Go Tax Revenue-Neutral to go to Carbon Tax

The majority of economists surveyed by Initiatives on Global Markets Forum believe that a carbon tax is the most effective means of reducing carbon emissions while minimising the costs. In light of this, why does the phrase ‘carbon tax’ often elicit such opposition? 

The UK has taken a rather piecemeal and limited approach to taxing emissions – often taxing fossil fuels rather than emissions produced. Until 1999, there was the Fuel Duty Escalator (FDE), which essentially equated to a carbon tax on retail petroleum products. The FDE was resurrected as Fuel Duty Stabiliser in 2011. The UK also has Petroleum Revenue Tax and Fuel Duty. The Climate Change Levy, introduced in 2001, is perhaps the closest thing the UK has ever had to a carbon tax.

What is most striking about the aforementioned taxes is that only the Petroleum Revenue Tax calls a spade a spade: these measures are taxes, dues demanded from the state on threat of violence. In answer to our earlier question, the reason ‘carbon tax’ elicits such hostility is that, in general, taxpayers do not want to pay more in tax – and understandably so. Successive governments have attempted to euphemise environmental taxes as ‘duties’ and ‘levies’ which, although synonymous with taxation, serves to numb some of the fiscal sting that taxes inflict.

It follows from this, then, that if one wants to garner support for carbon taxes – as a means of reducing the negative externalities of our emission-producing behaviour – it would be prudent to ensure that carbon taxes do not prove burdensome. A promising approach for ensuring this is to off-set the tax burden created by a carbon tax by slashing other taxes. For example, if the carbon tax raises £2 billion, slash VAT rates in a way that would reduce VAT receipts by £2 billion.

In making carbon taxes tax-neutral, the government can repudiate the criticism that environmental concerns are being used as a pretext for higher taxes and further state control. This fear pervades much of the right-wing and libertarian movement in both the UK and the US. For example, Emma Roberts, writing in Real Clear Politics (24/09/2019), warned: “The government wants control. And its excuse is the thin veil of only wanting the best for people and the Earth.” Likewise, writing for the Washington Examiner (23/09/2019), Brad Polumbo argued that “The climate change protests are a Trojan horse for socialism.” While that is an extreme view that may seem alien to more centrist political observers, for many hostile to government expansion and intrusion, opposition to carbon taxes stem from a state that greedily relies on the taxpayer.  It is imperative, as the British Conservation Alliance strives to do, to disassociate carbon taxes from socialism or an overzealous state. By integrating carbon taxes as part of wider, revenue-neutral tax reform, it is possible to further that disassociation.

Would it work? The evidence suggests so. The idea of off-setting carbon taxes with other tax cuts to render it revenue-neutral is not novel. Revenue-neutral carbon taxes were introduced in British Colombia in 2008, covering 70% of the Canadian province’s emissions – and the policy has proved to be a success. A study by the Smart Propensity Institute found fuel consumption declined by 8.8% relative to the rest of Canada without any adverse effect on GDP, while reducing also boosting disposal income by slashing other taxes by over $500 million over a five year period. Why such a decline? Because the tax not only disincentives pollution, but actively incentivises people to reduce their carbon footprint by promising them reductions to more burdensome taxes, like income taxes and sales taxes. It is punitive on emissions, not on taxpayers.

In the case of the UK, while this can remain an open-question that can and should be debated across the political spectrum, it would be particularly useful to use the tax revenue to reduce or even abolish the 5% VAT rate, thereby exempting the products within that rate from VAT altogether. Energy-saving construction materials, for example, could be made cheaper, which would in turn reduce the cost of ‘green housing’. Disability mobility aids would also be exempted from tax, reducing the cost for many of the most vulnerable in our society, as would smoking cessation products, which would also reduce strain on the NHS. In short, a revenue-neutral carbon tax would disincentivise the production of harmful of emissions while reducing the cost of a great deal of important products.

A carbon tax need not be synonymous with a more burdensome tax regime or an expansionary state. On the contrary, it can be consistent with reducing the tax burden for the vast majority of people. It is a proposal that can command cross-party support for it maintains tax receipts (to satisfy Labour) but reduces the tax burden on most (to satisfy advocates of small government). Polluters themselves will bear the cost of their emissions. A carbon tax is necessary for the environment, but it should not increase the tax burden on ordinary people. 

Matthew Norris