Emissions trading hits the poor

Scrap this regressive fuel tax and let countries be prosperous and free enough to cope with the effects of climate change

Matthew Sinclair
guardian.co.uk, Friday 30 October 2009 09.00 GMT
When the Grocer magazine accused Ken Clarke of planning to increase the rate of VAT on domestic fuel and power bills in 1997 it was a political scandal.
He was quick to deny their report. But, as our study released this morning shows, the European Union Emissions Trading Scheme (ETS) is now effectively doing just what the Grocer accused Clarke of planning. The ETS is now costing British consumers £3bn a year – equivalent to around £117 per family, and a large part of that bill is coming through higher electricity prices. When combined with other climate change policies such as the Renewables Obligation, it now accounts for 14% of the average household electricity bill. Yet, what percentage of the population even knows these policies exist, let alone how much they're paying for them?
The reason why increasing electricity bills has caused such a scandal in the past, and should be taken incredibly seriously now, is that the poor and elderly spend far more as a portion of their income on electricity. The 10% of the population on the lowest incomes spend more than three times as much, as a share of their income, as the richest 10%. Over-75s spend nearly twice as much as under-30s. We need to resist increases in VAT because it hits the poor hardest, but at least VAT is exempted or at least reduced for some items like food and children's clothing. The ETS does precisely the opposite, pushing up prices on the spending priorities of low-income families.
The fact that a large share of the proceeds goes to energy companies as windfall profits rubs salt in that wound. Those profits are going to continue for some years to come as the scheme slowly moves towards auctioning allowances rather than allocating them for free. Even once full auctioning is in place, the ETS will still be a highly regressive tax.
Of course, the reason why we are supposed to accept such a regressive tax is that it will help to cut emissions. Unfortunately, the efficacy of the scheme is undermined by its inability to produce a stable carbon price. The price has collapsed a number of times since the scheme was introduced. As Oliver Tickell wrote for this website, "wild fluctuations create a risk that deters some investors altogether and makes others demand a significant risk premium, putting up the price of capital." EDF Energy has called for a floor on the carbon price to "encourage investment in low-carbon energy like nuclear power". This calls into question the whole point of the scheme.
That volatility isn't going to end any time soon. The basic problem is that the supply of allowances is fixed (the "cap" in "cap and trade") so shifts in demand are entirely reflected in prices. As firms and households find it easier or harder to improve their carbon efficiency, and as the economy grows more or less quickly, the number of allowances allocated by the participating countries will never be quite right and the price will continue to crash up and down.
That volatility doesn't just undermine the efficacy of the ETS. It also makes the burden it imposes on households and businesses that bit harder to bear.
For those reasons alone, the Emissions Trading Scheme should be abolished. Instead, we should focus on making sure that developed and developing countries are prosperous and free enough to cope with whatever climate change throws at them. We should also directly support the development of technologies that can provide us with new options, ideally with the kind of rigorous prizes that have delivered dramatic results in the development of everything from agricultural machinery and private suborbital spaceflight. That will be far more effective and affordable than the current approach.
The ETS has been an expensive failure. Having been implemented through the EU without a real debate here, it lacks democratic legitimacy and it is imposing a significant burden on the poorest families while achieving very little. It should be abolished.