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Time to tax Carbon?

Malcolm Chilton

David Cameron has pledged to make his government the greenest ever.  Yet to do so will require significant changes in perception and behaviour, not least within the energy and waste sectors.  The introduction of a carbon tax could be the driver that helps the government to meet the targets that lie behind this aspiration, providing the necessary incentives to encourage the development of the UK’s renewable and low carbon energy infrastructure.  Using a similar model to landfill tax, and with a graduated introduction, the tax could also generate potential revenue of up to £4 billion in its first year.

The coalition government pledges that the UK will be at the forefront of pushing the EU to adopt more ambitious carbon reduction targets.  Domestically, the government is aiming to increase the already ambitious UK target to achieve 30% of electricity generation from renewable sources by 2020.  To achieve this, it promises to retain the Renewables Obligation and to introduce a feed-in tariff system to support micro-generation.

In 2009 the UK generated just over 6% of its electricity demand from renewables, up from around 2.5% when the Renewables Obligation was introduced in 2002.  The government’s aspiration will require a six-fold increase in just 10 years.  As a result I believe that it is unlikely that the continuation of the Renewables Obligation and encouragement of micro-generation alone will achieve that step change required.

Funding the transformation required will not be easy in the current economic climate.  However, the waste sector already has a good example of how fiscal measures can facilitate change in the form of landfill tax.  There is good reason to follow this model to bring about change.  Tacitly it seems that the government has acknowledged that something akin to a carbon tax is sensible.  The coalition agreement pledges that the government will put a floor under the price of carbon, which is an effective proxy for a carbon tax.  However, putting a floor of approximately £15 per tonne of carbon under the current price won’t be enough to change behaviour.

If a carbon tax was set at a level where each tonne of carbon would attract a charge equivalent to the value of a Renewables Obligation Certificate, which is a reasonable comparator of the desirable and undesirable, then it would come in at £150 per tonne.

Clearly introducing that overnight would be too great a shock to the economy. So, the answer may be to look to the landfill tax model, setting the tax at a low level initially and using an escalator mechanism to ratchet it up over time to a point where it really bites on behaviour. I believe that a carbon tax set at around £75 per tonne, and phased in over, say, ten years would underpin a certain transition to a low-carbon economy.  Initially set at a level of £17 per tonne and with an annual escalator of half that amount to reach the £75 per tonne target, the tax could raise £4 billion in its first year alone.

The other benefit of such a graduated approach is that it sends signals of intent to the market while allowing time for businesses and others to invest to make the required transition, in this case to low carbon operations.

Malcolm Chilton is UK managing director of Covanta Energy

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