The price we pay for carbon: can taxes take us to net zero?

hello everyone i am helen miller i'm a deputy director at the ifs and i'm delighted to welcome you to our event this afternoon how we reach net zero is clearly a a huge challenge and one where we need not just lots of policy action but also lots of good ideas and i've got no doubt that we're going to hear lots of good ideas today from our excellent panel of speakers you're going to hear first from isaac de lestra who's an economist at the ifs you'll then hear from tim lord who leads the work on net zero for the tony blair institute for a global change and then last but by absolutely no means least you'll hear from anna valero who is a senior policy fellow at the lse center for economic performance and he's done a large amount of work on innovation including as it relates to uh to climate change so you'll hear from those three speakers we'll give you a good overview of what's happening in the uk and what the challenges are we'll then have time for your questions so if you do have questions please put them into slido the link for which will be below the video wherever you are watching the video and if you like particular questions please vote on them because when i take questions i'll i'll basically pick the most the most popular ones to ask um so without further ado let's kick off on today's event and we'll start with isaac isaac the floor is yours yeah thanks very much helen um so i'm gonna start off uh by talking a bit about the role of tax policy uh in achieving that zero so um the uk now has this legally binding target to achieve net zero greenhouse gas emissions by 2050 so i'm gonna kick off by thinking a little bit about what progress the uk has made up until this point uh towards achieving that target and then i'm going to think a little bit about uh tax policy in particular uh and the role that's playing in generation incentives or indeed disincentives to uh decarbonize uh in the uk and then finally i'm going to think a little bit about the challenges that are likely to face the uk uh in the coming uh decades so um first things first uh what do we actually mean when we talk about net zero so in the uk um the net zero target is measured against something called territorial emissions so uh territorial emissions are basically uh the total uh greenhouse gas emissions generated uh on uk soil so as you can see from this chart territorial emissions uh have fallen uh quite a lot uh over the last 30 years uh down almost 40 percent since 1990 and it is worth mentioning that by international standards this is a pretty big reduction right so um of uh in fact it's the largest reduction in territorial emissions uh of any uh g7 country um but territorial emissions isn't the only sensible way uh in which we can think about uh the uk's carbon footprint so we could also look at a measure for example like consumption emissions so consumption emissions are the measure of all greenhouse gas emissions um associated with goods consumed here in the uk and you can see that consumption emissions in the uk are quite a bit higher than territorial emissions and they also haven't fallen by as much by since 1990 and the reason they're higher um is essentially that uh the uk is a net importer of goods which have greenhouse gas emissions embedded uh within them so it's just worth noting here that um if and when the uk does actually achieve net zero on this territorial emissions measure uh it's likely that there will still be some positive consumption emissions associated with the uk okay so one of the uh one of the features of the reduction uh that the uk has seen it in its emissions uh since uh 1990 is that that reduction hasn't been particularly evenly shared across sectors some sectors have seen a much greater decarbonization than others so if we look at this chart here the energy sector which is largely electricity generation the industrial sector and also waste management have all seen pretty big reductions um in emissions since 1990 now if you compare that to the household sector that's mainly emissions from home heating and also the agricultural sector these two sectors have seen much more modest reductions in emissions uh since uh 1990. and finally if we look at transport um the top line here is land transport which is predominantly road transport and we can see that land transport hasn't only not has not only not seen a reduction in emissions since 1990 it's actually seen a slight increase in emissions i mean it's now the largest single source of emissions um in the uk and also the bottom of these two lines we can see air and shipping emissions and those have actually increased quite substantially since 1990 by almost 40 percent um and that's largely as a result of big increases in emissions from international aviation although it is worth noting uh this chart ends in 2018 and clearly there have been some pretty big reductions uh in international aviation emissions over the course of the pandemic um okay so we've got a broad idea um of uh the progress the uk is making towards net zero um what i want to do now is move on to think a little bit about the role that policy and particularly tax policy is playing um in shaping incentives for individuals and businesses to decarbonize so the basic problem uh that climate change poses from an economic point of view is that individuals and businesses um who generates greenhouse gas emissions don't face the full costs that those emissions uh impose on the rest of us in the form of climate change now the textbook economic response to this kind of problem uh would be to impose a uniform cost uh on producing emissions so you could do that for example uh by imposing attacks uh on every tonne of co2 equivalent emissions generated and crucially by making sure that tax is uniform so that making sure you charge the same amount of tax on a ton of carbon dioxide no matter who generates that carbon dioxide what you achieve is that you avoid a situation where decarbonization is occurring in one part of the economy when it could be occurring more cheaply or more efficiently in another part of the economy so um the uniformity of these kinds of taxes can be quite important in making sure that decarbonization happens at the lowest possible cost to the economy as a whole now uh it's very important to note that the uk is a long way from following this kind of textbook prescription of a uniform carbon price a uniform carbon tax instead the uk has quite a complex patchwork of different policies all of which impact incentives to generate emissions in different ways so there is an emissions trading scheme in the uk which is probably the closest um we come to having a true carbon price but it only covers just under a third of total emissions uh generated in the uk there's also attacks on energy consumption by businesses there's a whole array of different levies and obligations on electricity suppliers some of which are used to pay for subsidies for a renewable electricity generation there are taxes on individual emission sources like fuel a landfill and aviation um and if that wasn't complicated enough all that is layered on top of a tax system which already favors certain forms of consumption over others so just to give you some examples if you think of v8t v80 there's a reduced rate of v80 on household energy bills and there's actually also a zero rate of v80 on airline tickets so we've got this quite complicated mess of different policies all of which are affecting incentives in different ways for different kinds of people and different kinds of activities um what we'd really like to know is when you take all these policies together and add them all up what overall incentives are they creating for different uh emissions generating activities um and so that's what we're doing here on this next chart um which is showing you um for the energy sector the implicit carbon tax that all these policies are taken together generate on gas and on electricity and we're looking at it for three different groups of end users so we're looking at households we're looking at energy intensive businesses um which benefit from certain carve outs from environmental taxes and we're also looking at non-energy intensive businesses now the first thing just to notice here is that if the uk were following this textbook prescription of a uniform carbon price all these bars would be the same size clearly that's not the case and clearly the very complicated um policy framework that the uk has adopted um has led to some very very different incentives being produced to decarbonize for different people in different parts of the economy so if we just zoom in on a few of those we can see that um for electricity well if there is a ton of carbon dioxide produced in generating electricity for the use of households that ton of carbon dioxide will be taxed at around 140 pounds um if the same tonne of carbon dioxide were produced um generating electricity for the use of non-energy-intensive businesses on the other hand that would be taxed at 230 pounds so we have these kinds of inconsistencies across the economy and and the problem with those is that you're very likely to have a situation um where there are there's decarbonization taking place by non-energy intensive businesses that could be more efficiently or more cheaply undertaken uh by households um equally if you uh look across the board and particularly at households we can see that the carbon content of electricity is implicitly being taxed um at quite a at a much higher level than the carbon content of natural gas so uh a household there's a relatively high tax on the carbon content of electricity but for the carbon content of natural gas consumed for say home heating well that actually is tax subsidized in the uk and mainly as a result of this zero percent rate of vat that applies to domestic energy bills now um taxes aren't the only options available to governments looking to disincentivize uh emissions uh you can also subsidize greener alternatives and that is something the government does um and so what i'm showing you on this chart um are the average subsidies per megawatt hour of electricity produced for a whole range of different renewable electricity technologies and what you can see is that the subsidy received by different technologies in the uk really differs by quite a lot so the government's made an active decision to provide more generous support to technologies that are considered to be emerging to be considered more infant and to provide less support to more mature technologies now that isn't necessarily a bad idea um there might be reasons why you might want a more diverse portfolio of renewable energy technologies and you might want to foster innovation in various ways and but it is worth noting that the government has essentially tried to pick winners here it's made certain bets and if it's made the wrong bets um then it can turn out that these subsidies might end up costing the taxpayer and more than they needed to um okay now finally what i want to do is uh show you the implicit taxes um in place in the transport sector so we've already looked at the energy sector i want to have a quick look at the transport sector the yellow bar you're seeing here is the implicit tax on the carbon content of household electricity we saw that one of the previous charts i've just put it here to give you a sense of scale um we can compare that to the implicit taxes on road transport so petrol and diesel both have pretty high implicit carbon taxes associated with them as a result of fuel duties which are levied still at a relatively high rate despite real terms reductions over the last 10 years and we can compare that with aviation so the way in which aviation is taxed is a little bit more complicated than a petrol and diesel there's a zero percent rate of vat charged on airline tickets as we already mentioned um it's also the case that airlines don't have to pay any fuel duty on the jet fuel they buy for their planes um pushing in the other direction however there is a per passenger tax on airlines called the air passenger duty and flights to the european economic area are also subject to the uk's emissions trading scheme now how do all those things uh add up and how has it all shake up in the end well um what you find is that an individual buying a flight from london to paris ends up facing a pretty similar implicit tax on the carbon content of that flight as they do on the carbon content of their household electricity however if you look at a flight a more expensive flights an individual let's say flying business class from london's new york and what you find is that those kinds of flights are actually associated with a pretty large tax subsidy they're implicitly subsidized by the tax system and the reason for that is that when you get to these more expensive flights the value of that zero percent rate of vat gets bigger and bigger and ends up basically completely overwhelming any additional costs imposed by a passenger duty so i mean the big picture here is that very much like in the energy sector um the current very complex nature of uk policy is creating really different incentives to generate emissions for different activities in different parts of the economy um okay so i want to now just finish off by thinking a little bit about the challenges the uk is likely to face um in the coming decades so i think it is worth just reiterating that the uk has actually made relatively good progress up until this point uh it's made larger reduction to the missions than any g7 a country since 1990 um but there are still some very very major challenges remaining so the big picture here is that policy is currently incredibly complicated and frankly pretty confused and and i hope if you'll take anything from its talk it's that one very powerful tool the government has at its disposal in trying to move the uk uh closer to net zero in the most efficient way possible would be to try and uh introduce a greater degree of consistency in how carbon has been priced across the economy and the kinds of costs that being posed on emitters in different parts of the economy um now doing that wouldn't be without its challenges um so one one big challenge associated with doing that um are international issues so um one of the reasons why um uh one of one of the reasons why lower carbon taxes tend to be levied on energy intensive businesses for example is the government's worried that those businesses might face a great deal of international competition for instance if taxes are too high in the uk and those businesses uh choose to move overseas um well that's going to be bad for uk competitiveness obviously but it's also not going to help us with climate change because those businesses are going to keep producing emissions overseas rather than in the uk and so we would like to avoid that happening um one option the uk might have uh would be to pursue something like a carbon border tax in order to protect the competitiveness of uk industry um but achieving that realistically is probably going to require some kind of international consensus or agreement at least if the uk wants to avoid sparking some kind of trade war um there are also pretty important uh inequality concerns so it's really worth noting that um a pound spent by the lowest income households in the uk um is associated with about 20 percent more emissions than a pound spent by the highest income uh households in the uk and the reason that's important is that if you did impose genuinely uniform carbon tax in the uk it would end up hitting lower income households harder than higher income households and so if the uk does want to move in this direction to have more uniform carbon pricing um it's almost certainly going to be the case that the uk might want to look at the possibility of potentially compensating these lower income households maybe using some of the revenue uh raised by these carbon taxes so um that's going to be all from me i think i'm now going to pass you over to tim who's going to talk in a little bit more depth about the way in which we can use tax to achieve carbon reductions yeah thanks uh thanks isaac um and uh hi everyone very uh very happy to be here so the angle i was going to take to talk about this is thinking about net zero tax and in particular behavior changes that we need to to go through to deliver net zero uh so first i want to talk a little bit about the behavior changes that we're going to have to make in order to achieve the net zero target if you look at the government analysis and the climate change committee analysis secondly what the key things we need to think about in terms of the tax system are in that context and then thirdly uh try and draw some tentative conclusions um so we start with uh what we actually have to do to deliver um net zero from a behavior change perspective the first thing to say is that behavior change is absolutely essential to delivering that zero so if we look at the last 10 years and isaac talked a little bit about this um most of the emission savings we've made have been through the power sector and we've done a great job in doing that but it hasn't required any behavior change you still flip the light switch and the lights come on so about 87 of our emission savings have come basically from technology change from fuel switching from fossil fuels to low carbon fuels only 13 from behavior change now if you look ahead and use the climate change committee numbers which are pretty similar uh to the government numbers that proportion rises from 13 to 59 uh in the next 15 years as we move to the government's 2035 target for emission reductions of 78 against 1990 levels and the emission savings requiring no behavior change so the stuff that just kind of happens behind the scenes without consumers really noticing falls from 87 to 41 so while behavior change isn't the only game in town it's a hugely important part of how we achieve emission reductions but it's worth saying as well that sometimes what we hear is that net zero requires us all to stop flying you can't have a car anymore you can't eat meat anymore you're gonna freeze under your blankets as uh um a particularly florid uh telegraph column put it recently but in fact there's only a relatively small number of behavior changes that really matter in this context so very briefly there's six of them and we outlined these in a report a month or two ago so the first is about our home so moving from high carbon gas to lower carbon alternatives in particular for electrification of heating secondly we need a lot of evs on the road so rising to about 10 million by the end of this decade but to about 25 million by 2035 that's about 40 million cars on the road altogether we need to drive a bit less according to the ccc so about four percent uh lower um kilometers per person and we need to recycle more we need to um consume a bit less and we need to overall reduce the amount of waste that we're producing we need to eat a little bit less meat and dairy so down kind of 20 to 30 percent depending which number you use um although the government have said that they're not advocating for that reduction and they're going to try and find the emission savings elsewhere and we need to fly a bit less so about six percent fewer kilometers per person so it's just to emphasize there are really significant behavior change requirements but but the number is relatively limited so what does that mean for the tax system i would draw out five key implications that we need to be thinking pretty hard about the first is about structural changes so the classic example of this is uh the loss of fuel duty revenues now i i disagree with isaac ever so slightly though i don't think petrol and diesel gc is purely a carbon price in the sense that it does a lot of things including reducing congestion or aiming to reduce congestion but the bottom line is that no matter which way you look at it currently evs pay about 98 less tax than petrol and diesel vehicles and what that means is if we don't do anything we're going to lose about 10 billion of tax revenue by 2030 we're going to lose more like 30 billion by 2040 and over that period the cumulative loss to the exchequer is about 240 well that well over 240 billion pounds which is a lot of money no matter which way you look at it so the first thing we're going to need to do is actually accept that there are some big structural changes happening in our tax system as a result of the move to net zero and planning to address them because what we can't do is kind of wait till 2030 and then go oh dear uh we've lost a lot of revenue we're going to lose a lot more now we're going to impose an alternative for example road pricing because at that point people will quite legitimately say hang on a minute i bought my ev on the assumption that it's going to be very cheap to run and now you're moving the goal posts and so that that's the first thing is address the structural changes the second thing about taxes is about how do we meet the costs of this transition and this chart is from the ccc and their advice on the sixth carbon budget and you may have seen it before but above the line it has the costs that the ccc estimate are involved in the transition so these rise quite quickly through the 2020s and stay at a level between kind of 40 and just under 60 billion pounds out to 2050 and under the line you've got the savings that occur as a result of the transition in particular through uh savings on for example um comparative cost of fuel for cars now the key thing that's notable about this is that the costs happen quite early and the savings come a lot later so there's a real question about how we use the tax system to meet those costs or how we use alternatives in terms of paying for them up front versus how we use borrowing to meet them either private sector or public sector borrowing and what the treasury have said uh in their net zero cost that that review then means we're going to have to use tax to do it even though the costs are high up front but the benefits both in terms of savings but also in terms of hopefully reducing the level of climate change and therefore the implications of that come much later so that is something that i think there's going to be quite a lot of debate about we're going to need to think pretty hard about is how much we use the tax system versus other means of raising revenue to pay the upfront costs the third area to look at is behavioral incentives i won't linger on this because isaac's touched on it in his uh in his presentation but if we look at what we need to do on heating basically we need to get people off gas and onto electricity or other low carbon forms of heating um but but as isaac said these numbers are slightly different actually these are the treasury numbers and we'll have to unpick uh precisely why the treasury numbers are a bit different to uh to the ifs you can choose who you trust more um but but the key thing is that is the is not the number itself but the difference where electricity faces a very high carbon price and a rising carbon price as it decarbonizes but the policy costs for that decarbonization all fall onto the lowest carbon form of energy which is electricity versus gas where you pay virtually no carbon price at all and what that translates into is that the running costs of electric forms of heating like heat pumps are a lot higher than the running costs of gas and the incentive that that creates is pretty obvious it's that i should keep my boiler because it's cheaper to buy and cheaper to run but we need 600 000 heat pumps a year by 2028 we need a million ish by 2030 we need one and a half million by 2035 so not just in heating but in other areas of the economy we need to think about the incentives that we're creating in the tax system and address them and obviously that links to some of the things that isaac was talking about about the consistency of carbon pricing not just here but in other parts of the economy too the fourth area that i think is really important is around signaling so you'll no doubt have seen the announcement of the chancellor made in the budget a week or two ago to cut air passenger duty for domestic flights um now there was a lot of talk that was going to increase emissions i think some excellent ifs analysis showed that actually wouldn't necessarily increase emissions that's because uh domestic flights are part of the emissions trading system so they emit more than someone else emits less uh all other things being equal but i think the crucial thing here is to think about the signal that that sends so domestic flights are a high carbon activity and there is a relatively low carbon price certainly in comparison to some other things and they have much lower carbon alternatives so driving is significantly lower carbon train uh even more so so the signal that that sends to consumers is a pretty confusing one about what do you actually want me to do in this context and we see that more broadly in in some of the stuff that isaac talked about about the inconsistency of carbon pricing across the economy the signal that we are sending to consumers is a very confusing one and then the last one which is obviously of critical importance is around fairness so the example i've used here is fuel expenditure of which the carbon price or tax is a really significant share on petrol for driving cars and you can see that the lowest income decile spend when they own a car spend roughly 12 of their income on fueling it versus the the 10th income decile which pays more like two percent and i think there's a couple of things you can draw from this one is that there's quite a lot of unfairness embedded in the tax system around these kinds of issues um at the moment and actually a transition to a different kind of taxation system into taxing carbon in a different way can aid fairness overall and actually help to help to address some of that and i think that the second one is that we have to see this set of issues in the round there's a risk i think sometimes in the way we talk about net zero that we think that every single component of uh the tax changes and the fiscal changes that it might involve has to be fair and in and of itself but actually i think what we need to do given the scale of the transition that we're talking about is look at it in the round and think about the tax system as a whole and the extent to which that is fair because there may be some parts of this which do bear more heavily on poorer households but they are then compensated in other ways so just to draw some quick conclusions as i run out of time so i'll run through these quickly the first is that net zero does not have to be a high tax agenda and i think there's actually a political opportunity there because there is a perception that it does have to be but when we look at the costs and the benefits relationship for example uh there is scope for rebalancing the tax system as opposed to just adding additional costs because we for example when when there's newspaper articles about road pricing it tends to be an assumption that rogue pricing will be on top of what people already pay when in practice of course it can be a replacement for it and it can be designed to be fairer than the existing system the second is tax is only one of a suite of options and it isn't necessarily the right lever to pull i agree that the economic ideal is a single carbon price but i think in practical terms that isn't necessarily uh the right way to go and we have to think about tax alongside other incentives like regulation and and you know government support etc um the third is the cost does not equal tax and there's again sometimes an assumption that the two are the same thing but obviously uh very different um the fourth is that fairness matters and in that context um i just highlight the point that isaac made which is you know the kind of polluter pays that sounds good and often is the right thing to do but in some cases the polluter might be someone who doesn't have at the capital for example to invest in energy efficiency in their home or whatever and therefore it has a limited ability to act so we need to make sure we're building fairness in there and then the last is that communication is absolutely key when you look at any of the public polling around this people are very very concerned and cautious around changes to taxation to deliver environmental outcomes so the way that this is designed but equally importantly the way that this is communicated is going to be hugely important to the success of the agenda as a whole so i shall i shall stop there and uh and hand over to anna for the third presentation today thank you very much thank you so i'm really happy to take part in this um discussion today and i think a lot of the messages that i'll be highlighting here are very consistent with what we've heard before so the angle i'm going to focus on is really the story about innovation and growth and the transition to net zero emissions and what all this implies in terms of policies in terms of taxes but also other policy leaders um and in doing so i'll be drawing on an article i wrote with nicholas stern which was published in research policy and a series of reports on sustainable growth that i've written with cp and grant from research institute colleagues and also more recent work on the resolution foundation cp economy 2030 inquiry so just to take stock on why this is such a challenge right now this is really a decisive decade we've got net zero we've got a series of pre-existing fragilities and we've got covered recovery to contend with so on climate change and i think by now we all know the immense scale of the challenge and we know there are immense dangers of warming beyond 1.5 degrees centigrade time is running out if we're able to keep that target alive um pre-cock we saw we're actually on a course to 2.7 degrees centigrade recent ia analysis being more um positive if all of the current promises were implemented that this is the crucial thing you know we need that implementation and and we also should be focusing for 1.1.5 so and targets are one thing but moving into action is is the key challenge now and all of this is against um the background of what we saw in the decade pre-covered we saw rising emissions destruction of biodiversity falling investment rates and slowing growth and in many advanced economies in the uk in particular um the productivity puzzle has been particularly in the uk this has widened our pre-existing gaps with our core comparative countries in terms of productivity and of course there have been challenges around social cohesion and populism with the faltering of internationalism in many cases and then there's the covert shock with the tragic loss of life the human course the economic impacts and widening of pre-existing inequalities all of this has really underlined some of the dangers weaknesses and fragilities in our in our world economy so against this background we argue that a new approach to growth is urgently required rather than thinking about the environment and decarbonization as a separate issue from economic growth and productivity these things need to be joined together and so a new model for sustainable inclusive and resilient growth which will be driven by clean investments and innovations so over the short to medium medium to well five to ten year time horizon this will really involve investment in sustainable infrastructure and other complementary assets that we know can boost short-run demand and growth sharpen supply improve efficiency a series of co-benefits that go along with that benefits to help from cleaner air for example um over about 10 years we'll see this should spur further innovation we already have a lot of great innovations which we know we can use but we need more innovation and today is actually the science and innovation day at cop26 so it's timely to be discussing this here um so that will then on these new waves of innovation discovery and for advanced economies like the uk growth opportunities you know we have sources of comparative advantage which we can leverage as global markets um are growing and over 20 years or further you know there is no other kind of growth on offer low carbon is the only feasible longer on growth anything else would self-disrupt um in terms of current analyses it's looking like low carbon technologies and business models could be competitive in sectors representing over 70 of global emissions of course all of this requires substantial investment across types of capital in the uk we have very clear kind of projections of what types of investments and costs are required but we argue these can generate higher returns in a more resilient economic model as tim said change will be felt by citizens and consumers in this next wave whereas before we we generally didn't actually have to change our behaviors to achieve the change and of course now we're seeing that momentum and policy is building there's momentum in terms of consumer attitudes citizens attitudes the actions of businesses and investors so this all had to be leveraged now to be able to make the changes we need um there are a series of market failures that point to a collection of policies and of course the the most commonly discussed one is the one that isaac focused on the greenhouse gas externality which obviously points towards taxes detroit particularly a coordinated robust carbon price that would align incentives also cap and trade and regulation and type of levers to address it but other other types of market failure at play here too some of which like the greenhouse gases externality is specific for the environment and i would argue also the co-benefit story is too in the sense that decarbonization carries with it a number of benefits which the markets don't necessarily price in so those benefits are not priced in to market outcomes but then there are other kind of market failures that relate to innovation which we might argue enhance in the case of clean technologies so the well-known r d externality the mar the individual private sector firm doesn't necessarily internalize all the benefits of the r d and the innovations that it creates so this just justifies public support for r d and tax incentives and here and evidence and from colleagues at the lsc has shown that knowledge spillovers are actually tending to be greater for clean technologies than their dirty counterparts there are capital market imperfections which means that perhaps certain areas of investment it seems more risky than others and there's evidence that this has been the case in cleantech in recent years there are of course network issues whereby you need government action to invest in coordinated infrastructure assets planning system design information frictions as it's been discussed raising awareness amongst the consumer or businesses and their supply chain decisions and investors in their decisions where to put their money and of course workers in terms of what skills to invest in for future proof and resilient jobs and of course some markets are absent so in in this case when we don't know the the actual solutions to a problem that's where investment investor expectations and credible pathways become so crucial but even if we had a series of policies to address each of these individual market failures we really need this collected and coordinated um set of policies to create that consistency which the other speakers have highlighted that we need in terms of driving behavior change and all the actions required across the economy and you can think about this a bit in terms of path dependencies we need to make change very quickly and it's radical change and in order to do that we need coordinated policies incentives and institutions past dependencies in production deployment and the diffusion of new technologies mean that you can't necessarily get the change at the pace required without having that and this concept is captured in the lecture on the environment and directed technical change um which has shown that if you don't have policy the market forces would favor the kind of incumbent dirty sector sound policy involves both carbon taxes and other levers including subsidies to r d and regulation for example but once clean technologies have gained their productivity advantage and are able to benefit from their own path dependencies the idea is you don't then need further policy at that point this literature has also been extended to consider the importance of pro-environmental attitudes so we know that behavior and attitudes are crucial for meeting that zero but this literature has shown that they also take the innovation outcomes of funds particularly more competitive markets so when we think about public attitudes and change and the need for this new economic strategy and it's really important to take this holistic view and while we've seen that pro-environmental attitudes have been rising in recent years the real challenge here is to convert that into action there are many barriers which i think have been discussed but you know while prices are relatively high in some areas of technology um maybe the best willing with the best one in the world you can't necessarily afford to buy that new cleaner piece of technology um there are disruptions to to people's day-to-day lives for example and and installing a new a heat pump at home and there are issues of free riding if other people are doing it do i need to do it information in terms of what's actually the best option um infrastructure to enable you to for example charge your electric vehicle and distributional aspects and this is the type of um subject that we covered in some depth in our economy 2030 inquiry carbon crunch paper um and here there's just an example of those distributional aspects and basically we know that there are savings to do with having electric vehicle but it's likely that some of those savings would be more likely to flow to the better off households who for example are more likely to have a garage or off-street parking and therefore can benefit from cheaper charging so in the economy 2030 inquiry we really characterize this next stage in the uk's journey to net zero as being one that involves more visible change as we've discussed in terms of behavior change in transport homes diet jobs as well it requires fair management of costs and sharing of benefits and that's crucial for actually achieving and maintaining support and all of this requires an update of our economic strategy to reflect the change context and this is really the argument for we've had poor growth we need to actually bring all of this together in a new economic strategy acknowledging for example the changes in the tax base over time and preempting that so what we're doing in this economy 2013 inquiry is building evidence that can help shape this talking a little bit more about these sustainable growth opportunities which i've mentioned um we've seen already there's been very rapid falls in the cost of renewable technologies you can see that on the right hand side here so for example 82 fall in solar technologies over 2010 to 2019 and what's actually happened is many of these prices have have fallen faster than was expected at the time and all of this has happened despite fairly weak policies and commitment this suggests that with with much more commitment as we're seeing now there's potential for much faster change but how can specific countries or regions determine which types of technology goods or services to support as part of an innovation or industrial policy to actually leverage some of these sustainable growth opportunities that i've mentioned one way of doing this in terms of forward-looking empirical analysis is using patents data and this is something we've done at the lse um both looking economy-wide but also in some deep dives in terms of the electric vehicles market and also carbon capture usage and storage technologies and what these charts here show is that actually the uk has technological advantage in terms of its patenting activity versus the rest of the world in a number of clean technologies in particular ocean energy and wind energy and these were areas that some of the previous charts showed actually receive quite high subsidies that suggest that's a good policy but one thing is to have advantage and be quite good at patenting something the other thing is does it actually generate spillovers and economic returns in your own country and the right-hand chart shows actually there's some suggestion that wind energy and ocean uh ocean energy um has some positive returns in the uk now what we did in this paper as well we were considering how well places the uk research system for addressing these key societal challenges so climate change being one of them the other one was covered and we looked at kind of our strengths in terms of covid related technologies like vaccine development it's no surprise that we're good at those things too but then what we did was we looked at the geographical distribution of some of our strengths here and you know this links to the leveling up agenda and trying to even out economic performance across the country so what we found was that patenting clean technologies appears to be relatively spread across the country as compared to when you look at all technologies which is the chart on the left hand side or simply the coded related ones those tend to be more concentrated around the so-called golden triangle whereas you'll see on the right hand side theme patents are quite spread across the country so we argue there's a triple win here where whereby support for clean technologies can actually help mitigate climate change because the uk is good at finding those global solutions um for for this issue good at promoting economic growth in the uk the spillover returns to some of these technologies are high in the uk but also potentially good for leveling up as well given the geographic distribution of activity now of course patenting is one way of looking at this not all innovation is patented so we're also doing a lot of work with trade data and with other new kind of forms of assessing companies activities for example using their websites and corporate communications but what we kind of bring this together into thinking about is a kind of framework of how policies can be thought of in terms of crowding in generating crowding in investment in these five complementary types of capital so infrastructure and physical capital knowledge capital and innovation human capital natural capital and social capital and many of these levers are at the national level as we've discussed carbon pricing having something that's robust and consistent in terms of the incentives it's producing regulation and standards procurement r d subsidies major infrastructure decisions and of course national growth and skills policies these are all generally taken at the national level but across all of these areas the local regional level is also key to implementing climate action and i put some examples here probably don't have time to discuss them all but just taking one example when we're thinking about knowledge innovation there are place-based aspects to this in terms of support for emerging technologies coordination of products projects strengthening linkages between stakeholders for example universities and businesses at the local level so in conclusion the argument is that sustainability can be achieved by reorienting growth rather than slowing or stopping it and this is not a new idea chris freeman the economist and innovation scholar and co-authors they they kind of had this in a publication in 1973. and this was clearly a long time ago but it and it feels like a lot of progress is being made now in terms of intentions and targets but we really need to actually convert this now into action and to do so we need coordinated government policy with consistent long-term incredible types of policies and incentives um we need to build support from consumers and civil society which will be required not only for achieving net zero but also for crowding in that investment that we need to benefit from the economic opportunities associated with it and we need to act at scale and pace policy action and real time research real time research are required at the same time we don't necessarily know all the answers when such radical changes need to be made and in that sense policies might need to be updated as new findings emerge or as circumstances change thank you very very much thank you helen great thank you everyone that was lots of food for thought so we have a whole bunch of questions on sliders let me just jump straight into the questions and get through as many as we can in our remaining 15 minutes so there's a couple of clarifica clarification questions so let's start with those just to get on the same page so i'll ask these to you uh in the first instance isaac um so one is just what do we mean by implicit carbon tax you can iron that out for us and why is it that one pound spent by the poorest households is associated with more carbon why is it more carbon intent so isaac do you want to just deal with those two yeah so the implicit carbon tax um i didn't confuse people with that language it's basically just that most of these taxes aren't real carbon taxes and they don't tax the actual carbon content of something so we're just saying okay in terms of the total amount of carbon produces what's the tax associated with that amount of carbon it might be the carbon would increase in that particular good or service or whatever it may be and the tax wouldn't necessarily increase so it's a it's an implicit carbon tax and that most uk carbon taxes aren't on context in the true sense um in terms of why um why is it that um a pound spent by the poorest household is associated with more emissions than a pound spent by the richest households and that's largely to do with um the fact that um quite carbon intensive things make up a bigger portion of poorer household spending so the most obvious example is to think about something like um energy bills they tend to make up a much bigger share of uh household spending for poorer households they do for a richer household and those things are quite like carbon intensive although it's worth noting that while uh the the spending of poorer households is more carbon intensive in the sense that each pound is associated with more emissions uh total emissions associated with the household with the spending of rich households is obviously much higher because uh richer households just spend more pounds so even uh if each pound is associated with less emissions the total emissions uh associated with their spending is going to be higher great thank you so take our top question which i'm going to ask to all of you but i'll broaden out a little bit so the question is what sort of compensation packages would you suggest to ensure that the poorest um aren't hardest hit by carbon taxes let me broaden that out to say that how do we think more broadly about when we're designing palace policies when to take into account distributive issues i think like tim was saying we don't need all of it to be redistributed but when do you make decisions about having taxpayers pay versus bill payer so how do we how we manage all of these distributional issues in the round tim let me come to you first when are you touched on that sure yeah just a couple of quick thoughts on that so the first is about you know think about home heating for example um if we rebalance the the cost between electricity and gas bills that incentivize people to get heat pumps but people on lower incomes will have uh less ability to buy those so for example if we recycle uh carbon tax revenues to support them to be able to make those capital investments that's one way that you can do that there's obviously a variety of different tunes that you can play on that kind of approach the second thing i'd say is the point i made about fairness in the kind of tax benefit system overall so if we look for example at the fact that we're currently dealing with an energy crisis and the prices have risen significantly you know consumers are protected from that to a degree because of the price cap but we can already see that next april those prices are going to go up a lot now one way you can compensate for that is for example by giving people money off their energy bills but another way you might compensate for that is you know on universal credit or in their benefit system more generally or in other ways and i think the key thing i would say is that from a net zero perspective it's really important we think about fairness as we design policies but not that every single thing that we do on net zero has in itself to be distributionally perfectly fair we have to look across the whole system and make sure that it's fair as a whole great thank you and i'll come to you next um yeah i mean i'd agree i think areas of targeted support where we know that for example some investment is required which there are financial constraints that prevent some groups from doing that that seems like a really good way to use some of those carbon tax revenues um and then as tim said it's about holistic view i think when when people feel like a program of change is fair that's more likely to to kind of generate support for it and people won't necessarily be looking at every intricate policy to see if that is individually fair but overall there has to be a program for addressing long-standing inequalities in the uk and that has to be also including education skills future jobs having perhaps more investment in groups that have been left behind in terms of having a better future that is perhaps linked to this net zero transition i think is another kind of positive way to to create fairness and also um improve people's understanding and support for this large-scale change great thanks isaac yes i mean i i agree with i do agree with quite a lot of that i i think that i think one thing also just to bear in mind um and one of the things that makes this quite difficult is that there are quite a few different dimensions of fairness which we can think about uh when we when we're talking about uh you know reducing emissions so i mean we've thought a lot about uh this aspect of uh you know people people at the bottom of the income distribution might might pay a higher price if you have this kind of uh uniform carbon pricing policy but um there are also all kinds of horizontal dimensions in which some people might be worse off than others so you might happen to have a house that's very hard to heat you might uh live in an area of the country where the housing stock tends to be more difficult to insulate um and so there are real questions to you know think about as to you know do we want to compensate uh people because of the kind of house they tend to live in because of the past the country they choose to live in uh there's no straightforward answer to those questions i think there's a there's a difficult um topics to tackle but i do i do think it's just worth bearing in mind that the inequality isn't only in terms of up and down the income distribution there's all kinds of people who may have similar incomes but who may face very very different costs in terms of uh decarbonization um and it's just worth thinking about the ways in which uh the system ends up addressing that and ends up uh ends up dealing with those kinds of inequalities as well great thanks everyone so there's a group of questions here about voting about new taxes i'm going to take them all together and again i'll ask you all all of you for your views on this so there's one question about would a higher wealth tax be better than the carbon tax for changing behavior do we need taxes on air pollution so not just the emissions but the particulates i guess and a question about what is your opinion on um a carbon tax in agriculture so if we take any of those i think the broader question here is you know there are some areas where we don't have anything at all agriculture there are very few incentives to change behavior and while we have some we have high attackers in some areas we have basically no taxes in other areas so i guess the broad question for you is if you could do something in one area what's the big missing tax or the big area where we think we need to do something where tax is the right right leader what's the big thing we need to do next um anna i'll start with you i think that i mean it does link to behavior change and i think that's where taxes are important where as we've seen that we don't have the coordinated incentives to actually enable individuals to make the decisions that will minimize their carbon emissions even when people actually want to and i think air travel is a good example of that at a time when france for example is closing down a number of domestic air routes we are encouraging people to travel domestically by air and of course in the round that policy itself might not increase emissions but it is about the signaling and if people think well it's fine to travel by by air domestically then they're also likely to not necessarily limit their international travel and and bring that down as we know we need to so i think it really has to be about having clear incentives to enable that behavior change which we don't have yet great isaac yes i mean you know trying to take those those two questions separately i mean you know on pollution absolutely i think that the same principles apply to pollution as apply to um carbon emissions in many ways right yeah in many cases you've got uh individuals or businesses producing uh pollutants and they're not facing the full cost of those pollutants and it would be completely sensible to uh tax those pollutants in the same way you might want to tax carbon i don't think that's a mutually exclusive um in terms of agriculture um i mean clearly if you want to impose uh uniform incentives to to move away from carbon intensive activities uh you know the the production of uh of uh beef for example is very very carbon intensive i think one of the things you need to be a little bit cautious with in terms of agriculture and particularly this is an issue um for many different industries is that you do you do want to avoid a situation where for instance uh we less beef produced in the uk but eat more beef that's uh imported from uh say brazil where maybe uh you know rainforest has been cut down to produce more land for that farming so as long as as long as uh imposing attacks on agriculture does genuinely mean the overall a global amount of agriculture is reducing then it does seem just as sensible as taxing any other kind of carbon emission um i think is broadly what i'd say but you do have to be you have to be cognizant of those kind of potential international carbon leakage issues thanks tim yeah so so i think two thoughts first on the question of kind of taxing other pollutants i mean i think the key thing there is that you know different taxes can do more than one thing right yeah and fuel duty is a great example that fuel duty is a carbon price it is an air pollution tax it is a congestion tax it is a pure frankly revenue raiser for the treasury and you can you can argue it's you know all those all those things none of those things a combination of those things um and similarly for other taxes you know one of the things that we need to think about is how do you tick a number of different boxes in in the approach that you've taken and as a bare minimum how do you avoid for example increasing air pollution while you're reducing greenhouse gas emissions and so on some technologies and approaches can do i think in terms of the kind of wish list or you know where are the big gaps i think i'd highlight too one we've already talked about which is on gas and electricity where although it's not a tax it's ineffective implicit tax in terms of the way that we focus policy costs on electricity not gas and therefore create a disincentive to use the lowest carbon fuel the other one is agriculture and land use and i've broadened that out slightly from just you know how do you get agricultural emissions down there's a much bigger question around land use and its role in decarbonisation so not just about cutting emissions but growing biomass afforestation etc and and tax can definitely play a role well i don't think it solves the whole problem in terms of how you shift those incentives so the owners of land not just farmers but obviously farmers to a large degree are using that land in a way that not only cuts emissions but also supports the wider decarbonization of the economy about carbon leakage which i think is a it's a concern actually across a number of areas like yeah it's why we have these high energy intensive businesses getting lower lower carbon prices um to what extent do you think the challenge in state agriculture is that we just have to find international agreement on taxes so that we can put up our taxes without things going offshore or are we going to need to rely more heavily on basically getting consumers to change their consumption patterns and just choose to eat less meat for example i mean does the international issue there and the current lack of international coordination seemingly on border taxes and things like that mean that we're going to have to rely more on getting individuals to just change what they're doing what do you think about that i mean i think you know this is a bit of a cop-out but i think you kind of need to do a bit of both if you look at carbon border adjustments i think they are really hard to do and if you look at how hard it was to achieve the agreement on corporation tax and then how much sort of different countries have tried to reel out of elements of that that kind of demonstrates that having said that carbon border adjustment taxes were you know purely theoretical really two or three years ago whereas now they are genuinely on the agenda the eu's looking at it hard in the uk government increasingly as well so i think i think they can uh potentially have quite an important role but i think you do need you know a degree of behavior change as well and you need to and you need to have some incentives in your tax system and a country like the uk has to show some leadership around that also great so come up against time let me ask one last question again to all of you i'll start with isaac and one issue that's come up i think in everything all of you have said is that you know in going forward the incentive's now been tilted much more in a way that people are going to notice it it won't be quietly behind the scenes in electricity getting cleaner it'll be partly there but it'll partly be in households need to do things differently um how do we get people on board with this change so that when it comes both it's not a shock but also they see it as a positive thing for the reasons that anna was setting out as opposed to something to be resisted so what do we do to make sure this is that people come with the agenda um isaac yeah i mean you know i think i think in many ways you know the potentially reason to be slightly more pessimistic about the future is just that uh in some ways we have taken the low hanging fruit in terms of decarbonization as we've all discussed some of the stuff that's happened so far in terms of big reductions in emissions from moving to coal generation to gas generation and partially to renewable generation aren't things that people really notice and if we want to make more gains we are going to have to start cutting into uh cutting into things which which people are going to notice much more um i mean you know how how you how you how you make that appealing to people um i think you know in reality if we are going to receive if we are going to reach net zero with the technology we you know we currently have maybe there will be some great technological innovation which will save us some of the pain in the future but but looking looking at the current rate of technological progress i think the reality is we are going to have to accept that there is going to be some level of reduced consumption for people in some of these areas um if we're going to uh achieve net zero thanks anna yeah i would say there's there's three things i mean one innovation really is key in this story so if we're talking about we've seen those cost curves if the prices of key technologies come down due to innovation which we can presumably achieve now with much more money going into this and a lot more will as well and then that can really help overcome some resistance change based on at least cost or perceived costs but i think really crucial is realizing well first of all understanding and realizing her benefits both economic and wider healthcare benefits for example for example if we through taxing fuel or through having clean air zones or congestion charging that's good for the environment it's also very good for health and you know air pollution is that actually a very big killer in uk and internationally so realizing and communicating those benefits as being actually part of a more healthy and improved life for people is really key but then also i think being upfront about some of the costs and you know as we've discussed where there are distributional elements to that making sure that they can be preemptively managed in a fair way that's kind of key to achieving that thanks tim follower to you yeah sure sorry um so i i think three things very briefly so the first is that you've got to make the case for why you're doing it um so we know people are worried about climate change we know they don't really understand their own carbon footprints very well we know that 50 of people don't know their gas pool is greenhouse gas emissions um we we hear a lot this is all going to be super easy and don't worry it's easy being green all that kind of stuff i think actually you need more honesty in terms of what's required and why we're doing it and why it's impactful i think secondly the point about communication communicating how this is being done in a fair way um is absolutely critically important and all the public polling data again says that if people feel it's fair then they're likely to be you know more amenable to it and then the third one is the one that anime which is about co-benefits you know get reduced car use you don't stop using cars but reducing it a bit means more livable communities lower air pollution lower accidents less time wasted in congestion etc etc i think but if you articulate that as a package and i think there is a quite a strong political story that you can tell around all of this that's kind of optimistic note to end on so that's that's that's good um so it's slightly overtime let me um let me wrap up and say a huge thank you to all three of you for um for excellent uh discussions i really enjoyed all of it and thank you to everyone watching um for joining us and you keep joining us for our events but for now thank you very much everyone