2021 CTA Address – carbon taxes are an equitable route out of the climate crisis, but fraught with political challenges
This year’s Chartered Tax Advisers’ (CTA) Address focused on the subject of environmental taxation and the role that tax and other carbon pricing mechanisms can play in helping the United Kingdom and other countries to achieve their net zero carbon ambitions.
Chaired by CIOT President Peter Rayney, the address was given by Sir Dieter Helm, Professor of Economic Policy at the University of Oxford and a former independent chair of the UK government’s Natural Capital Committee.
Joining Sir Dieter for a panel discussion were Jill Rutter, Senior Fellow at the Institute for Government, and Jason Collins, Head of Tax at Pinsent Masons and chair of the CIOT’s recently established Climate Change Working Group.
1. Guiding principles for the development of carbon taxes
One of the leading thinkers in energy and environmental economics, Sir Dieter Helm provided the audience with an overview of the general principles that could help governments to achieve net zero through the tax system.
Helm began by emphasising that the tax system provided a superior way of tackling environmental issues over other forms of state intervention. In general, markets and prices provided a more efficient way of allocating resources, compared to other forms of intervention, such as through the planning system. Unless the tax system can be harnessed to support climate ambitions, the result would be an inefficient and distorted market tilted in favour of polluters, he argued.
Helm noted that carbon taxation helped to ensure accountability for those responsible for pollution.
He said that it was people, not companies, who were ultimately responsible for pollution, and acknowledged the political challenges that this presented:
“Have no illusion, the polluters are you and me. Companies do things which are polluting on our behalf… (oil companies) don’t produce oil for the fun of it, they produce oil because you and me may put that in our car, in our heating systems and in many of the plastics and petrochemicals that we buy”.
Secondly, Helm explained why carbon taxes provided an ‘equitable’ response to the challenge of paying for pollution:
“It is right that those who cause harm should have to pay for the consequences of the harm they cause. It is not right that those who are harmed should pick up the bill to clean up the harm that’s caused to them”.
Lastly, Helm considered the administrative benefits of using the tax system to encourage environmental behavioural change, outlining how a carbon tax could cut through vested interests and help to deliver equity:
“They (taxes) are much harder to lobby against. One of the reasons that vested interests and lobbyists love direct interventions and direct support for particular technologies in a complex way is it is much easier to capture regulators than it is HMRC. It’s much easier to set up powerful and very effective bodies… to go after specific interventions by governments and try to bend them to the interests of the lobbying party.
“One of the things lobbyists hate about environmental taxes is it’s really hard to capture them and to distort them… A general carbon tax across the economy stops the game playing [between sectors]. It makes everyone face the same terms and everyone has the weakness that they can’t distort the common price in their own particular interest”.
2. Setting pollution taxes – “try to be roughly right than perfectly wrong”
Helm then set out two methods that could be used to calculate the rate of tax to be paid.
The first of these would involve detailed studies and cost-benefit analyses to determine the optimal rate of tax. On this, he said:
“I think that’s utterly hopeless, because part of the point of using prices and markets is to use the information that comes through the way we behave and we don’t know how people are going to behave in the future”.
The second option – learning by taxing and adjusting as and when required – carried more favour with the professor:
“You put a carbon tax in place. You see what happens. Provided you have a clear target about what you want to achieve – net zero by 2050, 78 per cent reduction by 2035 – you then, in the light of what happens with your tax, you vary your tax to keep yourself on the path to the objective you want to achieve”.
He added: “I would like to be roughly right, rather than perfectly wrong, which is where we are right now with most of the main pollutions in the economy”.
3. What do we do with the money that is raised?
Professor Helm explained that there were many groups who would advocate for any monies raised through environmental taxes to be hypothecated and used to support solely environmental objectives.
He said that while there were ‘some attractions’ to this proposition, there were also drawbacks. One of the attractive propositions of environmental taxes, Helm suggested, was that they had the potential to take up a lot of the total tax burden in the economy:
“Taxing bad things like pollution is economically much better than taxing good things like labour.
“It may well be that the government might raise a lot of money through carbon and other pollution taxes, and it may actually decide to spend a lot of that money on decarbonisation… But strictly, in principle, those decisions should be separable”.
Helm said that for many people, pollution taxes are perceived as regressive in comparison with income taxes, which are viewed as more progressive. He partly attributed to this to the regressive nature of many of the climate policies currently in place, but described the suggestion as ‘pretty delusional’, arguing it was not at all clear that income taxes were more progressive than a pollution tax would be:
“Presumably Bill Gates’ private jet will be attracting quite a lot of carbon taxation in a way that someone of much more meagre means, who is consuming much less, might not be paying anything like that.”
He expressed a degree of confidence that governments would eventually move towards carbon taxes as a revenue raiser:
“not because I think anyone is going to be persuaded by the arguments. I think when they run out of all the other sources of money, governments will find that this is an attractive place to go”.
But he warned:
“If we achieve net zero, then we won’t be doing any more polluting, and then the carbon tax will be falling back to zero. So these taxes are there to induce a change in the structure of the economy, but once you’ve stopped doing the polluting, you don’t have any pollution taxes left…and that’s an important way to think about the revenues going forward.”
The case for net zero and addressing climate change
Helm said that it was a ‘fundamental but sad fact’ that despite an increase in the rhetoric around climate change, very little progress had been made since 1990 in tackling the issue. He noted that in each of the last 30 years, an extra 2 parts per million had been added to the carbon concentration in the atmosphere, even during times of significant economic shock, such as the global financial crisis of 2007-2008 and the global lockdowns in 2020 in response to the Coronavirus pandemic.
The professor argued that when looking at their own carbon emissions, countries must also take stock of the carbon that they import from abroad, from carbon intensive economies such as India and China. Even if the UK was to shut down the last of its energy intensive industries, it would still be contributing to global carbon emissions, either through foreign imports or through the natural environment.
That is why Helm has argued for a carbon price that will, among other factors, ensure that the polluter pays (based on consumption), includes a wider range of taxable industries, incentivises sequestration and encourages behavioural change.
Respondent – Jill Rutter
Jill Rutter expressed agreement with the principles outlined by Helm, but cautioned the need for political realism in designing future environmental tax policies.
As a veteran of the Treasury and 10 Downing Street, Rutter outlined some of the challenges encountered by the civil service in its attempts to develop carbon taxes.
These date back to the 1990s when, as a civil servant, she was involved in the development of options for environmental taxes that are ‘somewhere in the National Archives now… but not on the statute book’.
She added that the challenges encountered by government officials in taxing environmental ‘bads’ – such as the decision in the early 1990s to increase VAT on domestic heating, where successive governments backed down and then cut the tax, in the face of wider public concern over fuel poverty – were a deterrent to action.
Where changes to the tax system have been proposed, Rutter noted that they were often introduced under the guise of ‘commitments’ or ‘obligations’ (as opposed to being explicitly labelled as taxes) or had failed in their objectives.
Respondent – Jason Collins
Jason Collins noted the absence of an overall climate change tax policy in UK politics and cited figures showing that over the last decade, the percentage of overall tax revenue attributable to environmental taxes had fallen from 8 per cent to 6 per cent.
He said that there needed to be a more coherent approach across government departments and that this required a wholesale review. He argued that a carbon tax should be central to this thinking.
Collins added that any discussion on the future shape of UK climate tax policy would also need to take into consideration the role of tax exemptions as a way of encouraging positive behavioural changes; the need for stability and certainty for taxpayers; and the need for trade and social policies to offset negative impacts on taxpayers.
He said that the CIOT had called on the government to develop a strategic roadmap setting out its priorities for the tax system over the next 30 years and the potential role that carbon taxes would play in its overall approach to taxation.
Response – Sir Dieter Helm
Prior to the question and answer session, Sir Dieter Helm was given the opportunity to respond to the comments made by the other panelists.
He said it was clear that action is now needed to address climate concerns, which have gone from being a problem facing future generations to a problem affecting us in the here and now, in a relatively short space of time. He acknowledged the challenges of the political economy, with voters reluctant to pay more and politicians prepared to back their wishes. But he was clear, unless we act, the status quo will remain. And he warned:
“At the end of this process, anyone who believes that government is going to come up with a clear and coherent strategy is clearly not in the same policy world that I have been in for a very long time.”
In the short question and answer session that followed, Dieter Helm was asked what the one single thing was that people could do to reduce their own carbon impact:
“Stop flying. Because if you really want to do one thing, why do you have to fly abroad to have a holiday”.
Jill Rutter was asked how to effectively communicate with decision-makers. She said that public opinion towards climate change was changing and that politicians have an opportunity to start persuading voters of the merits of climate action.
Helm was asked about the role of ICT in driving climate emissions. He cited traditional ICT equipment, the growth in mobile technologies and the rise in Bitcoin as having all contributed to increases in emissions.
He was also asked about the optimal level for setting a ‘sin’ tax amid fears that it could be seen as another cost of doing business. Helm replied that the objective of his proposal was to send a clear signal of society’s commitment to achieving net zero and to incentivise businesses into better, more environmentally friendly business practices. He said starting low and adjusting over time, with the tax tied to the net zero target, was a simple way of achieving this.
However Jill Rutter warned that successive UK governments have failed to increase taxes – such as the fuel duty escalator – due to political constraints.
Jason Collins was asked about the distributional effect of a carbon tax and whether to be effective, they would need to be introduced on an international basis.
He said this was difficult to quantify but that in broad terms, if the tax was based on consumption, it would be targeted on the location of consumers and supply chains. If done unilaterally, this would displace businesses and consumers. He said it was likely that carbon taxes would instead need to be focused ‘slightly further down the supply chain’ to prevent this from happening.
The panel were also asked about the role of the property tax system in encouraging environmental change. Jill Rutter said that she would prefer governments to focus on the principal sources of carbon emissions, such as the energy sector, as opposed to secondary sources like the property market.
You can read Sir Dieter Helm’s slides via the following link - https://custom.cvent.com/81FEF2093EEC4166886EC06241A66017/files/event/afb44a0386bd47799b27b15b939fdfc3/711a67e08cfe48469a8833d0e03da648.pdf
You can watch the debate here - https://www.presenta.co.uk/CIOT/CTA_Address/060521/index.html
If you are interested in buying Helm’s book, Net Zero, which he referred to during his Address, or want to find out more about it, click here.
By Chris Young, CIOT External Relations Team.