How can we make carbon pricing fair for those who can least afford it?
While averting climate breakdown is ultimately in everyone’s interests, our mission to stop burning fossil fuels and decarbonise is also a matter of fairness. The poorest members of UK society have the lowest climate impact but will suffer the most from effects such as rising food prices and increased flooding. A Sheffield Hallam University study has shown that the least wealthy half of the UK population accounts for less than 20% of final energy demand. The picture is even more stark at the global level. The richest 10% of people are responsible for half of all emissions (49%). Eradicating extreme poverty (less than $1.90/day) could be done with only a 1% increase in global emissions.
Carbon pricing may thrive or perish as an idea depending on whether it is seen as fair. At its core, carbon pricing is about fairness. By default, polluters do not have to pay for the damage they cause by releasing CO2 in the atmosphere. The effects are too diffuse for any direct market feedback to be established. But a carbon price takes into account this “social cost”, and makes polluters pay for their impacts.
As the numbers on emissions and wealth show, richer people who consume more will pay more carbon tax. But fossil fuel consumption is ubiquitous and carbon taxes will also apply to those who can least afford it. A carbon tax that just exacerbates the cost-of-living crisis will not be accepted.
So how do we make this fair?
Fairness and low-income UK households
In order to be fair, carbon taxes should not primarily be about raising money. The goal should always be to change behaviour. If carbon taxes are applied to things that cannot be changed, they will be seen as punitive. As a first step, we would need to assess specific sectors to see if these changes can be made by low-income households.
Carbon pricing faces the challenge of a “pinch point” where penalties for emissions begin to bite enough to encourage change, but alternatives are not feasible. But the tax will also create revenue that can ease the transition by:
Promoting inexpensive alternatives: The ideal scenario is where there is already a low-carbon alternative that costs the same as a higher emitting alternative (pre-carbon tax). This is seen in food and agriculture, with vegan and vegetarian diets often coming in cheaper than meat-heavy diets. Here policy attention should be directed towards promoting these inexpensive alternatives and facilitating their spread.
Subsidising expensive alternatives: There will be many more situations where the low-carbon alternative is, at first, significantly more costly as technologies scale. Take heating your home, where poorer households buy less gas overall but spend a bigger proportion of their income on it. Retrofitting homes with proper insulation, or installing a heat pump costs thousands of pounds. Households with little to no disposable income will not take part unless the cost is fully subsidised.
Creating low-carbon environments: Other sectors will require a broader approach to create low-carbon systems that go beyond any one household. For example, in cities at least, mass switching to electric vehicles would not be as environmentally positive as the development of effective, decarbonised public transport networks.
Investing in developing solutions: Finally, as well as promoting the solutions we do have, we should look to the future and invest in R&D to create innovative solutions.
Communication will be key throughout. For a carbon tax to work, people need to be aware that it is happening and to know how to respond. Fair warning and a gradual introduction of carbon pricing will allow people the room to adjust.
If none of the above measures work, the fallback is a “carbon dividend” of the direct redistribution of the revenue to the poorest households, even if this money is used to buy the same carbon-intensive products in the short term. Again, the public need to know that this is happening, unlike in Canada and Switzerland.
Fairness and developing countries
If the UK introduced a strong carbon tax while other countries did not, there would be a significant risk that companies would simply move their production abroad to avoid the tax, and then export their goods back to the UK. A carbon border adjustment mechanism, or CBAM, would apply the carbon tax at the border to UK imports so the same rules applied.
But the application of a border carbon tax that applies to all countries equally, richest or poorest, could hit developing countries that rely heavily on exports and damage the livelihoods of many whose subsistence is already marginal. A border carbon tax should recognise the “common but differentiated responsibilities” cited in the Paris Agreement and the different capabilities of the poorest countries.
Fortunately, while there are concerns about the position of the World Trade Organisation on carbon border taxes, their agreements allow for developing countries to receive special or differential treatment. The UK currently makes use of these provisions to grant unilateral tariff and quota-free access to 46 least developed countries, as defined by the United Nations.
The measures that could be taken broadly reflect what might help the poorest UK households:
Phasing the tax introductions to facilitate adaptation and alternatives.
Direct support to promote the adoption of alternatives, such as through technical support, the encouragement of investment, or by aid spending on green tech.
Exempting some sectors if the tax would be too damaging and impossible to adapt to, for example due to cost of technology or the ability to properly document emissions.
Or just reducing the rate while keeping some tax to reflect the emissions involved.
Carbon pricing alone will not get us to net zero. But if fairness is taken seriously and it takes place in a wider system of measures, like those mentioned above, it can be a significant step in the journey.
If you are interested in Seahorse’s work on carbon pricing and the support Seahorse can offer, please get in touch: clong@seahorseenvironmental.co.uk