Putting a price on carbon has the potential to slash emissions

By Ed McCue on 16.05.18 

Pushing fossil fuels off the grid through green investments and carbon taxes is a good way to halt climate change. There are huge economic opportunities present as we shift to a green economy. Last year, China invested $132.6 billion in clean technology. Several European countries and cities are committed to axing petrol and diesel cars by no later than 2040, switching to electric alternatives. Profiting from emerging green markets early can ensure that cities like Manchester harvest the fruits of its inevitable growth.


Even banks, less known for their environmental conscious, are getting in on the act, signalling to the market that climate friendly infrastructure is worth investing in. Lloyds Banking Group is providing a further £2bn of funding for green finance commitments under its new Clean Growth Finance scheme. In March, NatWest pledged to deliver £10bn of lending to UK renewable energy and energy efficiency projects by 2020. HSBC are due to stop funding for new fossil fuel industries.


Green investment in cities via nature-based solutions (NBS) is the vision conceived by five-year EU project GrowGreen. Manchester boasts frontrunner city status, along with Valencia, Wroclaw and Wohan, in a project running from 2017 to 2022, that aims to support the creation of NBS strategies at a city level, using greenery to inspire solutions to major urban challenges, such as flooding, poor air quality and unemployment.


Green investments could be funded for by hypothecated taxes on what is bad for the environment – solving one environmental problem by eliminating another, reallocating funds and resources towards a greener economy.  Putting a price on carbon in the form of a tax on the producers of fossil fuels would help to reduce emissions. The carbon tax, or carbon floor price, only applies at the point of generation, so producers are only required to pay it.


The revenue raised could subsidise alternative forms of renewable energy or research and development into new or existing technologies to find ways to reduce emissions. Higher carbon prices could accelerate the developments of smart grids and renewables.


Under a carbon tax, the firms that are best able to reduce emissions gain a competitive advantage. In the long run, the more inefficient producers can’t hide behind weak regulation and won’t be able to compete.  At the same time, it creates an incentive for new clean technologies and renewable innovations to come to market.


A report published by MIT and National Renewable Energy Laboratory last month presented the benefits of setting a carbon tax. If designed properly, it would not need be regressive or damaging to low-income households, according to the study.


Some experts believe that a carbon tax is essential if we are to meet the 2015 Paris Agreement goals and that carbon prices should at least double by 2021 across the EU.


The UK’s strong performance in low-carbon electricity usage, whereby it jumped from 20th in 2012 to 7th last year, in a league table out of a list of 33 industrialised countries, was down to a carbon tax which was imposed in 2013. Britain’s 13 place rise in four years is the fastest ascent of any country, according to Imperial College London, who authored the report. Between those years, the amount of coal-fired power generation in Britain has fallen 80 percent.


Currently the tax stands at £23 per ton of carbon dioxide emitted in producing electricity – almost five times more than in some other EU and industrialised nations. However, the government is committed to freezing the charge until 2020, when it is set to increase.


According to the energy consultancy Aurora, leaving the price at its current level could risk coals revival, but increasing it to £40 a tonne by 2025 would eventually drive coal out of the UK energy mix without additional regulation. As a member of the EU’s carbon trading scheme, UK electricity producers must also pay a market-based price (about £5 per ton of CO2) for carbon credits.


But not all countries enforce carbon taxes and those that do enforce different prices. Australia’s third straight year of rising emissions was predominantly caused by a stop to their carbon tax in 2014.


Fiscal intervention in the other UK markets with an environmental agenda have also deemed successful so far and it is hoped that carbon taxes continue the trend. England’s plastic bag usage has dropped 85% since the 5p bag charge was introduced. Last month the Government announced plans to set aside £61.4m to fight plastic waste. Bans to single-use plastic items such as disposable coffee cups, plastic straws and wet wipes are too on the horizon.


Not only will a ban on single use plastics in the UK help to clean our oceans and waterways, but its fall in demand may eventually dent the growth in demand for oil, over the next two decades, according to BP.


April also saw the Governmental announcement that they would soon ask the Committee on Climate Change for advice on how to strengthen our emissions reduction targets to bring them in line with the Paris Agreement. Could the carbon tax be used to further strengthen our environmental commitments? It won’t be sufficient on its own to limit temperatures to well below 2oC, but it does have an important role to play.


Achieving our climate goals can only be fulfilled when we understand the critical role that the free-market and business play, and how they interact with regulatory barriers. Going green is a good investment. Taxing our way our of fossil fuels could be equally attractive.