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Podcast | Can carbon taxes get us to net zero?

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This week, all eyes are on the UN Climate Change Conference (COP26) summit in Glasgow as world leaders meet to accelerate action on climate change. 

The UK is legally committed to reducing the net greenhouse gas emissions that arise from UK-based activities to zero by 2050, but action to reduce emissions will need to happen on a global scale to be effective. What policies should governments worldwide introduce to combat climate change? How should carbon taxes be designed to ensure a cost-efficient and fair transition to net zero?

This episode, IFS Director and Climate Change Committee member Paul Johnson is joined by Alice Pirlot, Research Fellow at the Oxford University Centre for Business Taxation, and IFS Associate Director Peter Levell.

Transcript

Paul Johnson:

Hello and welcome to this edition of the IFS Zooms In with me, Paul Johnson, and today I’m really pleased that we are talking about one of the big issues of our time, climate change and the role of policy and in particular tax policy and tackling it. And I’m particularly pleased to be joined by Alice Pirlot from the Centre for Business Taxation from the University of Oxford, and Peter Levell, a colleague of mine here at the Institute for Fiscal Studies. And we’re going to talk a bit about where we are with moving towards our target of net zero in the UK, but we’re mostly going to focus on what are some of the polices that governments can follow both here and internationally as we make progress in that direction.

It’s particularly good to have Alice here because she is an expert on one of the things that really matters here, beyond the economics that we work on here at the IFS, looking at the legal situation in terms of developing global responses, global carbon taxes, and these adjustments at boarders, the fact that we may need to change trade policy if we’re going to reduce our overall carbon footprint.

But let’s start Peter just by saying a little bit about where we are in the UK in terms of doing that, in terms of reducing our carbon footprint. How are we doing?

Peter Levell:

Well, there’s no doubt that it’s going to be a significant challenge for the UK to reach its net zero targets. The government’s ambition is for net carbon emissions to be zero by 2050. Over the last thirty years the UK’s made pretty good progress in reducing its carbon emissions, they’ve fallen by about 40% since 1990. Relative to other countries, that’s pretty good going, so the UK saw a faster per capita reduction in carbon emissions than any other country in the G7 for example, over that period.

But what’s difficult is that the pace of emissions reductions going forwards is going to have to be much faster than it was in the past. So, if you look at the pace of emissions reductions over the past thirty years, they’re about 1.3% of 1990 levels per year, and going forward they’re going to have to be about 3% of 2018 levels. So, there’s a significant increase, acceleration in the amount of emission reductions that we need if we’re going to meet that net zero target.

Paul Johnson:

And Alice, one of the things that you’re obviously focused on is the international environment. The level of progress across the world is pretty variable and one of the things that Peter referred to is the 40% or so reduction in our emissions, but once you take account of our consumption, progress hasn’t been quite so good, has it?

Alice Pirlot:

Yeah, that’s true. It’s interesting to know that reductions in emissions are usually accounted based on production level rather than consumption and so all countries’ commitments are linked to their reduction in emissions with regards to where emissions are being released, and so not so much the emissions linked to consumption because the emissions related to the production of a car will be accounted for in the country where the car is being produced, rather than in the country where the car is being used.  

And so that’s why we need the global response to climate change because we, a country alone couldn’t account for all the emissions linked to both production and consumption because it’s very, very difficult to know how much emissions are linked to the goods you consume. Right? Like how could we know how much emissions have been generated for the production of a car? To know that we need to go into the country where the car is being produced and check that the level of the plant as to assess how much greenhouse gas emissions have been released during the production process of the car.

Paul Johnson:

Which is one of the many reasons why global response is so important. Obviously, doesn’t matter where carbon dioxide emissions occur, they have the same effect on the planet, wherever they happen which is why this is a global issue. But equally, the response needs to be global because there’s no point in the UK stopping building cars, or producing steel, or producing concrete if we just bring it all in from other parts of the world. And one of the reasons why our so-called production emissions have fallen more than our consumption emissions is because we are importing more stuff from other countries.

Peter, the good progress you’ve described, and actually most of that progress I think it will be fair to say has come from de-carbonising our electricity supply, we’re not all the way there yet, but most of those reductions in our emissions have come from moving from coal and gas to produce electricity, towards wind in particular and some solar. What are the big challenges going forward from here?

Peter Levell:

Well so it’s exactly as you said that most of the carbon emissions over the last thirty years have come from electricity generation. That’s been achieved through a whole series of levies that are applied on electricity suppliers and the revenue from those levies are used to subsidies renewable power generation. Going forward there’s going to be more challenges in further decarbonising the electricity sector, we saw the difficulties with the challenges posed by having a grid that’s largely powered by renewables recently, when we’ve had problems with intermittency and we’ve needed to fire up more gas-powered power stations, even coal-powered stations to keep the grid going. So that’s a challenge we need to address as we increase the share of renewables.

Paul Johnson:

So, just to be clear, the consequence of that is if you’ve got lots of wind and lots of solar, energy most of the time. You still need to keep a whole load of gas and other stations available for when the wind doesn’t blow, and the sun doesn’t shine?

Peter Levell:

Yes, exactly. So, as well as the cost of building and operating renewable power stations, we also need to take into account the cost of maintaining capacity in for example gas-fired power stations, so that they can step in in the event that the wind doesn’t blow, or the sun doesn’t shine. And of course, that’s difficult to do if it’s a gas shortage at the same time as you’re having problems with renewable power. That’s one problem.

A further problem is of course that we want to electrify a lot of things, as we’re decarbonising home heating, transport. So, electricity demands are going to go up for those reasons, even if that might be off-set by reductions in a demand through greater energy efficiency and so on.

And the other challenge is that now we’ve achieved large emissions reductions, particularly with electricity generation, we need to start looking at other sources of emissions and the sources of emissions might be more politically challenging, so things like home heating for example, transport and motoring and agriculture. So, they’re what the government’s going to have to, eventually going to have to start looking at it if it wants to achieve net zero. And of course those are the areas that they haven’t touched recently, you know possibly for, because of the political challenges involved.

Paul Johnson:

Two really important points there, I think. I think one is that pretty much all of the de-carbonisation we’ve gone through so far has been through the electricity system and actually we the consumers haven’t noticed anything; the electricity that comes out our plug is exactly the same as it always was. We are going to notice a bit when we’re going to have to drive electric cars, we are going to notice a lot when someone comes to rip out our gas boiler and install an air source heat pump, or we’re told that we can’t eat meat and we’re not going to quite get there but things are going to affect us.

But the other thing that seems really important from what Peter just said is that this de-carbonisation electricity supply doesn’t just mean replacing all the gas power stations, it means probably creating two or three times as much electricity going forward as we are because we’re going to be doing so much more with that electricity.

So, let’s move on a little from some of those issues and talk about one of the other big challenges which is aviation. And you know we’re in a world at the moment where actually the tax on flying is very small, we have an air passenger duty. We know that, or it looks like that in twenty to thirty years’ time, aviation can be a very large chunk of our emissions, but there are whole series of problems here because this is an international industry and we need international agreements to make progress on that. Alice, can you tell is a little bit about why this is all so complicated and why we’ve made so little progress actually on that particular sector.

Alice Pirlot:

Yes, certainly and I think there are legal and practical reasons for why it’s so difficult. On the legal side and this is also something you’ve said like you can’t really act at a unilateral level, the straightforward way to internalise the emissions of the aviation sector would be to impose a carbon tax on aviation fuel. But there are many, many legal obstacles to the taxation of fuel for international flights. The Chicago Convention regulates international civil aviation and has been signed by many countries and it prevents its signatories from taxing fuel on board of an aircraft of another contracting state on the condition that the fuel is retained on board.

And on top of this international convention, many countries have concluded the bilateral aviation agreements that prevents them from taxing fuel introduced or supplied in the treaty for use in an aircraft of an airline of another contracting state. And because of all these legal provisions, many counties are required not to tax fuel supplied under treaty for international flights, and in any case, regardless of these bilateral aviation agreements, countries are discouraged to do so because air carriers could very easily avoid paying those taxes. They could simply fuel their tanks in other countries where no tax is imposed on aviation fuel. And that might explain why the UK has this air passenger duty, because it’s not a tax on fuel, it’s a tax charged on passenger flights from a UK airport and the rates varies based on the destination and the class of travel, but it’s not a tax on fuel so the link to greenhouse gas emissions is much less straightforward.

But we should not be too negative, I think there is still hope, at the international level the International Civil Aviation Organisation has established a global market-based mechanism for the aviation sector, it’s called the CORSIA for Carbon Off-setting and Reduction Scheme of International Aviation. And this scheme could be effective in the coming years. If it’s successful, it could be a very, very good news for the mitigation of the aviation sector. The UK will have to implement the CORSIA in UK law, they will also have to think about the relationship between the UK emissions trading system and the CORSIA and maybe there is space also for reforming the air-passenger duties, so certainly a space to watch.

Paul Johnson:

And presumably for the CORSIA to work you need an awful lot of counties to sign-up, just as you would do if you were to undo the Chicago Convention on the taxation of fuel. I mean how well are we doing in getting counties to sign up? And why not just re-write the Chicago Convention and allow people to tax fuel?

Alice Pirlot:

Yeah, that’s a very good point and I think it would be much more straightforward to just have a tax on aviation fuel. But the ICAO so the International Civil Aviation Organisation has always been opposed to the use of taxes on the aviation sector, not just taxes on fuels but also VAT etc, and so I believe that’s the reason why we have these global market-based mechanisms not being negotiated and implemented at the ICAO level. There are quite a few countries that have voluntary signed-up for now, so it’s not too bad. There are of course a few countries that haven’t signed-up yet, but you know the situation might change in the coming years because the scheme is now implemented in a voluntary way, and it will become fully effective and enforceable in 2027 if I’m not mistaken.

Paul Johnson:

But you’d think that, you know, this is exactly the sort of international issue that would be top of the agenda at COP26, but it’s not, is it?

Alice Pirlot:

No, it’s not and it’s not for good reasons. Because all the negotiations at COP are not related to the aviation and maritime sector. It has been excluded from the scope of those negotiations twenty years ago, so that’s the simple reasons why it’s not being discussed.

Paul Johnson:

Which to normal human beings listening would seem completely mad! Because if there’s one thing that’s clearly an international issue, this is it.

Alice Pirlot:

That’s true but I think everything in relation to climate change is international. If you think about the steel industry you have similar global issues. Because as you were mentioning earlier, steel manufacturers could relocate from the UK to other countries, and if not all countries are on board then you’ll necessarily have those problems of carbon leakage. So I understand that aviation is clearly an international issue but, and certainly for relatively small countries, like in terms of geographical scope, for bigger countries you also have a bigger share of domestic flights, which wouldn’t haven’t those cross-border effects, so year, I think that’s also important to keep in mind, that it’s not all international flights but also domestic flights that are problematic.

Paul Johnson:

Okay, we’ve talked a lot around the area of carbon pricing and carbon tax over the last several minutes, perhaps we should step back a minute and just ask ourselves what do we mean by carbon pricing? And why do most economists and lots of other people think that a carbon tax is a pretty good idea and a good way of getting – or helping us at least – to get to net zero. Peter can you just explain what we mean by pricing carbon and why we economists are so keen on it as a tool towards getting it towards net zero?

Peter Levell:

The way economists think about the problem is that when you undertake some activity that emits carbon dioxide, that imposes costs on other people that you don’t have to pay for. And the way to correct your incentive so that they’re in line with what’s good not just for you but for society as a whole, is to put a price on those emissions, either through a tax or actually have to buy carbon permits or through putting a price on carbon through some other means to correct people behaviour.

One of the other attractions of the carbon tax as opposed to other means of getting people to cut their carbon dioxide emissions such as subsidies or regulations is that it’s a market-based mechanism. So, the government doesn’t need to know anything about what the cheapest way of reducing carbon emissions is, it can just set the tax and then firms and households can then change their behaviour in way that is now good for them, and decide for them what’s now the most cost-effective way for them to reduce their carbon dioxide emissions.

Paul Johnson:

Really important point here again about why a tax or a market mechanism is so important, this is an area actually where one sees governments, possibly inevitably making quite a lot of big decisions about what they think is the right way forward: it’s this kind of green energy technology, or it’s that kind of heating technology, and it’s that kind of speed. And we may need to do more of that than we’d normally be comfortable with when it comes to climate change. But there are big issues there: one is that it opens the government to lobbying, the other is, you get things wrong and make things more expensive, so the price mechanism can be really quite powerful here.

But Alice you weren’t talking about taxes when you were talking about the way that we were moving towards some kind of carbon pricing in aviation. You were talking about a trading scheme; can you just explain to us what a trading scheme is and how that differs from a tax?

Alice Pirlot:

Certainly. An emission trading scheme usually will require heavy energy installations to surrender emissions certificates to cover the emissions that they generate on a yearly basis. And some of these certificates are sometimes allocated for free but most of them are auctions. Which means that companies that fall under the scheme will have to pay a price for all the emissions that they generate on a yearly basis. The total amount of certificates is established by the authority and in principle there should be a cap on the maximum amount of greenhouse gas emissions that the authority considers to be at the suitable amount of the year.  So, let’s say the UK authority could issue a certain number of emissions certificates that would correspond to the total amounts of green-house gas emissions that they consider appropriate for the industry that fall under the scheme.  

So that’s the logic of the emission trading system and it differs from a carbon tax because you have certainty to the reduction in emissions level, which you don’t have for a carbon tax. But on the other hand, you don’t have any certainty as to the price level, sort of the carbon tax you know that one tonne of future emissions you’ll have to pay so much, with the emissions trading schemes you don’t get that certainty because the price you’ll have to pay depends on how many emission certificates are available on the market and who wants to buy them and who needs to buy them. So, you get less certainty as to the price, but you get more certainty as to the result.         

There are theoretical differences, in practice the two instruments might not differ so much because for the tax you could change the tax rate and then you could get more certainty as to the level of emission reductions and for the emission trading systems you could also play a little bit with the number of emission allowances that you put into the market and then you would get more certainty as to the price of each emission certificate.

So, in practice I would say I wouldn’t over-emphasise the differences between the two instruments, but what I think is really, really important is that countries have an effective carbon pricing mechanism – it could be either a tax or an emission trading system – and the more consistent and coherent those mechanisms are, the better.

At the moment the UK has like a big set of instruments, it’s quite complicated with an emission trading system but also taxes on energy uses, carbon taxes and other types of instruments that’s very, very complicated and it might be better for the UK to reform those instruments and maybe simplify the existing policy framework so that we would have one single instrument to price carbon emissions.  

Paul Johnson:

Funnily enough Peter, you’ve been writing about exactly that recently and illustrating what an extraordinarily complex set of instruments we have and what very, very different prices we effectively charge for carbon emitted in different places.

Peter Levell:

Yes, that’s right, and as Alice was saying, we don’t have a single carbon price or a single carbon tax. The closest we come to that comes from the UK own emissions trading scheme, but that only covers about 30% of UK emissions. And on top of that trading scheme, there are a whole set of environmental levies and duties that you can think of as putting the price on carbon in some way. But the way they’ve been put together has meant very, as you say very, very different levels of carbon taxation on some sorts of emissions compared to others. So, for example we tend to tax households use of energy less than business, we tend to tax electricity emissions associated with electricity a lot more than we do for gas, in fact for households, because there’s a reduced rate of VAT on energy including gas, the net carbon price for gas is in fact at a negative, the taxes relatively favours consumption of gas-

Paul Johnson:

Just halting on that and that is a really important point, I think people often don’t quite get – they point you’re making is that we charge less than the standard rate of VAT on consuming gas, there’s no additional tax on it, so relative to consuming other things, the governments effectively subsidising us to burn gas.

Peter Levell:

Yeah, and that’s important to remember when we think about pricing carbon is we need to think about putting taxes on a system that is to start with not neutral, in terms of how it treats different forms of consumption and production. So for example, we have this reduced rate of VAT on energy, we’ve also talked about the zero rate of VAT that applies to flights, so when we’re thinking about the overall incentives the tax system gives people, we don’t just need to think about you know, new environmental levies but what’s already in place to work out the overall incentives people have to undertake different activities.

I should say all this complexity matters and it is extremely complex. We spent quite a lot of time trying to get to grips with all the different polices that apply to the energy sector, and how they translate into taxes on carbon. The cost of this complexity is, well it’s just not very simple and easy for people involved to understand what their incentives are sometimes. But also, it means that for example businesses will be making - or incentivised to make emissions reductions quite costly compared to what the households can do in their place. So, you’re looking at a move towards net zero that’s going to cost more than it would if we had a uniform set of carbon prices.

Paul Johnson:

That’s really important again that point about the cost of getting to net zero, I worked a bit with Nick Stern with his review of climate change fifteen years ago now. And one of the things he absolutely was banging on about, quite rightly, was that you can deal with climate change relatively cheaply, but only if you do it right, only if you get policies right, you can do it in a way that’s much too expensive. But obviously, Peter, one of the obvious impacts of what you’re suggesting or talking about, is if we did put a carbon tax on and VAT on domestic gas for example, that’s going to not please a lot of people whose bills go up. And indeed, because we know that poorer people consume more gas a fraction of their income than people who are better off, it will be a bit of a regressive thing to do.

Peter Levell:

Yes, indeed and I think you’ve put your finger on one of the most challenging aspects of this whole thing that in general we know that if you put greater prices on carbon, the people’s whose consumption baskets are not necessarily consuming the most carbon but the most carbon intensive in terms of how much carbon is emitted per pound spent is that it’s the poorer households that are going to be hit relatively more.  

How do you address that problem? So, the approach we’ve taken so far is we’re not going to price the carbon associated with domestic gas emissions, instead we’re going to effectively subsidise energy efficiency improvements, almost exclusively at the moment low-income households, but also more recently in terms of incentives for, for example to introduce heat pumps instead of gas boilers. So, we’ve gone for this approach of subsidising rather than taxing.

The difficulty with that approach is obviously you need to decide what you’re going to subsidise, and obviously you’ve got to get the revenue to finance these subsidies from somewhere. So, it’s not a costless approach. The way economists traditionally suggest you get around this problem is of course carbon tax is going to raise revenue, and those revenues can be used to compensate the people that lose out from greater carbon pricing in the way that doesn’t undo their incentives to actually you know reduce their emissions. So, for example you could use the revenue to raise certain benefit rates or cut taxes or finance expenditures that are of particular benefit to the people that would otherwise lose out from carbon pricing.  

It still is a very tricky problem to deal with, particularly when you think about how to design a compensation package that’s going to reach the people that are really hurt by these polices but the same time not having the unintended consequence of meaning that you’ve actually reduced their incentives to cut emissions.

Paul Johnson:

Yeah, and part of the problem as it were is that some people on low incomes don’t use much gas, and some, because they may live in drafty houses or they may have medical conditions that mean they need to get very warm, use an awful lot of gas and it’s going to be really hard to compensate everybody appropriately and indeed almost impossible, and that’s a big political economy question for government as well.

But let’s move from one tricky question to another, we’ve been talking largely about what’s been going on in the UK, we’ve touched on aviation as an international issue, but actually whatever we do in the UK, isn’t going to have any impact on the climate, what needs to happen is change across the world. And Alice you’ve been thinking about that in two respects. Firstly, I mean let’s start with one, is it possible to get a carbon tax across the world? I mean can we have a worldwide carbon tax? Is this in the realms of possibility, or is that pure science fiction?

Alice Pirlot:

People really thought it was pure science fiction but interestingly enough, some international organisations have, are pushing for that kind of proposal at the moment so there is a policy know by the IMF that has been published a couple of months ago, proposing for a minimum carbon price at the global level, and so clearly that is something that’s being put on the negotiation table and that could potentially completely change the international climate change talks, so it’s impossible to predict whether they’ll be successful with the proposal. But it’s not impossible that some countries will come together, form a climate club and decide that they want to have a common carbon price on the use of fossil fuels in all those countries.  

It would be a very good idea, it’s clearly no longer impossible because many countries are now adopting carbon prices. The World Bank has a very nice website where they show all the countries considering or have a carbon price in place and when you look at that website, you see that more and more countries are popping up showing that there is a move in favour of carbon pricing instruments all over the world. And it’s not just developed countries, it’s also developing countries.

Paul Johnson:

If you wanted to do that on the internationally coordinated basis, is that a situation which a trading scheme might be better or easier to implement than a tax that’s consistent? Or again is there not that much to call between them?

Alice Pirlot:

No, again I think you could either use one or the other. If you had a global carbon price, I think you need to have a tax if you want to have a uniform price for carbon, unless you have a global carbon trading system where trading systems link between every single country all over the world, and in that case the market price would also be generated at the global level. Like every enterprise where wherever they located could buy emissions allowances on this global market.

I’m not sure that there is a huge difference between a global carbon tax and a global market-based mechanism or global emission trading system. But to me the global carbon tax seems more straightforward. I’m not sure it’s easier though, especially when it comes to the difference between developed and developing countries because as such we could argue that developing counties do not need a carbon price as high as developed countries, so the idea of a uniform carbon price might be in a position where this principle of common but differentiated responsibility and respective capabilities that underlies international climate change law.

Paul Johnson:

That’s going to be a really serious issue right across negotiations on climate change. The other sort of aspect of international climate change policy is in the absence of global carbon price, and I think we can assume that that absence will be with us for a little while longer, people have been talking about these things called CBAMs, Carbon Boarder Adjustments Mechanisms which broadly speaking would mean counties like the UK, deciding to impose a tax on some imports from other countries which have been responsible for producing green-house gas emissions.  

So, for example if we were to buy some steel from China and the carbon within that hadn’t been appropriately taxed in our view, we might put a tax on it as it comes into the country. And you can see the attraction of that because there’s no point in closing down steel production in the UK if we just import it from somewhere else where it’s still creating greenhouse gas emissions. Alice you’ve been looking at this proposal as well, it sounds very sensible in principle, has it got legs in practice?

Alice Pirlot:

I guess so *laughs*. At least we have this very detailed proposal from the European commission that gives flesh to the mechanism. The whole idea is that you would have a similar mechanism as the EU emission trading system in place for imported product. Not every time of imported product, but just a selection of energy-intensive imported products, such as steel, iron, fertilisers, electricity, aluminium, I might forget one, iron, probably. And the main objective of the mechanism is as you said it, to mitigate the risk of carbon leakage, namely enterprises moving relocating to jurisdictions where you do not have any carbon price in place.  

So the plans to use that mechanism as an alternative to the system of free allowances that they’ve used so far in order to mitigate that risk of carbon leakage, at the moment energy-intensive energies in the EU that are considered at risk of carbon leakage receive those free allowances which means that they don’t really pay the carbon price, or they don’t pay the full carbon price, these mechanisms would be gradually phased out and the carbon board adjustment measure would be gradually phased in.  

Of course, it’s difficult to implement in practice because you need to know how much CO2 emissions are linked to imported products. So how much greenhouse gas emissions have been realised during the production of one tonne of steel, or one tonne of iron or one tonne of cement? That is very hard to know, you need to rely on the evidence that’s being provided to you by importers based in China, India or wherever they’ll be located. And if you don’t believe them, you then need to use an alternative formula that you’ll use in order to average the greenhouse gas emission that you think have been released during the production of that one tonne of steel or one tonne of cement. And that makes it yeah, difficult to implement.

Paul Johnson:

And also, you need to presumably get agreement from some of those other countries. I mean one could unilaterally impose this, but we don’t really want a big trade war with China, presumably?

Alice Pirlot:

Oh, I don’t think you’ll get agreements on other countries because why would countries accept that you would start pricing the greenhouse gas emissions that have been released over the treaty? Counties would argue that they are taking care of those emissions and that as long as they’re part of the Paris Agreements you shouldn’t price them. So, I think it’s a fully unilateral move.

Though you say that they wouldn’t impose this additional price if countries take the lead, meaning if foreign countries start imposing a similar carbon price at the carbon price that’s being imposed in the EU, for example for the UK, that means there wouldn’t be any additional charge being imposed on products imported from the UK into the EU because the UK has a sufficiently high carbon price.

But again, that’s a very sensitive issue because it basically means that the EU will have to assess the carbon pricing policy imposed by other countries. For the UK it’s easy because the UK was part of the EU, so the carbon pricing policy in place in the UK is still very similar to the carbon pricing policy in place in the EU. But how can the EU know whether the carbon pricing policy imposed by China, the US, Canada, or any other country in the world is equivalent to the EU ETS? And why should the EU do that?

So clearly it could lead to trade war, you’re totally right on that, it could also lead to dispute in front of the World Trade Organisation, and we don’t know what could happen. In the worst-case scenario, the EU proposals will have a negative impact on the negotiations at the national level, including the negotiations that will take place in Glasgow and the next negotiations.

On the positive side, the EU proposals could also encourage third counties, foreign countries to introduce a carbon price and ambitious carbon price, and in that case, that will have a positive effect because it could even help get into the direction of a global carbon price, as we were discussing earlier. So, it’s very hard to assess what will be the exact impact of the EU proposals and we could go into you know, either direction, either very negative impact of a very positive impact.

Paul Johnson:

So, are you an optimist or a pessimist on this?

Alice Pirlot:

I’m not too much of a pessimist, because also it’s, at the moment it’s just a proposal, so you could also use this as a strategic tool. You know, not really implementing the scheme but using it as a strategic instrument to tell foreign counties that they have to implement an ambitious carbon price and they have to do their share. So I could totally see the EU doing that because the EU has been doing that the past, in particular with the aviation sector, when the EU introduced, and the UK was part of the EU at the time, but the EU included the aviation sector into the emission trading system, and so the emission trading system would have applied to flights departing or landing in to the EU, including flights from let’s say Paris to New York, or flights from New York to Paris. And of course, third countries were not too happy with that move, but I think it really helped to have more ambitious targets at the level of the International Civil Aviation Organisation.

So, I really think that the strategy cues of the ETS and the inclusion of the aviation sector into the scheme helped to foster negotiations on the internalisation of the emissions of the aviation sector at the international level. And so, it could totally be that the CBAM proposals will lead to the same kind of consequences.

Paul Johnson:

That’s a very nice positive note and an interesting foray into the workings of international diplomacy. Peter, last word, are you optimistic or pessimistic about the UK getting to net zero?

Peter Levell:

I think it’s easy to underestimate some of the challenges. I mean when you just look at the arithmetic of the amount of emission reduction that need to take place, and where they need to take place, it does look daunting and it’s particularly daunting in a kind of international environment, where you’re not sure what other countries are going to do, particularly now. And I think it’s at least emphasising determining international coordination is extremely important. Not least because it may be cheaper for countries, other countries to reduce their carbon emissions than it is for the UK to do so, so there is money on the table that could be exploited for that reason. But also because of you know the political economy that comes with problems of carbon leakage, how happy are voters going to be if plants and factories in the UK shift overseas because of stringent carbon polices and ways that aren’t any better for the environment than the situation was before?          

So, I think the high rate of progress the UK’s shown to date is some grounds for optimism, but I don’t think we should underestimate some of the challenges.

Paul Johnson:

Oh dear, well the economist as ever showing their reputation of being miserable is very well deserved. A positive ending from Alice, a rather negative and downbeat one from Peter. He’s obviously right to be clear about the scale of the challenge that we have, and I do worry actually that the electorate hasn’t quite understood the scale of that challenge and how things will have to change. But we’ve still got thirty years, and we’re making good progress and I guess I’m a little bit more optimistic than Peter on that one.       

Anyway, thank you so much Alice, thank you Peter, it’s been absolutely fantastic conversation. Thank you everyone for listening and please do tune in to future editions of the IFS Zooms In.