It’s time to put a price on carbon

In the first of the Rising to the Challenge webinars I listened to my esteemed colleagues in the transport planning and policy professions discuss how best the nation might respond to the government’s Decarbonising Transport[1].  It was a good discussion but I could not help wondering if we are trapping ourselves into making it all more complicated—and therefore less effective—than it could be.

There is a direct approach and one that is simple for everyone to understand: if the problem is the release of carbon dioxide, then price carbon properly.

If carbon were properly priced then people would quickly seek ways to use less of it and to find substitutes or simply consume less carbon-derived energy. The remaining carbon in use would find its way into the most valuable applications instead of being squandered as it is now.

By common consent, if we are to succeed we have to get millions of individuals and businesses to change their behaviours considerably and quickly across a number of sectors. Most of them will only do that if they see it in their personal interest to do so, not because of some poorly-understood and distant national entreaty.

But because we assume that “proper” carbon pricing is impossible to achieve the profession tends to fall back on the prescriptions that we have been advocating for decades—with limited effect: reducing car traffic; improving the price and quantity of public transport; improving cycling facilities and so-on.

Whilst there are good arguments for these policies they are second-best in relation to the objective of reducing carbon dioxide emissions. That requires a direct attack.  The primary objective here is to reduce carbon emissions not to reduce car use or change modal shares—though that may, or may not be a consequence.  Traffic congestion is a different issue: at times and in places where it is a problem it has a different solution—road user charging. Damage to air quality similarly.

The risk is that it all becomes too complicated and unfocussed.  If we keep advocating more of what we have advocated in the past  we risk only continuing to achieve what we have in the past—and that is not enough. Many prescriptions (like making public transport free) require increased levels of Exchequer funding that experience has repeatedly shown unlikely to be forthcoming because government perceives better alternative uses.

Unlike gas for domestic heating which only carries 5% VAT, the duty on petrol and diesel fuels already carries an exceptional tax (£0.70 per litre including VAT at 20%).  That could be argued to be already enough to represent a carbon charge.  But it has never been presented that way and the truth is that it is largely a sumptuary tax to raise net revenue for the Exchequer:  in 2018/19 Vehicle Excise Duty and Fuel Duty yielded over £30 bn and total expenditure on national and local roads was less than a third of that[2]. It is clear that this sumptuary revenue raising will have to continue.  Indeed a recognition of the need to pay more for carbon would support the argument made by David Begg[3], myself[4] and others that fuel duty should be restored at least to the higher rate in real terms it used to be earlier in the century.

Of course, all these policies inflict pain and are hard to sell. By common consent, a perception of “fairness” is essential. An immense advantage of carbon pricing is that it would generate new revenue which can be used to help redress unfairness. That is an important difference from policies that require increased taxpayer support.

Ring-fencing a portion of the incremental revenues would probably be necessary to secure support and would facilitate all sorts of attractive policies—including a genuinely bankable income stream to fund and finance regional infrastructure funds. That kind of hypothecation is uncommon in the UK fiscal system but in any case many argue that our uniquely centralised system has been in need of reform for many years and without it devolution to regional authorities cannot be made real.  No doubt that will be a topic raised in the third Rising to the Challenge webinar.

It’s not just about transport.  The changes necessary in other sectors such as domestic heating and insulation are monumental and may or may not offer a more effective use of public funds than subsidy in the transport sector. A gram of carbon burned to heat a poor person’s home is just as damaging to the climate as a gram burned by a person using a car to go down the road shopping. An attraction of proper carbon pricing is that it goes across the piece, irrespective of sector. In particular it would give the right signals to the delivery and road haulage  services and agricultural users. Again, revenues are available to mitigate unfairness—and if we refuse to countenance any policy that might cause an unfairness needing mitigation then we will get nowhere.

An alternative to carbon pricing which, in principle would prove similar incentive effects would be to give each individual a fixed, tradeable carbon ration. There is a substantial literature on this. One drawback has been administrative cost and complexity of in effect  creating a new currency, but maybe digital developments—including the block-chain technology supporting cryptocurrencies—make this idea worth another look?

I was thinking of examples in the past where a change in relative prices has caused a rapid response.  Congestion Charging in London in February 2003 caused an overnight reduction in traffic in the area.  A small price difference quickly wiped out the use of leaded petrol. The smogs of the 1950s were eliminated when cheap heating oil (and later gas) became available as a substitute for coal.  The change from town gas to natural gas was a massive change—though others may know better than I to what extent this was in response to a price advantage. Of particular relevance, a few years ago now, research by Phil Goodwin[5], and separately by Dan Graham and colleagues[6] offered good empirical evidence that if the pump-price of road fuel increases by 10% then the demand for it will fall immediately by about 3% and by about 7% over a few years. Maybe there are better examples?

It would be naïve to claim that all that is required is the get the pricing “right”.  Where there has been major social change the lead has often been taken by regulation facilitated by a change in public attitudes—as with seat belt wearing and the ban on smoking in public spaces.  But I would argue that getting the prices facing individuals closer to the social costs of their actions imposed on others is a necessary (if not sufficient) condition for progress. In other words, so long as people see that carbon is cheap to them it will be hard to stop them being profligate with it.

The proposition is that when, but only when, individuals see it as being in their personal interest to change because of changes in relative prices, will they respond quickly enough.

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1009448/decarbonising-transport-a-better-greener-britain.pdf

[2] https://greenertransportsolutions.com/wp-content/uploads/2020/07/Bayliss-Glaister-and-Travers.pdf, p19, 20.

[3] https://greenertransportsolutions.com/wp-content/uploads/2018/06/THE-UNINTENDED-CONSEQUENCES-OF-FREEZING-FUEL-DUTY-JUNE-2018-2.pdf

[4] Ibid

[5] https://www.jstor.org/stable/20052977

[6] https://www.jstor.org/stable/20053890