Why carbon taxes really work

25th November, 2021

A friend recently wrote to me agonising over an ethical question. He was pondering a long-haul trip to see his family but was all too aware that the flight would have a huge carbon footprint. Could the journey possibly be justified? I suggested that my friend find out what the carbon footprint was (a tonne of CO2, it turns out) and then imagine a hypothetical carbon tax. Would he still be willing to travel if he had to pay the tax? If not, the trip wasn’t worth it.

My advice raises the question of what this carbon tax should be. At a carbon tax of £5 per tonne of CO2 — plenty of carbon global emissions are taxed at less than that — the extra tax on that one-tonne return flight would be trivial. At a more serious £50, it would be noticeable but perhaps not decisive. (The emissions trading systems in the EU and the UK until recently implied a carbon price of around £50 per tonne of CO2; the UK price has since leapt. US Democrats are pondering their own carbon tax.) If the carbon tax were a deep-green £500 per tonne of CO2, my friend would have to be missing his family more than most of us ever do.

I realise it is quixotic to advise checking one’s personal consumption decisions against a completely hypothetical tax, but it gets to the core of what a carbon tax is for. It isn’t just an incentive to change behaviour; it’s a source of information about which behaviour we most urgently need to change.

That information is currently obscure. The world’s supply chains are formidably complex, delivering products with a carbon footprint one could only guess at. The big picture is obvious enough: flights are bad, cycling beats driving, double glazing is a good idea. But should you buy the British tomatoes, possibly grown in a heated greenhouse, or the Spanish variety, with more food miles on the clock? Even for the attentive, these questions are difficult.

About a decade ago, Mike Berners-Lee published How Bad Are Bananas?, a book that explained the carbon footprint of various everyday products. (Bananas are fine.) The title hints at the hopelessness of waiting for consumers to voluntarily vanquish climate change. How bad is red wine? How bad is an iPhone? Collectively we make many billions of decisions every day about what to buy, how to travel and where to set the thermostat. We cannot be expected to do so with Berners-Lee at hand.

The brilliance of a carbon tax is that we would not have to. The price of everything we buy is tied to the cost of resources required to make and deliver it. If something requires acres of land, tonnes of raw materials, megawatt-hours of energy and days of skilled labour, you can bet that it won’t come cheap. The link between price and cost is fuzzy but real. Yet carbon emissions have not been reflected in that cost.

A carbon tax changes that by making the climate impact as real a cost as any other. It sends a signal along all those supply chains, nudging every decision towards the lower-carbon alternative. A shopper may decide that a carbon-taxed T-shirt is too costly, but meanwhile the textile factory is looking to save on electricity, while the electricity supplier is switching to solar. Every part of the value chain becomes greener.

Large changes might well be achievable with a surprisingly subtle carbon tax. The International Monetary Fund has suggested that a tax of $75/ton of CO2 might be required, but even with a £100/tonne tax — nearly twice as much — the day-to-day pain would be less than most people expect.

In the UK, carbon dioxide emissions are less than six tonnes per person per year, plus two or three tonnes more to reflect the carbon footprint of imported goods. A £100/tonne tax that covered those emissions would raise the cost of living by just over £2 a day, and cover more than 5 per cent of UK tax revenue. That’s not nothing: the government would be wise to send everyone a monthly lump sum in compensation. The burden would fall unevenly: those who spent a lot, flew a lot, drove a lot or heated big, draughty houses would pay more. It is unlikely that you would notice much impact on the price of bananas.

Coffee provides an instructive example of how much of the change would be imperceptible. According to Mark Maslin and Carmen Nab of University College London, a kilogram of coffee beans delivered to the UK has a typical footprint of about 15 kilograms of CO2. If farmed and shipped more sustainably, the footprint is 3.5 kilograms. With a £100/tonne carbon tax, that’s either £1.50 or 35 pence. You can make dozens of coffees with a kilogram of beans, so coffee drinkers might not notice, but you can bet that behind the scenes farmers and shippers will be looking to push their costs away from £1.50 and towards 35 pence.

My colleagues Gillian Tett and Simon Kuper have been writing about the risks of “greenflation” and the pain that a serious carbon tax would cause. They’re right to be wary of the political damage that a botched tax might do. But one can also worry too much.

It seems like a huge leap to decarbonise the world economy, but it is better understood as a trillion tiny steps. From frugal shopping to efficient logistics to renewable sources of electricity, carbon taxes gently steer us towards the greener solution every time, whether we are racked with guilt or blithely unconcerned. They should be at the centre of our fight against climate change.

Written for and first published in the Financial Times on 29 October 2021.

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