Britain's New Carbon Tax: Could It Work Here?

Adam Werbach Oct 26 2010, 8:00 AM ET

Taxes have long been the third rail of politics, but in an era of deficits, that may start to change where it comes to carbon taxes.

The British government's Carbon Reduction Commitment (CRC) -- a mandatory cap-and-trade scheme that will apply to major non-energy-intensive organizations in the UK's public and private sectors -- was initially intended to be revenue-neutral for the government: The companies with the greatest carbon reductions would receive rebates to fund efficiency investments. But the government has now announced that it will keep revenues from the CRC instead of rebating them for efficiency work. According to the official statement: "Revenue raised from the CRC Energy Efficiency Scheme will be used to support the public finances (including spending on the environment), rather than recycled to participants."

And just like that, the UK established one of the world's largest carbon taxes.

A tax, unlike many fees or 'schemes', goes directly into the general treasury to fund public services like roads and schools. The deficit-strapped UK Treasury will receive about 1 billion GBP in revenue that had been previously slated to go back to the companies that fund the tax. The Carbon Reduction Scheme affects about 5,000 companies directly. Each of these "participants" consumed at least 6,000 mwh of electricity in the year 2008, and will now have to buy allowances at a cost of 12 GBP per ton of CO2 emitted a year.

The cost of emitting carbon is getting very real, very fast. "The challenge with the CRC," says David Solsky, CEO of Global Carbon Systems,"is that it hits medium-size organizations like local government authorities. A local council that has 150 schools has caught a liability on the order of 1 million GBP." Global Carbon Systems is one of the fastest-growing data companies that is helping organizations take their energy bills and turn them into financial-grade data. A whole new ecosystem of accountants and consultants is sprouting to help companies deal with this new liability. Companies won't just count their carbon, they'll seek to reduce their emissions and their tax bill.

But for the past few years I've been arguing that making the cost of polluting energy higher is only one part of the equation. It's more important that we lower the cost of clean energy so that it outcompetes older energy technologies. Today over two billion people live in a state of energy scarcity, without the basic energy they need to stay warm, cook meals, or power a cell phone. And many of the rest of us are not all that thrilled to see our energy prices go up, even if it's for the good of the planet. We need to make energy cheaper, not more expensive.

With the failure of the U.S. Congress to pass climate change legislation, and the devolving Congressional consensus for action, a movement spearheaded by the Breakthrough Institute, the American Enterprise Insitute, and the Brookings Institution for a "Technology-First" approach to climate change is finally gaining traction. The idea, simply stated, is to invest $25 Billion a year in the U.S. to make clean energy cheap. Federal investments have spurred innovation before, from railroads to microchips to the Internet. With all of the focus on cap-and-trade, the U.S. took its eye off of the groundwork needed for innovations that would radically lower the price of low-carbon energy.

Still, with outsized deficits in many countries, new taxes will eventually be levied to balance budgets. David Roberts from Grist points out that income taxes and payroll taxes are even more unpopular than a carbon tax. Many economists prefer a tax to a cap and trade system because it sends a clear and direct price signal, with fewer opportunities for gaming the system. Cap and trade is dead for now. Maybe a U.S. carbon tax would have more luck.