The Carbon Tax: a Liberal Solution

Thomas Bailey, ex-Campaigns Officer, argues that the implementation of a Carbon Tax is the most effective and liberal approach to tackling the issues of climate change.

The existence of anthropogenic climate change has long been accepted by the vast majority of scientists and politicians. Governments around the world, most notably in the Paris agreement, have accepted the huge reduction in CO2 emissions that need to be made to keep global temperature increase to well under 2°C. Yet despite commitments to significantly reduce emissions (the UK is committed to a reduction of 80% by 2050), it is clear that unless bold action is taken these goals will not be met.

So how can the target set out in the Paris agreement be attained? A wide variety of schemes are being used and proposed: including cap and trade systems; subsidies for renewable energy; or a ban cars with internal combustion engines. Yet perhaps the simplest, and most liberal, is a tax on greenhouse gas emissions, often called a Carbon Tax.

With a Carbon Tax the government places a price on releasing greenhouse gases into the atmosphere, and thus creates a cost to do so. This obviously then provides an incentive to reduce carbon emissions. But perhaps more importantly than its simplicity, is the fact that a Carbon Tax is a liberal approach to reducing emissions. By leaving the specific details of how to reduce emissions to individuals and corporations, it abides by the liberal principles of subsidiary and individual autonomy. This is also the reason why a Carbon Tax could well be more effective than any alternative, by unleashing the power of the market and competition. Putting a price on carbon will create a strong incentive for companies to develop new (and cheap) ways to reduce their carbon footprint, and thus provide a path to the widespread adoption of carbon reducing technologies and efficiencies.

However, there is significant criticism of a Carbon Tax. The high price that must be placed on carbon to achieve the desired reductions in emission would significantly increase the tax burden, potentially leading to damage to the economy and huge amounts of wealth being transferred from the private to public sector. Additionally, it would be a regressive tax, placing greater burden on the poorest of society (since the price raises it would cause would represent a greater proportion of their spending). Yet there are ways to overcome these criticisms. By making any such tax revenue neutral (or close to it) any damage to the economy should be minimal as the tax burden is just shifted around. An obvious candidate for a tax to be cut would be VAT, the most significant regressive tax currently levied. However, there are other possible ways to mitigate the negative effects of the tax, for instance state support for those on low income could be made more generous and the government could make significant investments in the infrastructure needed in a post-carbon digital economy.

There is also a concern that since the purpose of a carbon tax is to reduce its own revenue base there is a risk that the government could become dependent on an income source that it is trying to eliminate. Whilst, it is very unlikely that this could create a situation where the government would incentivise CO2 emission through other policies in order to raise additional revenue, it does raise the valid point that this tax should not be used as a reliable source of income. Initially though this should not be an issue. As the tax is introduced the increasing price of carbon should mean that revenue would remain similar even as carbon emissions fall. However, once carbon pricing has reached a maximum or carbon emissions become negligible, it may then be necessary to restore the taxes (or increase other ones) that were cut upon its introduction. However, it would be hoped that the introduction of a carbon tax would encourage the UK to become a world leader in the post-carbon economy - strengthening the overall economy, and thus tax base.

But what makes a Carbon Tax a more liberal proposal than some of the alternatives? Firstly, as a policy that changes incentives, rather than enforces action, no one will be compelled to take any specific action against their will (other than of course paying the tax). This is clearly a more liberal approach than outright bans or measures that directly intervene. It also does this without compromising its efficacy, as with a higher price on carbon, emissions will always be reduced. A Carbon Tax is also technology neutral, meaning that the government will not be involved in choosing winners or losers: a liberal approach that will allow the methods and technologies to reduce carbon emissions to be achieved in a distributed manner. This will not only have the benefit of allowing more options to be explored (and reduce the risk that too much investment flows into an ultimately dead-end technology) but is fundamentally liberal by allowing individuals and companies to choose their own solutions to the fundamental issue of greenhouse gas emissions.

Many question what the point of introducing such a radical policy is, considering that this is a global problem that the UK alone will be unable to make a significant difference to. Yet this is a defeatist attitude that will lead to global catastrophe. It is only by the action of individual countries that real progress will be made, as global agreements have until this point (and for the foreseeable future) been weak and unenforceable. Furthermore, after making these changes the UK will be in a far stronger position to advocate for others to join us in the serious fight against climate change, providing both a model for other developed economies to follow and helping to counter the argument of developing countries that they will only act after the developed world.

A carbon tax of the scale needed to seriously cut emissions (with a price on carbon in the order of several hundred pounds a tonne) not only provides a possible mechanism to reduce the impact of climate change, but a credible and liberal one. Until it becomes more profitable to take carbon emission seriously than to ignore it, there will be no significant change in behaviour, particularly in large companies. A Carbon Tax would succeed by directly modifying this profit motive and thus force the country and economy as a whole to find solutions to such an enormous issue. In addition, by using the power of markets to drive down the cost of carbon reducing technologies, the effects could be seen far beyond the borders of the UK. Finally, and perhaps most significantly, by leaving decisions in the hands of individuals a Carbon Tax is able to save the planet without taking away individual agency or centralising yet more power with the government. Thus it can lay claim to being a truly liberal policy, protecting the freedoms of those in the future without infringing on those who live today.

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