It’s time for a UK carbon tax
With a link to the EU carbon market now impossible by January, the best option for the UK is to commit to a carbon tax.
- Set up an independent panel to recommend the necessary carbon price rate, and the sectors it should apply to. This would give businesses greater confidence in the cost of carbon over the longer term, and help drive greater zero carbon investments, with lower risk. This could be hosted within the Climate Change Committee, or an external set of experts. This is especially necessary if the government moves away from the indicative link between the UK CET and the EU ETS price.
- Explore using auction or tax revenues to pay ‘carbon dividends’ to citizens. Such payments could improve public support for carbon pricing, and help mitigate the regressive effects of increased electricity prices.
- Remove the carbon price exemption for biomass. There is now scientific consensus that biomass should not be assumed to be carbon neutral by default – the true emissions from biomass burning are dependent on the type of feedstock, the counterfactual, the time horizon considered, and the supply-chain emissions. The UK’s new system for pricing carbon after Brexit provides a golden opportunity to correct a mistake in EU carbon pricing – making sure the growing number of wood-burning power stations pay for their net carbon emissions. This would not only be great for the climate, and the UK’s green leadership – it could bring in billions of pounds to the Treasury. Read more about our proposals for a carbon price on biomass.
- Introduce a carbon border adjustment. This could eventually allow for greater industrial exposure to the carbon price signal, and so faster zero-carbon investment. We’ve previously suggested that a carbon border adjustment may be simplest to implement first on electricity.
- Firm up the proposal to tie carbon pricing to the net zero target, and the interim Carbon Budgets. If the UK is not on track to meet the five-yearly Carbon Budgets under the Climate Change Act, as it is not for the 4th and 5th Budgets, the price can be increased to accelerate the transition in those sectors.
- The government should investigate extending the sectors covered by carbon pricing, including fugitive methane emissions released during the production and transport of fossil fuels (coal and gas).
With just over thirty days until the end of the Brexit transition period, a link between the EU carbon market and the UK after Brexit is now impossible. A UK-only Emissions Trading System would be risky and highly complex, so the best case scenario for the climate is for the UK to implement a carbon tax on January 1st.