Download The UK Climate Change Levy and Ecological Tax Reform

The UK Climate Change Levy
and Ecological Tax Reform
Professor Stephen Smith
Department of Economics
University College London
Outline
•
•
•
•
What the UK has done
CCL and the ideal carbon tax
Carbon taxes and emissions trading
The way forward: taxes and/or trading?
The UK’s climate change
programme
Three linked elements
• Climate Change Levy
• Climate Change Agreements
• UK Emissions Trading Scheme
The Climate Change Levy
•
•
•
•
Announced in 1999 Budget
Introduced April 2001
Tax per unit of energy
Applies to industrial and commercial
energy use, not households
• Revenue-neutral introduction. £1billion
annual revenues finance cut in employers’
payroll tax (NICs)
Climate Change Levy tax rates
Pence per kWh $ per tonne C
Gas
0.15
45
Coal
0.15
24
Electricity
0.43
46
LPG
0.07
n.a.
Climate Change Agreements
• Negotiated agreements between industry groups and
government
• 46 energy-intensive sector (6000 companies) have
CCAs
• CCA members qualify for 80% reduction in CCL
• In return, undertake to meet quantitative target for
reduction in energy use or CO2 emissions
• Targets may be absolute (tonnes) or relative (tonnes per
unit output).
• Compliance possible through reduced energy use, or
trading.
• Were some targets “hot air”?
Motor fuel taxes in the UK
• Motor fuel taxed much more heavily than other fuels
throughout EU
• UK has the highest rates of motor fuel excise in the EU
• No fuel duty preference for diesel
• Fuel duty “escalator” (FDE) between 1993 and 2000.
Introduced as climate-related measure, abandoned after
fuel protests.
• Over 1993-2000 FDE raised fuel prices in real terms by
17 p/litre (petrol) and 21 p/litre (diesel).
• FDE fuel price rise equivalent to carbon tax of $405
/tonneC (petrol) and $440 /tonneC (diesel).
How do these taxes compare to a
systematic carbon tax?
An ideal carbon tax would:
•
•
•
•
•
•
Tax fuels in proportion to their carbon content
Apply uniformly to all sectors (industry, households, etc)
Have no exemptions for energy-intensive sectors
Exempt non-fuel uses
Tax fuel inputs to electricity generation
Tax carbon at a rate equal to marginal damage costs of
CO2 emissions
• Be levied worldwide at the same rate
The optimal carbon tax rate
• Most studies estimate the
marginal damage costs of
current carbon dioxide
emissions at $5-20 /tonne
C
• Some are much higher,
over $100 /tonne C
• Uncertainties are mainly
downside risks (“nasty
surprises”)
• UK government uses £70
(approx $105) / tonne C
for policy assessment
Reasons for differences in
estimates of marginal damage
costs of current CO2 emissions
Assumptions about physical
processes (the “science”)
Assumptions about economic
responses (adaptation, policy, etc)
Scope of the analysis (countries
included, time horizon, etc)
Welfare criteria (discount rate,
distributional weights)
The role of CCAs and trading in the
UK system
• UK Emissions Trading Scheme began March 2002.
• World’s first large-scale greenhouse gas trading scheme
• “Direct” participants: 34 successful bidders in March
2002 auction
• Descending clock auction, budget £215 million.
Purchased approx 4 million tonnes C.
• Market clearing price £53.37. Equivalent to £17.79 ($27)
/tonneC over the life of scheme.
• “Agreement” participants – firms within CCAs can
achieve compliance by trading
• Market price has fluctuated, but always well below
auction price. Currently about £2.50 ($3.75) /tonneC
What role for taxes in future climate
change policy?
EU Emissions Trading scheme will provide systematic market-based
approach to climate change policy. Is there still a need for energy
taxes?
Strong case for taxes within climate change policy package, for three
reasons:
• Permits tend to be issued free, which foregoes revenues, and hence
potential “double dividend” benefits
• Taxes provide a safety net, reducing risk of overgenerous “hot air”
permit allocation
• Future international agreements should discuss carbon prices, and
not just quantity targets. Co-ordinated carbon taxes would be a
simpler agreement to define, implement and monitor.