It’s easy being green: Embracing nuclear energy, a border-adjusted carbon tax, and clean free trade

The Adam Smith Institute’s latest paper, in conjunction with the British Conservation Alliance (BCA), and authored by BCA policy director Connor Tomlinson outlines a market centric approach to tackling environmental issues such as climate change:

• Market environmentalism uses the engine of free markets to tackle environmental challenges. This provides practical, sustainable and highly effective solutions.

• The market system naturally drives towards good environmental stewardship — through the profit mechanism that rewards innovation that produces more using less resources and waste; property rights that rewards protection of valuable land; and wider prosperity that creates wealth and political pressures for protection.  

• State-led, socialist economic models have consistently failed the environment. Nobody takes care of unowned resources, as demonstrated by the Tragedy of the Commons. Resources are overexploited, as demonstrated by the Soviet Union’s continuing whaling (the Soviet Union were responsible for 98% of all blue whales killed between 1967 and 1978, after the 1966 global ban). The economies are less efficient and therefore more environmentally exploitive, as demonstrated by the Eastern bloc economies or modern day Venezuela.

• The best, in fact the only way to tackle the challenge presented by climate change, including the Government’s Net Zero by 2050 target, while maintaining modern prosperity is to embrace a market-led approach.

1. Nuclear energy

• The United Kingdom, like many countries, is struggling to reduce dependence on fossil fuel energy sources. The existing renewable options, solar and wind, are undermined by lack of storage capacity and grid inertia generation. 

• The backup battery capacity to power a renewable-only grid in the UK would cost £2.9 trillion, a sum larger than the entire UK economy for a year.

• Nuclear power is a safe, cost-effective, efficient, and emission-free source of energy production.

• Nuclear power currently produces one-fifth of the UK’s annual electricity; but almost half the country’s current capacity is set to retire by 2025. This risks being replaced by dirtier fossil fuel power stations.

• Nuclear power is held back by high fixed costs to design, achieve regulatory compliance, and build reactors.

• If the Government wants to achieve the Net Zero target, they should take the following steps in relation to nuclear energy:

  • Allow energy production companies to implement a Regulated Asset Base model as a method for funding new nuclear plants (beyond initial projected construction costs) to make construction financially viable and reduce reliance on state funding under feed in tariffs; and

  • Make sustainable construction projects (particularly nuclear plants) eligible for private sector income-tax-exempt loans, enabling flexible funding to account for additional escalating costs incurred after planning.

2. A border-adjusted carbon tax 

• Britain’s tax system requires reform to facilitate a transition to a carbon-free national grid.

  Fossil fuels benefit from tax breaks and a reduced rate of VAT.

• Carbon emissions are a negative externality — a cost suffered by a third party, neither the producer nor the consumer. It is standard economic policy to discourage this behaviour by forcing producers to internalise the costs.

• A tax on carbon would incentivise market actors to substitute away from using fossil fuels and innovate by developing new low-carbon energy products. This is superior to a state-led approach involving heavy subsidies of particular products or regulation that bans certain behaviours.

• A carbon tax will fail if it is perceived to be a revenue-raising exercise: consumers must be the winners from lower corporate and income taxes.

• It is necessary to border-adjust to ensure that goods produced overseas, in jurisdictions without sufficient policies to tackle climate change, outsource Britain’s carbon usage. This should not be regardless of country of origin.

• If the Government wants to achieve the Net Zero target, they should take the following steps in relation a border-adjusted carbon tax:

  • Levy a border-adjusted carbon tax on imported goods and energy manufactured using fossil fuels. This tax would also be applicable to developed nations failing to meet Paris Accord emission reduction targets. Prices would be predicated on regularly adjusted carbon pricing mechanisms, accounting for multivariate analyses of social, environmental, and economic cost. Compatibility with World Trade Organisation guidelines would determine whether a consumption levy or production charge form of taxation is more viable;

  • Revert fossil fuels to the standard VAT rate of 20%, eliminating an indirect subsidy for the industry;

  • These changes — the border-adjusted carbon tax and full VAT on fossil fuels — should be revenue neutral by lowering or removing other taxes; and

  • Create a Carbon Credit Market, allowing market actors to offset carbon taxes by spending revenue on approved conservation and reforestation efforts (constituting ‘nature-based solutions’ to carbon capture and storage). A cap should be placed on percentage deductible, as to keep in place the incentive for businesses to transition to sustainable practices. This rate should be inversely progressive during the COVID-19 recovery period, as to provide equal opportunities for small businesses decimated by lockdowns.

3. Clean free trade

• Liberalising trade enables more sustainable economic growth by encouraging efficient production and allowing transfer of knowledge. 

• For example, because transportation accounts for a relatively small carbon footprint, New Zealand lamb has a lower carbon footprint then Welsh lamb. New Zealand produces dairy products with half the energy per tonne, lamb at a quarter the energy, and apples at a third the production costs of the UK.

• If the Government wants to achieve the Net Zero target, they should take the following steps in relation to Clean Free Trade:

  • Abolish tariffs and quotas on all goods that the OECD designates as having environmental significance;

  • Seek membership of Agreement on Climate Change, Trade and Sustainability (ACCTS);

  • Encourage — but keep voluntary — carbon/eco-labelling for consumer goods; and 

  • Ensure ascendance to CPTPP does not undermine climate policy related goals by providing excessive protection for the fossil fuel industry.