A economy-wide carbon tax paid by both domestic and international producers would prevent carbon leakage, level the playing field for Britain’s heavy industry, fund a dividend to be paid to taxpayers and tackle climate change, argues the new report from Policy Exchange’s influential Energy unit, The Future of Carbon Pricing: Implementing an independent carbon tax with dividends in the UK. A better approach would reduce the cost of decarbonisation, prevent the offshoring of emissions and make carbon pricing popular.

The UK is already a world leader in climate action and should build on our track record to implement a system of carbon pricing that really works, overcoming a market failure that does great harm to the environment. The report recommends that, although Brexit makes it likely the UK will leave initiatives overseen by the ECJ such as the EU’s Emissions Trading Scheme, the UK should remain a member of the ETS until the end of the third trading period at the start of 2021. At this point, Policy Exchange recommends that the UK should take the opportunity to innovate in carbon pricing with an independent carbon tax which would:

• Be steadily rising and economy-wide, paid by companies that sell fossil fuels in the UK (though ordinary citizens will be protected from price rises through the recycling of tax revenue back into their pockets). The tax would initially continue at the level at which the UK leaves the EU ETS in 2021, and steadily rise at a rate set by an independent body such as the Climate Change Committee to give the policy institutional certainty and bankability.
• Be structured around border carbon adjustments, to create a level playing field for domestic and international producers so that companies which export carbon intensive products into the UK will be subject to the same level of carbon tax as domestic producers, helping industries like the British steel sector.
• Fund dividends from carbon taxation that are returned directly to the public in an annual lump sum, to lock in political and public support for fighting climate change. People would be able to borrow against their future dividend payments for investments in energy efficiency.
• Allow a rationalisation of environment regulations without reducing environmental protection, as an economy-wide carbon tax will make a number of existing carbon taxes and policies redundant. Eventually at least 10 direct carbon taxes would be rationalised into a single unified price paid for emitting carbon dioxide and other greenhouse gases in the UK. For example, we would no longer need the Climate Change Levy, but we should continue with energy efficiency standards and energy labelling.

In a cross-party Foreword to the report, former Labour Chancellor Lord Darling of Roulanish and former Conservative Foreign Secretary Lord Hague of Richmond write:

“The UK has consistently led the world in responding to the threat of dangerous global warming. By signing into law the Climate Change Act in 2008, with cross-party support, we were the first country to set legally binding targets for reductions in greenhouse gas emissions.

“However, as this report by Policy Exchange shows, many challenges remain, most notably that of carbon leakage whereby energy intensive industries move abroad to avoid environmental taxes. Cleaning up our own energy system will mean little if we simply outsource our emissions. In the absence of a unified global carbon tax, border carbon adjustments are essential to ensure that British businesses are operating on a level playing field with those that are foreign-based. This is a clear plan for how this would work in practice.

“In our drive to decarbonise the economy, it is important that we take people with us. If carbon taxes are seen to unduly punish that average citizen, they will fail. That is why Policy Exchange’s idea of recycling the revenue from carbon taxation back to the people in the form of a ‘carbon dividend’ is worth exploring. It would make a carbon tax both progressive and popular.”