Nudges, Tax and Trade: Boris Johnson, Rishi Sunak Can Set Their Legacy Today; There’s a Small Chance They’ll Do it (3)

–Push for carbon border adjustments seen in drive for climate justice, higher CO2 prices and steeper tax rates
–Governments can also “nudge” change, not just force it
–Post-Brexit British system can be model for the world
–NOTE: Johnson and Sunak didn’t step up

By Mathew Carr

March 2-3, 2021 — LONDON: British Prime Minister Boris Johnson and Chancellor Rishi Sunak have a chance to change U.K. and global history today; there’s only a small chance they’ll take it.

Challenging the people (Conservative Party members) who put you in power takes courage. I’m not sure these gentlemen have enough bravery, but I hope I’m wrong.

What the pandemic has clearly shown is how fragile health, economy and society is.

Some libertarians in Johnson’s party no doubt believe conservatism and freedom equals pretty much doing what you damn well please. This notion goes against what the pandemic has shown us.

No, burning the crap out of fossil fuels does not equal freedom. It’s clearly going to ruin the life of pretty much everyone on earth as the climate changes, bringing floods, droughts, wildfires and disasters.

Helping lead the G7 countries gathering this year and the United Nations climate talks in November, Johnson and Sunak right now have a rare chance to SHOW the world a better way. Unless they do it today however, the chance will have been lost until the UN negotiations, when they will only be able to TELL the world, not SHOW it. That’s a much weaker position.

Changing the tax system to focus on adjusting bad behavior, including the burning of fossil fuels, makes a lot of sense. Polluters need to start paying for the damage they cause.

The U.K. is already well ahead on this front, with carbon prices set to be above those even in the European Union, which the country has just left. See this:
https://carrzee.org/2021/02/24/five-years-later-and-after-the-fact-brexits-still-set-to-roil-europes-carbon-market/

It and other EU nations made more than 57 billion euros selling EU allowances until the middle of last year. After the U.K. introduced a carbon floor support in 2013, it made even more. That floor helped fill a gap in the country’s budget after the global financial crisis more than a decade ago, so there’s a precedent. The pandemic has left a huge gap and the money from the floor as well as the country’s new U.K. market is set to bring in the cash.

The higher the price, the bigger the revenue. Here is an earlier scenario from Vivid Economics setting out the range of possible prices:

https://www.theccc.org.uk/wp-content/uploads/2019/08/Vivid-Economics-The-Future-of-Carbon-Pricing-in-the-UK.pdf

A U.S. professor has been advocating for Britain to showcase the fee and dividend model because U.S. lawmakers are too beholden to oil, natural gas and coal:

http://www.columbia.edu/~jeh1/mailings/2021/20210205_DearPrimeMinisterScience.pdf

The freedom delivered by Brexit allows Sunak to adopt an aggressive, post free-market capitalism model and make a few more important tweaks during the next eight months, before the climate talks in Glasgow. Here’s a little roadmap:

  1. Flag to U.K. voters that the country’s poor will be protected from cost increases that hit them because of higher carbon prices. The carbon “fee and dividend” system can become a global standard. Britain is already doing this to some extent because it has energy regulations that protect those in “fuel poverty”. In a related move, fossil-fuel subsidies can be dropped, saving taxapayer money (Fossil-fuel subsidies are effectively negative carbon prices.)
  2. Say to airlines landing or taking off in Britain and their customers that the price offered online MUST INCLUDE the cost of offsetting the carbon dioxide caused by a flight, starting in July this year. (Britain has already flagged it plans to do this and this timing will allow the nation to capture the post-pandemic holiday exodus). This forces buyers to think, requires them to uncheck a box saying they are unwilling to pay the offset costs. Importantly, offsetting should start as a “nudge” rather than a mandatory requirement. Rich people should be discouraged from unchecking that box. Sunak could also announce bringing this mandatory offset offering to the petrol pump as soon as possible. Only the poorest in society should tick the box on the pump that allows them to wiggle out of the environmental cost of their fuel. Such a system would help companies seeking to hit net-zero emissions targets.
  3. Plan to adjust the tax system so that it’s more sustainable as soon as possible, meshing it with the carbon pricing and green-trade rules. The widening gap between rich and poor will be addressed at some point. Should the Conservative party undertake this difficult task, it’s likely to take away the political opportunities of the opposition party, Labour. The government is already planning to include climate risk disclosure into accounting rules as mandatory starting from 2023, so tweaking capitalism a little more to make it target goals other than profit would be the right thing to do right now.
UN sustainable development goals: https://www.un-page.org/page-and-sustainable-development-goals

This three-point plan may not be as unlikely as it seems. The U.K. is already seeking to position itself as a global climate and tax leader, including via its G7 role.

A person familiar with the government’s situation said this:

Climate change is a key priority of the British government’s G7 Presidency, including a push for “a lasting green recovery.”

It’s much easier said than done. G7 leaders published a statement Feb. 19 outlining climate priorities including for a just transition to net zero, including tax reform. The G20 and China is also in the frame.

Emerging nations are worried rich-country climate policy might limit their exports.

Britain is seeking to deal with that concern. The U.K. will continue to work with developed nations on how to best reduce emissions, including industrial production gases, in a way that does not disadvantage developing countries, the person said.

One way of ensuring the U.K.’s climate policy doesn’t lead to increased emissions elsewhere are Carbon Border Adjustment Mechanisms, one of which is planned by the EU by 2023. This could further increase government revenue.

Energy intensive goods would face a “price adjustment” if they are coming from countries with lax climate policy.

See: Interim report of the Net Zero Review for a range of approaches could potentially protect green industries.

“Carbon border adjustments should be treated as a part of an international, multilateral effort which is the best way to prevent carbon leakage,” the person said.

As the Business Secretary said in the U.K. parliament on Dec. 16 (while Energy Minister): “…if we impose a tax unilaterally on carbon-emitting products coming into this country, we may well be disadvantaging our own consumers if others around the world are not placing such a tax. The Government feels that multilateral co-operation in this regard is by far the best way to prevent carbon leakage.

Further investigation is needed in order to understand how such a measure would be implemented, whether it would comply with World Trade Organisation rules, and how effective it would be, the person said.

Some Conservatives are calling for immediate tax rises, so there’s hope.

See this: Budget 2021: https://news.sky.com/story/budget-2021-lord-hague-throws-his-weight-behind-calls-for-rishi-sunak-to-raise-taxes-to-deal-with-covid-spend-12233373

On the other hand some are arguing “now is not the time,” for tax increases, blaming the pandemic.

This seems wrong headed. The pandemic provides a perfect reason (not an excuse) for clever tax rises, especially where they help show the world how to save the climate.

NOTE: Sunak is set to launch world first green bond today:
https://www.ftadviser.com/investments/2021/03/01/green-bond-growth-welcomed-after-sunak-launches-world-first/

(Updates with carbon revenue context, floor, professor, Vivid chart, updates carbon revenue; adds “NOTE” at the top under the headline on March 9)

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