Government urged to overhaul UK's 'regressive' carbon pricing system

The UK's current carbon pricing system is "inconsistent, regressive, unclear" and in urgent need of an overhaul in order to put the country on the path towards net zero emissions by 2050, according to Bright Blue.

A report this week by the liberal-conservative think tank sets out range of measures for reform, including a new target price range for carbon taxes across the economy, as well as regular ‘carbon budgets' announced each year to ensure an effective carbon pricing strategy that supports the UK's net zero goal, without poorest communities the hardest.

A road pricing scheme with "green miles" offering initial discounts for electric vehicle (EV) drivers and low-income individuals is also suggested in the reportt, arguing this would ensure drivers pay for the emissions produced by their vehicles. Such a policy would also help to claw back declining Treasury revenues from fuel duty as petrol and diesel cars sales are phased out  from 2030.

Former Number 10 energy and environment adviser, Josh Buckland - who authored the Bright Blue report - said carbon pricing was "a critical tool in [the government's] armoury, but the current system is inconsistent and, in places, regressive".

"Significant reform is needed, but any changes must be accompanied by a plan to deal upfront with the political challenges that taxing carbon properly will create," said Buckland. "Reaching net zero emissions by 2050 is a monumental challenge, one that will require the government to utilise every possible option for driving down emissions in a fair and economically productive way."

Released ahead of this November's COP26 meeting in Glasgow later this year, the report proposes a three-part plan to deliver a more comprehensive approach, including placing a consistent price on all emissions, taking effective action by 2030 and helping build a lasting public and political consensus on carbon pricing.

Ryan Shorthouse, chief executive of Bright Blue, said that it was now essential that policymakers take the first opportunity to focus on carbon pricing.  

"Once we control Covid-19, the government has three immediate priorities - restoring the public finances, achieving net zero emissions by 2050, and levelling up," he said. "More consistency in the taxation of carbon across different economic sectors can help with the first two. But to support the third, those on modest incomes and from poorer regions of the UK cannot be overburdened by the cost of the net zero transition - in fact, they need to really feel they will eventually benefit, through increased living standards and job opportunities."

One of the key proposals in the report - setting a ‘target price range' for carbon taxes across the whole economy by the end of the decade - would create a ‘floor price' for emissions, which it suggests should sit somewhere between £40 and £120 per tonne of carbon emissions, dependent on the sector. The figures should be reviewed and reset every five years, it states.

The report also argues that Chancellor should launch a ‘Net Zero Tax Review' in the Autumn Budget, which would report in 2022. The review should consider the full tax framework and risks associated with climate change, and not simply be limited to carbon taxes, according to the think tank.

Moreover, it should consider a series of ‘carbon tests' to assess changes to any policy that might impact the effective price of carbon paid by businesses or households, the report argues. These tests would be then applied to any policy or tax decision that has an impact on effective carbon prices across the economy.

Among the other proposals, the report also suggests rolling out of a road pricing scheme by 2030, prior to which voluntary pilot schemes could be developed in areas immediately. A 'green miles' initiative would offer discounts for a period to those driving electric vehicles (EVs) and on low incomes, while ‘surge pricing' would be used to reduce traffic in congested areas. 

"The most viable replacement for fuel duty is a road pricing scheme that applies to all vehicles, charging road users on a per-mile basis, which the government should immediately pilot," the report concludes.

The Treasury declined to comment directly on the report, but pointed to the government's recent Transport Decarbonisation Plan, which stresses that "we will need to ensure that the tax system encourages the uptake of EVs and that revenue from motoring taxes keeps pace with this change, to ensure we can continue to fund the first-class public services and infrastructure that people and families across the UK expect".