How to solve climate change and slash income tax at the same time

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We’ve reached a tipping point in climate awareness. The brutal summer of 2018 — of heatwaves, wildfires, droughts and crop failures — brought home to voters what scientists have been predicting for thirty years. People are scared. If this is what happens at less than one degree of warming what will happen to our children who face a future of three or four degrees or more? Our politicians are largely silent, pre-occupied with populism, Brexit, Trump, internal party fights and austerity. Our media love a disaster and an emergency but will mostly fight radical political measures that threaten the status quo.

And even passionate and concerned people have a sense of powerlessness. What can I do? Does recycling my waste or buying an electric car really make much of a difference? Isn’t rapacious capitalism careering helplessly out of control towards its own hellfire destruction?

I believe the situation is grave, but we still have time, just about, to reverse carbon pollution and stabilise our climate. The reason I write this is because of the 6 C’s of optimism for action. The 6 C’s are coal elimination, climate lawsuits, carbon taxes, co-operative innovation, city power, and corporate self-interest. These pillars of climate response are happening below the radar of national politics and media headlines. Each and every one of us can add our voice and energy to these pillars of hope.

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“The politicians, who have ears but no eyes, will not attend to the persuasion until it reverberates back to them as an echo from the great public.” John Maynard Keynes

Keynes told us that for politicians to act we must engage with the great public to understand their fears and conflicts about livelihoods and environment, and to mobilise for a better future.

Photo by Marcus Kauffman on Unsplash
“The 6 C’s are coal elimination, climate lawsuits, carbon taxes, co-operative innovation, city power and corporate self-interest.”

In this post I focus only on carbon taxes? No one likes taxes. Politicians treat the word ‘tax’ as an obscenity, a guarantee to lose votes. Yet I believe a progressive political party could make a carbon tax enormously attractive. Because carbon taxes should not add to the tax burden. They should be a substitute for income tax. The aim is to replace taxes on GOOD things, like income from hard work, with taxes on BAD things like buying products that increase carbon emissions.

If you said to your electors we shall cut your income tax by half, and replace government revenues through increased carbon taxes in order to tackle our environmental crisis, many people, especially poorer families, would find this a good deal. Yet I haven’t heard this argument put forward by major American or British politicians in any serious way.

So far carbon taxes have not been easy to implement or sustain. Recently, Republican grandees in the USA, James Baker, Paul Volcker and Hank Paulson, put forward the idea of a carbon tax, where the tax collected was distributed directly to citizens whose carbon usage was less. As US Republicans they reasoned that citizens are more likely to value a carbon tax where they see immediate personal benefit than where taxes collected enter government coffers. So far, their idea has fallen on deaf political ears, even though large oil companies have said they will accept a tax if it is applied across the board.

What is a carbon fee?

Governments must encourage companies and households to pollute less by using cleaner technology and green practices. They can do it by placing a price on carbon emissions through a carbon fee. This is a surcharge on carbon-based fuels or carbon pollution arising from industrial processes. For example, a flight from London to Rome might cost you $100 on a low cost airline. But this price does not include the environmental costs of air fuel pollution. With a carbon fee the flight might cost $180. But if your income tax is halved, you as a consumer can make a choice. Maybe you decide to take a train to Rome. Or you decide to holiday in the UK instead.

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Likewise if your supermarket paid the environmental price of importing vegetables from Peru or Kenya their price would be much higher. Local production in the UK or US would be far more cost-effective. So a carbon tax would shift consumption towards local producers and benefit the economy in other ways.

The carbon price that is set drives the extent to which green choices are encouraged, such as uptake of zero carbon electricity contracts derived from solar and wind power. Polluting activities become more expensive, green products become cheaper and so will be used more. And creative green companies will innovate and invest in green solutions.

“A table full of vegetables including celery and carrots at Marché aux Fleurs” by Peter Wendt on Unsplash

Three common criticisms of carbon taxes are

  1. High carbon taxes will damage the productivity of an economy
  2. Carbon taxes discriminate against poor people in rural areas who depend upon cars.
  3. A Cap and Trade system is better than a carbon tax.

Lets consider these three issues.

High carbon taxes do NOT damage the productivity of an economy

In 1991 Sweden introduced a carbon tax to reduce greenhouse gas emissions. Their Ministry of the Environment believe the carbon tax has directly cut emissions by 20 per cent, over and above other regulations. This meant that Sweden reached its 2012 target under the Kyoto Protocol. Sweden’s carbon tax is way higher than most other countries. The average carbon tax across the world is around $11 per tonne. Sweden’s tax is set at $140 per tonne of carbon pollution. Since the tax came in, their economy has more than doubled in size, and the country is joint sixth in the world on economic competitiveness.

In fact, the most competitive economy in the world is Switzerland. They were happy to raise their domestic carbon tax by 14% in 2018 to almost $100 per tonne of CO2 after their emissions from fossil fuels missed the country’s annual reduction targets. They are not concerned they will lose their number one spot.

2. Poor people in rural areas who depend upon cars can be protected.

This can be dealt with fairly simply by rebate cheques from local government based on agreed criteria and ratings based on location. Every state is different but local politicians could find a way to ensure the poorest and most remote families are protected.

3. A Cap and Trade system is better than a carbon tax.

In a cap-and-trade system, government caps the level of carbon pollution from industry and reduces that cap year on year to reach their pollution target. Each year as the cap gets tighter the government announces pollution quotas.

The system forces polluters that exceed their emissions quota to buy unused quotas from other companies. So non-polluting companies have an additional incentive. They can sell their unused quotas to other companies and make money. The market sets the price of quotas.

The EU prefers the cap and trade system because they believe the cap ensures pollution goes down. In this sense it has an advantage over a carbon tax because it builds certainty into emissions reductions. And companies are heavily incentivised to comply. By contrast, carbon taxes ensure the price of carbon pollution is set, but gives no guarantee about emissions cuts.

But a carbon tax has a crucial advantage. It is simple. Cap and trade requires complex legislation and regulation. Needless to say caps face intensive lobbying and legal loopholes. The transaction costs may be high. And the buying and selling of quotas requires the administration and functioning of an emissions trading market. A tax is much simpler and more transparent.

But a carbon tax does need governments to be straight with their voters. A recent paper from the Grantham Institute emphasises that governments must engage with their voters to explain the nature and benefits of carbon taxes. These would include:

  • Expected greenhouse gas reductions arising from the tax
  • Expected ‘co-benefits’ (for example, reduced traffic congestion, air pollution and health costs; improved atmospheric visibility, health and quality of life)
  • Expected variation in cost for goods most likely to be affected by the tax
  • Impacts on average household income and the economy, including potential competitiveness effects and job losses
  • Impacts on low-income household
Photo by Marcus Kauffman on Unsplash

This summer was a horrible wake up call for all of us. We must act now. The solutions are there but we must all pressure our politicians to ensure that policies on carbon tax and cap-and-trade rise up the political agenda. Only 13% of the world economy is covered by carbon taxes. The carbon intensity of our global energy system HAS NOT CHANGED since 1990. We’re sleep-walking towards an environmental catastrophe.

We’ve been talking about climate change for twenty years but carbon emissions inexorably rise, global warming is real, it is caused by us, and if we do nothing, the future for our children will be grim. This should be the number one global political priority.