We respond to the HM Treasury Carbon Emissions Tax Consultation…

The UK’s withdrawal from the EU Emissions Trading System and the implementation of a UK Emissions Trading System (ETS) provides the UK with a historic opportunity to improve the economy-wide coherence of incentives to reduce emissions and achieve Net Zero by 2050.

This also represents an opportunity to introduce enduring carbon policy improvements that will enhance the market environment for low and zero carbon innovation across the UK economy.

Net Zero carbon policy

Energy Systems Catapults work on Net Zero Carbon Policy points to the advantages of taking a sector-led approach to policy for reducing emissions, allowing policy packages to be designed to address sector-specific challenges without sacrificing the overall coherence of incentives across the economy.

Our work also points to the difficulty of placing a high reliance on generic carbon pricing instruments alone (e.g. a widely applicable carbon tax) to drive the investment and innovation needed across very
different economic sectors. Therefore, if it is not possible to design and apply a UK ETS from 1st January 2021 (resulting in the need to apply a Carbon Emissions Tax).

Does Carbon Tax reduce emissions?

Our view is that such a Carbon Emissions Tax (CET) should only be applied as a temporary measure, while a fuller Net Zero consistent sector-specific set of carbon policies, including carbon trading, is developed for implementation. The temporary nature of a CET should be clearly communicated and supported by clear plans and timelines to replace it with a UK ETS and/or sectoral carbon standards and trading mechanisms (as described in our report Accelerating to Net Zero: A sector-led approach to an economy-wide carbon policy framework).

Carbon Emissions Tax UK: Key points

When considering a CET, we suggest the following are taken into account by HMT:

• Revenue recycling should be clear from the outset, in particular, to assist in addressing potential distributional impacts of a CET.
• For industry, options should be developed to improve or replace allocation of free allowances, be it under a UK ETS or by proxy through a CET, to mitigate carbon leakage and competitiveness impacts for energy intensive, trade-exposed industries; including tradeable performance standards and border carbon adjustment.
• Incentivising negative emissions, we propose that a marketplace for nature-based greenhouse gas removals (GGR) is developed, using the framework provided by the Environment Bill 2020, paying farmers (using public money) in return for providing public goods. Eventually, the GGR marketplace could be expanded to include technology-based negative emissions, from technologies such as direct air capture and bioenergy with carbon capture and storage.
• Addressing the low and uneven nature of carbon pricing policy, in particular, the impact on consumer choice where relative prices continue to tilt in favour of higher carbon options.