A politically feasible carbon pricing scheme must take account of the social distribution of its costs
There are a number of schemes that price greenhouse gas emissions. The EU ETS is the central one, and there are also further European and national schemes covering specific industries or geographical areas.
An intended outcome is that carbon intensive products increase in price more than low-carbon products. People should respond by reducing their consumption of carbon intensive products or switching to greener alternatives.
These costs are not necessarily borne fairly. The ‘fuel poverty’ issue, which the government is currently struggling with, shows that an increase in the price of energy affects poor people more than wealthy people (rising energy prices are not driven by carbon pricing alone, of course, but the principle remains the same). Or, as cars become more expensive to run, people living in rural areas may be more affected than those in cities.
Policy research has focused mainly on the overall efficiency of carbon management tools and not adequately investigated how carbon costs are distributed. This does not mean that we need to look for a combination of efficiency and equity in a tool, but we need to consider what structural funds, tax benefits or subsidised low-carbon alternatives should be bolted on to make the most efficient tool consistent with our understanding of an equitable society.
It works both ways, of course. Supporters of personal carbon trading – including David Miliband when he was a Defra – believe that it would have a progressive economic impact. As each person has the same cap, there would be a transfer of money from rich to poor as rich people with large carbon footprints buy spare credits from poor people with small footprints. This does sounds fair, but the scheme is primarily designed to achieve a reduction in emissions and its fairness is only loosely understood (although the RSA is looking into it now).
These issues should be taken seriously – otherwise people will feel they are getting a raw deal out of carbon pricing.