What should we legitimately be charging for environmental damage?

Designing policies to address environmental damage has proven extremely difficult. Those who pollute should bear the costs but there is little agreement on even setting the criteria for precisely how much extra we should legitimately be charging for our fuel. Andrew Warren, chairman of the British Energy Efficiency Federation and a regular contributor to EiD, provides us with a valuable review of the efforts over several decades in Britain to set the correct charges.

How do we charge for environmental damage?

This month marks the thirtieth anniversary of the first official acknowledgment of the desirability of increasing the price charged for fuel, in order to reflect the amount of environmental damage caused by its use.

It came as a result of a report from the House of Commons all-party environment select committee, chaired by the admirable Conservative MP for Hornsey Sir Hugh Rossi. (Full personal disclosure: I used to be a special advisor to the Commons environment select committee, although not on this particular report)

This report spawned a whole phalanx of academic work, mostly taxpayer-funded, designed to establish precisely what the appropriate surrogate charges should be.  This in turn led to many serious speeches from both aspiring and established politicians, concluding that “something must be done” to ensure the introduction of financial surrogates for this failure by the marketplace to incorporate “externalities” into final prices.

The trouble swiftly became that, whilst everybody seemed to acknowledge that the wrong sum to charge was the “zero” then levied, nobody could agree precisely what the correct price should be. I say everybody acknowledges: everybody that is, apart from the Trump administration, whence the order has now gone out from US federal energy regulators to abandon the use of social cost of carbon metrics developed during the Obama administration.

To be fair, this is in part over legitimate qualms with appropriate discount rates. But it is largely a knee-jerk response to seek to overturn as much as possible of President Obama’s legacy. Never mind the damage caused.

In contrast, back in the early 1990s the European Commission was formally promoting a scheme to add precisely $10 U.S. dollars to the cost of every single barrel of crude oil traded in Europe. This was in the belief that this surcharge would feed through into the price charged for all forms of energy, however generated, thereby sending an appropriate signal to consumers to minimise unnecessary consumption.

This proposal foundered, and was eventually abandoned.  As it happens, the same lead Commission official, a Belgian called Jos Delbeke, who initially championed the $10 per barrel tax, switched horses and became the great promoter of the European emissions trading scheme. It was launched in 2005, when he became the first director general of a new EC directorate promoting anti-climate change policies, called DG CLIMA.

That initial tax had been billed, very astutely, as an energy/carbon tax.  Had it just been deemed to be related to carbon, its inflexibility would surely have destroyed its credibility. Across a few years, the price of a single barrel of oil fluctuated more than four fold. When the price was low (at around $30) the new tax would have been dismissed as quite disproportionately high. When it went over $120 per barrel, the political squeals about the prospect placing any extra burdens upon industry/motorists/households would render the tax too difficult to progress.

That has been the fate of many other such universal panaceas subsequently considered, usually fought off by those who consistently queried quite what would happen to the money so raised.

Instead of attempting such overt taxation initiatives, public administrations have instead preferred to use such exercises as a way of justifying more energy efficient regulatory standards. For instance, for the past 25 years the minimum standards set for insulation in new homes in England under   Part L of the building regulations have been set by adding a presumed £62 for every extra tonne of carbon dioxide avoided as a result of any electricity or gas being saved. As Sir Michael Caine might say, not many people know that.

But at least the Communities Department arrived at an absolute amount to add on to prices, in order to compensate for environmental externalities. This is in serious contrast to what happens to those seeking to create a more sophisticated form of charging- like the convolutions of the UK’s floor price for carbon.

This started out life in 2012 as a straight carbon tax, levied on all but the smallest businesses, broadly based upon each fuel’s carbon impact. But it has now been so gerrymandered as effectively to exclude many of the sectors with the largest carbon footprint, whilst also taxing those businesses that obtain energy from several non-fossil fuels.  Turning it rather more less into a carbon tax, rather more into a kind of floor price for energy for non-energy intensive sectors.

So, what lessons should we draw? Primarily, that even thirty years on from that seminal Commons environment select committee’s report, which first established the need to impose extra charges for environmental damage caused by energy usage, we have still yet to establish the key criterion. Which is: precisely how much extra should we legitimately be charging? Until we settle that, the Trumpian philosophy of negativity will continue to block progress.

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