The future of carbon pricing

A economy-wide carbon tax paid by both domestic and international producers would prevent carbon leakage, level the playing field for Britain’s heavy industry, fund a dividend to be paid to taxpayers and tackle climate change, argues the new report from Policy Exchange’s influential Energy unit, The Future of Carbon Pricing: Implementing an independent carbon tax with dividends in the UK. A better approach would reduce the cost of decarbonisation, prevent the offshoring of emissions and make carbon pricing popular. The UK is already a world leader in climate action and should build on our track record to implement a system of carbon pricing that really works, overcoming a market failure that does great harm to the environment. The report recommends that, although Brexit makes it likely the UK will leave initiatives overseen by the ECJ such as the EU’s Emissions Trading Scheme, the UK should remain a member of the ETS until the end of the third trading period at the start of 2021.

At this point, Policy Exchange recommends that the UK should take the opportunity to innovate in carbon pricing with an independent carbon tax which would: Be steadily rising and economy-wide, paid by companies that sell fossil fuels in the UK (though ordinary citizens will be protected from price rises through the recycling of tax revenue back into their pockets). The tax would initially continue at the level at which the UK leaves the EU ETS in 2021, and steadily rise at a rate set by an independent body such as the Climate Change Committee to give the policy institutional certainty and bankability. Be structured around border carbon adjustments, to create a level playing field for domestic and international producers so that companies which export carbon intensive products into the UK will be subject to the same level of carbon tax as domestic producers, helping industries like the British steel sector. Fund dividends from carbon taxation that are returned directly to the public in an annual lump sum, to lock in political and public support for fighting climate change. People would be able to borrow against their future dividend payments for investments in energy efficiency. Allow a rationalisation of environment regulations without reducing environmental protection, as an economy-wide carbon tax will make a number of existing carbon taxes and policies redundant. Eventually at least 10 direct carbon taxes would be rationalised into a single unified price paid for emitting carbon dioxide and other greenhouse gases in the UK. For example, we would no longer need the Climate Change Levy, but we should continue with energy efficiency standards and energy labelling.

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