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Tackling the Climate Emergency: Proposals for Carbon Pricing - LibDem Motion F12

September 13, 2021 10:52 AM
By Catherine Dawson in Liberal Democrat Voice

Some thoughts on Motion F12: Tackling the Climate Emergency:
Proposals for Carbon Pricing

(draft article - publicity checkboxes not checked until LDV article is online)

Motion F12 states that Lib Dem carbon pricing policy should be to reform the UK Emissions Trading System (ETS),
and seek to return to the EU ETS. Carbon pricing was last debated by the party in 2005 and a simple carbon tax
applied upstream to 'primary fuels' was supported then.(1) Since then there have been several successful real
world applications of the revenue neutral carbon pricing policy known as Carbon Fee and Dividend or Climate
Income. In this system a steadily and predictably escalating carbon fee is placed on fossil fuels 'upstream', (ie at
the point of extraction or production rather than consumption). This sends a clear message to producers and
consumers, enabling them to plan ahead with the certainty that decarbonisation will be worthwhile.

Carbon Fee and Dividend is fair because the carbon fee is not treated by the government as a source of revenue.
All or most of the fee is returned to the population as a 'dividend'. This enables the fee to gradually rise to price
fossil fuel based products out of the market whilst cushioning the effect of the rising prices to consumers. Where
adopted the policy has worked alongside other measures to encourage decarbonisation, such as subsidies and
grants, but it complements them by giving industries and householders a clear direction of travel which politically
vulnerable grants and subsidies do not.

The Canadian government has predicted that carbon pricing alone will prevent 80-90 MT of Greenhouse gas
emissions by 2022, helping to drive emissions 227 MT lower in 2030 than previously projected.(2) With CF&D the
dividend cushions the rising fuel cost, so the price can go as high as is needed to decarbonise the economy.
The fee is planned to rise to 170$ CAN by 2030. With ETS a recession or even pandemic can lower industrial
productivity and the demand for carbon permits so much that the auction price drops thus reducing the incentive
to decarbonise.

139A argues that carbon taxes are more volatile than ETS as vulnerable to government whims. Whilst this can be
the case for carbon pricing which is expected to raise revenue for the government such as the blatantly unfair tax
which triggered the Gilets Jaunes protests, the dividend system offers less chance to do this and a strong
disincentive to remove the dividend once established.

In Canada 90% of the fees raised funds a dividend distributed to all adults and half dividend to the first two
children with a 10% supplement to rural populations because of the reduced options for decarbonising in
infrastructure and transport. Meanwhile other regulations and subsidies are designed to address the cost of
retrofitting, 10 % goes to retrofitting public buildings (along with other financial measures). (3) …

The majority of people receive more than they pay out in added costs; there is no attempt to tweak the payments
to make up for failings in the welfare system. Targeting only the 'poor' for dividends would remove the fairness
element, increase administrative costs and render the system itself vulnerable to political whim. Who decides who
are the 'deserving poor'? Would, for example, the definitions of deserving recipients given in the Green Party
backed IPPR report (4) be fair and effective or just totally antagonise the middle classes who are expected to do
most of the domestic retrofitting? Social inequality should primarily be tackled by other means, not a carbon
pricing system.

139A argues that ETS is more effective because it sets a cap on emissions and the auction price would set the
optimum price to reach this goal. lf the auction price is designed to reflect emission reduction targets rather than
the actual market situation it is no different to applying a predictable carbon fee. When it is not "manipulated"
economic downturns and even the lowering cost of renewables can render it less effective as the price inevitably
drops. A steadily rising carbon fee on all fossil fuels at source will encourage decarbonisation in a far less
cumbersome and corruptible way. Professor Dave Waltham has explained how an escalating carbon fee can, by
itself, render green hydrogen more cost effective than blue (5).... A back of an envelope calculation shows that
hydrogen would be a cheaper energy source than natural gas if we have a carbon-price of £130/tonne CO2 in
2030. We could get to that by starting at £15/tonne next year and increasing it by £15/tonne each year. "
The EU ETS scheme was itself proposed for politically expedient reasons, not because it was the best system to
encourage emissions reductions. Jaques Delors hoped to implement an EU wide carbon tax in 1992 but decided
that it would be politically unachievable because a tax would have required the unanimous approval of all the
member states, a trade scheme could however be passed by a qualified majority.(6) Price volatility, the over
abundance of free allowances to 164 industries, representing more than 75 percent of manufacturing emissions
(7) and the carbon permit market disincentivising direct decarbonisation rendered the ETS too unpredictable a
tool to encourage the large scale decarbonisation of industrial processes. This has been acknowledged by
commentators who support ETS in principle….

However, it was not the ETS price signal that drove this accomplishment, but other policies which were mainly
introduced in the power sector. In this, the EU ETS indeed has little credit to take. However, in recent years the EUA
prices were sufficiently high to support coal to gas switching in the power sector. (8)
The main attraction of ETS to would be policy makers seems to be that it is already established and the pricing
effects are invisible to the "average consumer" so it operates as a stealth tax. This might have seemed a sensible
option even a year ago! Since the publication of the 6th IPPC report (10) and the appalling wildfires, heatwaves
and floods this summer awareness of the climate crisis has reached the point that there is no need to hide
decarbonisation behind a flawed stealth tax such as ETS.

Other political parties are reconsidering carbon pricing strategy and the Zero Carbon campaign (11) has submitted
a 108,000 strong petition on carbon pricing to Parliament. Now is the time for us to go back to the drawing board
to consider all carbon pricing options and go for the most effective and fairest!

The Green Liberal Democrat group is supporting an amendment to allow the party to …"explore in detail the introduction of a `carbon fee and dividend` structure, together with border carbon tax adjustments, to accompany the proposals set out in the paper, and to bring proposals to a future conference for debate.".
Please do consider watching the debate on F12 and voting for this amendment.

Catherine Dawson