Policy Exchange has called for an economy-wide carbon tax with adjustments at the border to prevent the outsourcing of emissions to other countries.
The think tank said the UK is unlikely to remain a full participant in the EU Emissions Trading System (ETS) over the long term. Its departure would present an opportunity to create a replacement which is “fit for purpose”.
In a new report, Policy Exchange said staying part of the ETS following Brexit would require the UK to continue abiding by energy market and other EU rules “while having little say over new rules as they are implemented”.
It would also have to accept the jurisdiction of the European Court of Justice for the resolution of disputes and perhaps compromise over the free movement of people.
The report suggested this would be unpalatable to policy-makers.
It said the UK should therefore introduce a “steadily rising, economy-wide carbon tax” after leaving the ETS at the end of the third trading period in 2021.
To provide continuity for businesses, the tax would initially be set at the same level as the total carbon price at the time, consisting of the European carbon price plus the UK-only top-up.
The tax would be raised each year along a trajectory signposted in advance by the government. The trajectory would be set in line with the UK’s emissions targets by an independent expert body such as the Committee on Climate Change. Any deviation would require a vote in parliament and a public statement from the chancellor.
The tax would be gradually expanded to cover all sectors of the economy.
A system would also be set up to ensure companies that export carbon intensive products to the UK would be subject the same level of carbon taxation as domestic rivals. Companies exporting from the UK would receive a rebate at the border.
“Cleaning up our own energy system will mean little if we simply outsource our emissions,” the report explained.
“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.”
Given the complexity in identifying the specific generation sources that serve interconnectors, the carbon tax could be levied on the owners of the cables rather than buyers and sellers of power. They could be charged on the basis of the average carbon intensity of the electricity they import and export.
Policy Exchange said a carbon tax by itself would be “regressive and unpopular”. The proceeds should therefore be funnelled “directly back into the pockets of the people” through a quarterly or yearly “carbon dividend”. The think tank said citizens should be able to borrow against future dividend payments to fund investments in energy efficiency measures.
An economy-wide carbon tax was also one of the recommendations of Dieter Helm’s cost of energy review.
In November’s autumn budget, chancellor Philip Hammond announced that the total carbon price in the UK would be frozen until the completion of the planned phase-out of coal generation to maintain the competitiveness of British businesses.