on outcomes instead of means, and the belief that merely passing laws will solve problems, have hindered climate change policy.

David Cameron promised this coalition Government would be the ‘greenest government ever’ with proposals for the Green Deal, a £3 billion Green Investment Bank, and a carbon floor price of £30 per tonne by 2020 (see also Nik’s article in May). In addition are the plethora of ‘green taxes’ like the Climate Change Levy and Fuel Duty - it is questionable to what extent these tackle the central problem of carbon emissions.

It can be argued that these measures have exacerbated the energy price increases caused by the global commodities bubble and ‘oil shock’ in the Middle East - according to some reports, as much as £200 has been added to the average family’s energy bill.

What other solutions are there? Cap-and-trade programmes may appear to be satisfactory free market answers. However, a centralised bureaucracy would have to administer the auction of carbon permits, which would only increase the already hefty compliance costs for British businesses, so potentially deterring enterprise, investment and job creation.

Many, such as Lord Heseltine, would argue that we should liberate the market so that ‘green’ entrepreneurs and ‘green’ businesses can produce ‘green’ products and reduce carbon emissions, be cost effective, and high quality. This is certainly the best option but the state can still act to help move Britain towards a low-carbon economy by reforming ‘green’ taxation.

The least economically damaging form of carbon pricing is to replace all the numerous ‘green taxes’ and emission controls with a ‘single tax’ on the burning of fossil fuels in proportion to their carbon content. This Carbon Tax would help to tackle the negative externalities of carbon dioxide emissions as well as avoid increased bureaucracy and greater compliance costs for businesses. We could also experiment with charges for pollution and congestion.

Climate change has to be dealt with but governments must resist just saying ‘something must be done’. A Carbon Tax is the most effective and simplest measure to replace harmful environmental regulations whilst actively discouraging unsustainable levels of emissions. Nevertheless, it will be the market, not the state, that will provide the most viable solutions. 

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