If a carbon tax is your weapon of choice, wield it carefully

8th Feb 2021

 

Last week we saw media reports that the Government were looking more proactively at a carbon tax –across a whole range of products and services. Free market economists will no doubt be jumping for joy, as it suggests the market will solve our climate change challenges.

The rest of us will acknowledge that our industry does not operate perfectly, far from it. And when imperfect markets operate, outcomes are not always fair. So if a carbon tax is your weapon of choice, it is best to use it carefully and be prepared to deal with the unintended consequences.

But I like to be positive and I’m happy to add an observation or two to this debate. Firstly, I would avoid attaching carbon taxes to residential use of energy in any initial foray into this field. For domestic customers, I still believe the standing charge is an anomaly that needs looking at. Its impact means that for low users of energy, their average cost per unit is higher than for more profligate users. That’s perverse. It should be the other way around. If the price mechanism is going to be used as a policy tool, then this anomaly needs tackling.

But non-domestic use does lend itself to a carbon tax, if that is your choice. Already there is the Climate Change Levy and VAT at 20 per cent. But the VAT, if reclaimed, doesn’t necessarily act to deter use but a carbon tax might. Whilst there is considerable focus on residential energy efficiency there is less interest in non-domestic savings. A carbon tax might incentivise action.

A word of warning though. Individuals, business or households, will have overall cost trigger points that will force behavioural change. There isn’t a rule that applies to everyone, we will all have different reactions to price increases. Consumers of energy will need to see what the extra cost buys, and saying achievement of Net Zero might not be enough of a sell. And the idea that politicians who very loudly object to any increase in fuel duty of the price of petrol will cheer increases in gas bills, is a little hard to believe.

Best wishes

Mike Foster, CEO