Britons face carbon tax to pay for the Government's rapid transition to net zero

Prime Minister Boris Johnson delivers a speech during the Global Investment Summit at the Science Museum, London. Picture date: Tuesday October 19, 2021.
Prime Minister Boris Johnson delivers a speech during the Global Investment Summit at the Science Museum, London. Picture date: Tuesday October 19, 2021.

HM Revenue and Customs could raise an extra 1.3% of gross domestic product in taxes with a new carbon tax

Published

A review into the future of the UK’s net zero plans found that HM Revenue and Customs could raise an extra 1.3% of gross domestic product in taxes with a new carbon tax.

It will be cheaper for the world to combat climate change now than to do nothing and deal with the consequences, the Treasury has found.

It would not quite offset the loss of revenue from fuel and vehicle taxes, but would go some way to closing the gap.

The Treasury said that “the costs of global inaction significantly outweigh the costs of action” to tackle climate change.

But “as with all economic transitions, ultimately the costs and benefits of the transition will pass through to households through the labour market, prices and asset values”.

It would not be possible to assess the impact on individual household finances across the next three decades as the UK decarbonises its economy, the review found.

But it added that there would be a big call on the public purse, especially from lost tax revenue.

“There will be demands on public spending, but the biggest impact comes from the erosion of tax revenues from fossil fuel-related activity,” it said.

Governments “may need to consider changes to existing taxes and new sources of revenue” rather than relying on increased borrowing.

The Government collected £37 billion from fuel duty and vehicle excise duty (VED) in the financial year ending March 2020, about 1.7% of GDP.

This could not be plugged purely through a carbon tax – which will itself slowly dwindle as emissions are reduced before the net zero target in 2050.

“Without action to offset these pressures the public finances will be put in an unsustainable position,” the review said.

“Therefore, delivering net zero sustainably and consistently with the government’s fiscal strategy requires expanding carbon pricing and ensuring motoring taxes keep pace

with these changes during the transition.”

Rebecca Newsom, the head of politics for Greenpeace UK, said: “Despite fears of this review scaremongering, it would seem that the Treasury might actually be starting to get it.

“Taking a longer-term view of the huge economic opportunities from climate action, as well as the costs of inaction, is the right approach.

“It would be short-sighted only to look at short-term financial impacts. Rishi Sunak’s also right to emphasise fairness in the transition, which will be an increasingly critical issue as we advance to net zero.”

The review was published alongside the Government’s net zero strategy in advance of the Cop26 climate change conference in Glasgow next month.