Green taxes: a double-edged sword

July 2023

The Bank of England policymaker, Catherine Mann, caused controversy recently when she said Britain and other rich nations should consider a carbon tax as the most efficient way to reduce greenhouse gas emissions. In her view, this is the best incentive for consumers and business to reduce their emissions and could also generate much-needed revenue that could be used to invest in green technologies. This may be correct but in the current landscape, would additional green taxes work in practice?

 

At a time when the cost of living crisis has pushed up costs for consumers and businesses, would they be able to stomach a further cost burden in the form of another green levy? In truth, any future taxes are likely to be levied on businesses rather than consumers. By paying taxes in proportion to the amount of pollution they create, companies and industries absorb the harm they’re causing to the environment. However, these taxes inflate production costs for some businesses – particularly manufacturers or waste management firms, for example – which then means they have to pass on some or all of those costs to consumers. This may disincentivise companies from making investments that would improve their carbon footprint. In addition, higher prices on goods effectively discourages consumers from purchasing them.

 

Another reason for not introducing green taxes is the absence of any standardised definition of them, which results in their arbitrary implementation. Many countries have introduced a carbon tax but the cost of this and the way in which it is implemented varies widely from country to country. Some countries, such as the US, have no carbon tax at all.

 

Furthermore, by imposing such taxes unilaterally, the danger is that carbon-intensive processes simply re-locate to jurisdictions without such taxes and which potentially have lower environmental standards and higher emissions, resulting in a worse outcome at a global level. Despite some levy exemptions available to energy-intensive industries, the UK has seen decline in such industries in recent years with production moving to other countries. Prominent economists such as Dieter Helm have argued instead for the application of a carbon border tax in which imports would be subject to taxation to level the playing field.

 

On the plus side, green taxes generate much-needed revenue for governments, revenue which they can then use to reduce other taxes or invest in infrastructure improvements. Taxing carbon emissions also, in theory, encourages firms and consumers to develop alternatives that could improve the environment. This could be something as simple as encouraging staff to walk or cycle to work, or it could involve the development of low-carbon electricity, such as solar power, which can then be sold and sent to the grid.

 

Catherine Mann’s suggestion has certainly given policymakers food for thought. Whether or not it will be implemented is another question altogether.