I’ve been asked to speak at a conference on this subject on Thursday in Brussels organised by the Spring Alliance and welcome the opportunity. The issue of how and who pays for environmental measures has become a hot political topic and I’m going to write a few blogs on pricing carbon, electricity supply and coal over the next few days.
I’m posting a presentation which I wrote a few years ago as this seems more pertinent now as the issues of environmental pricing policy design become more fraught.
But first the social dimension has to be seen as one of a number of issues which all need to be considered. A non-exhaustive list includes: Environmental policy, Energy policy, Electricity/Power policy, Fiscal policy, Tax policy, Social policy, National and Regional competitive position, Technology priorities, Land use policies – Forestry and Transport policy.
From a social policy perspective one needs to consider what is the most efficient policy which meets the social policy aspirations? From an economic perspective, the imperative is to reduce all emissions efficiently, ring-fencing some emissions from reduction for other policy reasons needs to be justified carefully and in particular the method chosen. Price signals are the clearest way to change behaviour but they fall disproportionately on the poorer sections of society raising the question of whether Fuel poverty will be replaced by Fuel/Carbon poverty as an issue as increasing carbon pricing comes into operation?
So what are the mechanisms that can deal with this and address social policy concerns? To change behaviour one needs to maintain a carbon price to reduce emissions, so in this context it appears one needs to provide non tax measures to deal with fuel and carbon poverty. Given that the lowest cost measures to reduce emissions according to McKinsey are energy efficiency measures then energy efficiency programmes and education become crucial. These programmes need to focus on housing stock and housing heating in particular although transport will be another important issue.
But in addition one needs to focus on other tax policy measures and whether they make sense in terms of the wider environmental objectives. An example from the UK is the 5% VAT rate on electricity. If the policy objective is to price emissions then logically this will need to be removed. Given the current mix of electricity generation this is a disguised “carbon subsidy”.
So environmental externalities do need to be priced consistently, but policies need to be designed to address the social consequences in addition to policies which address the competitive position of business sectors both within the EU and globally.