Carbon reduction: who picks up the tab?

In order to help curb global warming, the UK Government has set a target of an 80% reduction in total carbon emissions by 2050, compared to 1990 levels.  If we are going to reach this target, someone is going to have to pay.  The question is, who should it be?

The Problem
In 2008 the energy sector accounted for around 28% of the total UK greenhouse gas emissions, but it has the potential to become carbon neutral.  The Committee on Climate Change estimates investment costs in the energy sector needed to reduce emissions will reach up to £16bn annually, compared to £2bn average annual investment in the electricity sector in the early 2000s, and the money has to come from somewhere.

So, which groups could bear the cost?  It comes down to four possibilities: energy companies, industry and businesses, taxpayers, and consumers.

Unfortunately, energy intensive businesses and industries are already feeling threatened by the carbon tax, consumers and voters are complaining of being in the “squeezed middle”, whilst 21% of households are already said to be in “fuel poverty”; there is no obvious candidate to bear the investment costs required.

He who uses most, pays most?
Many would argue that a fair way of sharing the cost would be for those who produce the carbon emissions, or the big users of the electricity which created the emissions, should pay for the changes as it is they who are causing the problem.  The cost of the emission reduction schemes could be divided up proportionally based on the quantity of electricity each uses and added to their electricity bills.  This means the energy companies, energy intensive industries and large businesses would initially bear the majority of the cost.

However, it soon becomes clear that this would not be feasible.  Energy companies, industry and businesses need to make money; it is part of the legally binding agreement with their stake holders, and not to do so would spell disaster for the company.  The companies also need to remain competitive within the global market, with the possibility of industry moving abroad if production costs are substantially higher in the UK.  Therefore, any costs associated with changing to become more carbon efficient will be passed on to their consumers rather than affecting the company’s profit margins.  By passing the cost directly on to the consumer, those on a lower income will be more adversely affected as their energy bill will represent a larger proportion of their total income.

Taxation
Perhaps, then, taxation is a better way to pay for the changes needed.  Government taxation brackets aim to alleviate this proportion problem by charging those who buy more, and those on a higher wage, a higher rate of tax.  However, there have already been a number of taxation rises in the UK in the past couple of years, including a VAT rise from 17.5% to 20%, rises in the alcohol duty rate, and the recently proposed “hot food tax”.  The latter caused such a stir in the general population that it was binned before reaching the serving counter.  People become unhappy when they have to pay more tax or pay more for goods and services so the creation of a “Green Energy Tax” would undoubtedly be unpopular, especially if added onto the cost of electricity, and the government strives to please the greatest number of voters, especially around the time of elections.

A problem of time
A major stumbling block for many carbon emission reduction initiatives is the long timescales needed for investment.  Governments only remain in power for four years before another election, and ministers and civil servants change posts, especially over a 40 year timespan.  This means that decisions made by one person can be changed by the next incumbent of the post, unless the decisions are enshrined in law, which is very unusual.  The carbon emission reduction scheme was enshrined in law, but the long timescale proposed for the changes means those making the decisions may be tempted to put off the cost of the scheme until it becomes the next person’s problem.

Private investors are also less likely to be interested in such schemes with too great a period between investment and possible returns, especially if government policy is not seen to be consistent, making returns less certain.

Global warming is a slow process too and the real effects will not be felt until it is too late.  There is also no unanimity among the governments of the world on the need for a cut in carbon emissions, its urgency, or its extent.  Without global consensus and a view of political exigency it is very easy for UK governments to avoid ensuring the costs are met for the carbon reduction schemes if that means making themselves unpopular with voters, or if it means making the UK’s industries less competitive in the global market, especially in the current economic climate.

So the question of who will pay for the changes required to prevent large-scale global warming is not a simple one.  The bill will probably fall to the taxpayer if the target is to be met, but the government then has to decide between a short-term more favourable economic climate or a long-term more favourable global climate.  If the government chooses the planet over the economy, they have the choice of raising taxes further, or moving money away from another area to direct it to carbon efficiency.  Whatever is decided, it affects us all, because we all will pay.