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The UK’s Autumn Budget and Environmental Policy: A Tale of a (Recyclable) Tub

Dr John Constable: GWPF Energy Editor

The United Kingdom’s Chancellor of the Exchequer, Mr Philip Hammond delivered his Autumn Budget, 2018, on Monday the 29th of October. Although silent on many environmental issues it contains clear indications that the Treasury is persisting in its attempt gradually to introduce technology neutral carbon taxation to replace income support subsidies to renewables. If successful, this attempt will represent a major and by and large desirable change of direction.

If attacked or troubled by a whale, sailors in the seventeenth century were in the habit, so it is said, of distracting the creature by tossing out a barrel with which it could be tempted to play as  the ship made its escape. Jonathan Swift took the concept as the title and the underlying jest of his first satire, The Tale of a Tub of 1704 (Figure 1, below, shows the frontispiece to a later edition). It may also be seen as a model for the Chancellor’s Autumn Budget of 2018, at least insofar as environmental policy is concerned, with the whale as the green sentiments of the public, and the distracting “tub” the tax on plastic packaging.

Figure 1: The Leviathan of Popular Environmentalism, distracted for the moment by a sustainable container.

Meanwhile the Chancellor and his colleagues set sail in another direction.

Elsewhere, and apart from a promise to fund the planting of trees, this Budget makes only apparently minor references to the environment or to climate change. As we shall see, these references are in fact heavily freighted with meaning, but the whole presentation is certainly in a minor key. There is, admittedly, some Green Boasting – the plastics policy is described as “world leading” – but the usual touchstones are absent. Indeed, the term “renewable” does not appear at all in the text, a notable omission, and there is nowhere any sign that the government has given in to recent and very vocal lobbying demanding a restart for subsidies to wind, deviously badged with Orwellian disregard for the truth as “subsidy-free” long term contracts. The Treasury’s 2017 moratorium on new support for renewables until the current expenditure levels start to fall, remains in place.

Furthermore, the Carbon Price Support (CPS) has been frozen, at £18 per tonne of carbon dioxide, the justification being that the EU Emissions Trading Scheme price has recently risen to relatively high levels. However, the Budget goes still further and actually signals an intention to reduce the level of Carbon Price Support if the ETS price remains high.

In a rather more conciliatory gesture, the Treasury has also announced that should the UK have to leave the Emissions Trading Scheme, as would be necessary in the case of a No-Deal Brexit, then a UK-specific Carbon Emissions Tax would be introduced from the 1st of April 2019 at the rate of £16 per tonne of carbon dioxide, in order to “help meet the UK’s legally binding carbon reduction commitments under the Climate Change Act” (p. 3). The implicit admission that such a level of tax, which is lower, of course, than the current Carbon Price Support, will only “help” towards the Climate Change Act targets is significant. It wouldn’t be sufficient, and the Treasury is quite aware of the fact. The implications for the CCA are left hanging, suggestively in the air.

But this initial No-Deal Brexit measure would appear to be a stop-gap measure, since the Budget text observes in addition that:

The government is also legislating so it can prepare for a range of long-term carbon pricing options. (p. 48)

Indeed, the implication seems to be that even if there is a deal, EU ETS membership would in time be replaced with carbon pricing legislation specific to the UK.  Some will find that implicit refusal to take the Brexit dividend regrettable, and I agree, but realistically one could not expect the government to do anything else at this stage and so long as the Climate Change Act remains on the Statute Book. Indeed, it is notable that an Act of the United Kingdom parliament, albeit an arguably foolish one such as the CCA, is presented as the driving legislation, and the EU ETS simply as an ancillary mechanism, to be replaced or supplemented as required. This is beginning to sound like “taking back control”.

But most of all, these remarks are entirely consistent with the persistent rumours that Treasury would much prefer, as would most economists, a climate policy grounded in carbon taxation rather than income support for renewables. Circumstantial evidence in support of this view can be seen in the otherwise easily missed fact that the Treasury wishes to equalize the rates of Climate Change Levy (CCL) on electricity and gas (p. 53). That is precisely the sort of efficient tidying and ground clearing that is to be expected ahead of a new policy departure in this area.

There can be no doubt that something important is afoot here. The plastics tax, laughable in some ways and laudable in others, is not opportunistically intended to camouflage a weakening of environmental policies. The truth is much more dramatic. It is providing cover for a major change in the fundamental character of the United Kingdom’s approach to the reduction of greenhouse gas emissions. This country is now clearly and steadily moving away from heavy-handed attempts to pick winners via subsidies to renewables, and tacking carefully towards the technology neutral and much more flexible approach of carbon taxation. This is long overdue and should be welcomed by all interested parties, lukewarmers and sincere catastrophists alike, because it is a mark of sane engagement rather than moral exhibitionism. As William Nordhaus, the recent winner of the Nobel Memorial Prize in Economic Sciences, observed in his 2008 book A Question of Balance: Weighing the Options on Global Warming Policies, if a government is not talking about carbon taxation, it is simply not “serious” about climate policy. Mr Hammond, in spite of his attempts at humour in the Budget speech, is of course a very serious person. But this goes much deeper than the Chancellor’s own inclinations; a shift towards carbon taxation appears to be the emerging Treasury View, and we can expect it to continue for many chancellors to come.

But it is certainly important for Mr Hammond, and for his party, since there is a lot at stake here politically. Anything other than a firm line on further increases in environmental levies, would have made absurd and vulnerable his opening peroration in the Commons, in which he promised that this was a Budget for the early-rising, hard-working, hard-pressed, strivers and grafters that keep the economy on an even keel. As is obvious in the latest update from the Office of Budget Responsibility (OBR), the costs of the environmental policies are extremely high, and still rising. Data in the Supplementary Fiscal Tables (Receipts and other, Tab 2.7), shows that total subsidies to renewable electricity reached £7.4 billion in 2017/18, or £285 per household in total cost of living impact (assuming 26 million households). These costs are expected to be £8.6 billion in 2018/19, and to climb, with only the slightest hint of a fall in the rate of increase, to £11.5 billion in 2023/24. Interestingly, the Capacity Market, that embarrassingly costly guarantee of security of supply made necessary by renewables, is forecast to rise to £1.3 billion in 2020/21, then fall to £0.9 billion in 2022/23, before rising again to £1.2 billion in 2023/4, presumably indicating that it will remain necessary at least until market distorting levels of subsidised renewables start to fall away through natural wastage.

If tax rises are to be avoided as the means of paying for the respite from “austerity”, then the economy will have to grow, and for it to grow households and the economy generally must prosper, and with burdens such as those spelled out by the OBR, to pay for renewables, they are unlikely to do so. One must infer that subsidies to renewables at this growth-inhibiting level have no long term future.

In another much reported part of the Budget the Chancellor despatched the unlamented Private Finance Initiative (PFI) with the remark that government had considered the schemes “in the light of experience” and “found the model to be inflexible and overly complex”, and a “source of significant fiscal risk”. With such oblique terms does the Treasury issue a death sentence. Something very similar is happening in relation to the United Kingdom’s current generation of climate policies. The “light of experience” is an unforgiving light, the UK has learned its lesson, and the country is now heading in a new direction. This can’t happen soon enough, as the OBR’s ghastly numbers show, and frustration at the government’s pace of change would be quite understandable. But patience is required. The Treasury is clearly trying to deliver a better climate policy in difficult circumstances, and whether it will succeed is an open question. For quite apart from the troublesome whale of misguided popular environmentalism, which may in any case be only temporarily diverted by its “tub”, its coffee cup of predominantly recycled and otherwise sustainably sourced materials, the waters around us are not only stormy but teeming with hungry, rent-seeking sharks, and they, unlike blundering whales, are not at all easily put off the scent.