IFS says better green taxes would boost growth
The “unnecessary complexity” of the UK carbon tax system is expensive for business. Complicated incentives and disincentives can’t easily be turned into a simple price for CO2 emissions that businesses can take into account.” So argues the IFS in its Green Budget 2012 echoing a key point made by the TUC and industry about the unchecked cumulative impact of climate change policies on energy costs, especially for energy intensive industries. Simplifying the UK’s green tax system could significantly improve economic performance, the IFS says.
Oddly, the tax paid for emitting a tonne of CO2 varies widely according to the fuel used and whether it was used by households or businesses. This results from the interaction of an array of overlapping policy initiatives – from the EU Emissions Trading Scheme and Carbon Reduction Commitment to the Climate Change Levy and the Renewables Obligation – each raising the price of some sources of emissions but not others.
Arguing for more efficeint green taxes and not to abolish them, the IFS says we are in the “ludicrous position” the IFS says that CO2 emissions from domestic gas consumption are not just untaxed but positively subsidised relative to other goods and services. As a result, instead of choices being made on the basis of prices that reflect the underlying commercial and environmental costs of different activities:
- energy-intensive business activity is much more strongly discouraged than household energy use.
- households and businesses have a strong incentive to use gas rather than electric heating.
- electricity generation is biased towards coal rather than gas as a fuel.
Heavily penalising some forms of carbon emissions, while leaving others untouched even if they would be much easier to reduce, is an immensely costly way to reduce greenhouse gas emissions. Simplification and consistency are needed. But concerns over carbon leakage – the loss of jobs and investment to competitors without CO2 controls – explain the special provisions for energy intensive industries announced in the Autumn Statement. IFS recognises that the need to secure industrial production is a constraint on improvements to carbon pricing. But smart changes would support improvements to the UK’s overall economic performance.