politics transport

Transport innovation of the week: carbon tax and rebate

From January 1st this year, the Canadian province of Alberta is operating a ‘carbon levy and rebate’ scheme. You can read the details of it on their website, but here’s how it works in a nutshell:

  • A levy is added to the cost of any fuel that contributes to climate change, adding a few cents to the price of petrol, diesel, and natural gas.
  • All eligible households then get a rebate: $200 for the first adult, $100 for a spouse and $30 for each child.
  • The levy will rise in future, incentivising people to use less fuel.

For most households, this won’t be expensive. In fact, six out of ten will end up better off, receiving more in the rebate than they paid in taxes – a bonus of around $20-$40 dollars. The less you drive, and the more efficient your home is, the less you will pay. If you don’t drive at all, the rebate will be a net gain.

Full rebates are paid to low and middle income households, with partial rebates paid to families earning over $95,000. There are a handful of exemptions to make sure that particular groups aren’t disadvantaged (farmers, small businesses), but the general aim is to incentivise Albertans to reduce their fuel consumption.

I like this idea. It cuts through the controversy of fuel taxes by giving the money back to ordinary people. You’re in control of how much this costs you – if you resent paying it, fit some insulation or downsize to a smaller car. As the website says:

Alberta’s carbon levy provides a financial incentive for families, businesses and communities to lower their emissions. Economists agree that a price on carbon is the most cost-effective way to reduce emissions. It drives innovation and changes behavior by encouraging individuals and businesses to become more energy efficient and shift away from higher emission fuels.

Could we do something similar in Britain? Unlike Alberta, we already have a pretty hefty fuel duty. It vanishes into government coffers, makes driving more expensive than in other countries and is generally resented. Originally it went up every year, but that led to protests in 2000 that brought the country grinding to a halt. Politicians have scored cheap points with the tabloids ever since by promising to end ‘the war on motorists’ and freeze fuel duty.

Britain’s escalating fuel duty made everyone really angry, but if it had been matched with a rebate it could have been a very different story. So why don’t we learn from Alberta and bring in a rebate? Fuel duty brought in £27 billion in 2015, enough to pay £400 to every man, woman and child in the country with a couple of billion to spare. Yes, that’s a slice of government revenue that we’d have to replace from elsewhere, but we don’t have to use all of it. We can add more to it. We ought to be able to think creatively about it.

What do you think? What have I missed? Post your refinements, hesitations, or criticisms below, and perhaps we can develop a policy idea between us.


  1. Hi Jeremy, good post. Yes, the Alberta carbon levy is a key component of the Climate Leadership Plan and the idea is to help fund the transition to a cleaner energy sector in the future, as well as incentivize decarbonization. The inclusion of the rebate has been something that takes the “sting” out of the perception that it is “just another tax” and instead creates a systemic net benefit to Alberta. Perception is everything as this has been rolled out and constant engagement, public education and transparent usage of the funds generated are the key points that would be critical for the UK.

  2. Hmmm, I’m not convinced this is any better than just taxing fuel. I suppose as others say, it is all about perception. An alternative is to scrap vehicle excise duty (and all the bureaucracy that goes with it) and just add more tax to fuel, so the more you burn (big engine or lots of miles) the more you pay. It you have a powerful car and drive it rarely, you only pay for the little fuel you burn. Very low admin costs. Impossible to avoid or cheat. Same applies to domestic heating.

  3. Pigou taxes, such as this really should be revenue neutral. Governments, regardless of political stripe, have a relentless desire for extra revenue. The public and beauracracy always want more spending on services and ‘sin’ taxes are a more easily justifiable source.

    The point of these taxes should not be to punish people but to price in the externality that wasn’t being charged before. Charging more than that means we use resources less efficiently than we would, which is a waste and means living standards are lower than they would be.

    If carbon taxes are a source of revenue then the natural incentive for governments is to push them as high as they can politically, over and above the cost of the externality.Two UK examples spring to mind. If you go on the Stern Review we are already taxing petrol higher than its carbon cost. The fuel duty escalator was a lovely revenue raiser for HMG and had no end point until the public rebelled. The second is the Banking Levy which was introduced to price in the implicit government guarantee but has since been pushed over the level where it would be a reasonable premium.

    Now you might think that we the bankers deserve it or that cutting emissions is so important that it is worth the lower living standards. This is why they are a good target for governments, they have lots of people cheering them on. The damage is in small widely spread increments so hard to spot until the cumulative effect builds up.

    Giving rebates solves the incentive problem. If the government makes no money it will only want to set the tax at the level to price in the externality. You can also try to compensate for the unfair effects of taxes such as fuel poverty where green levies and VAT on fuel are an important factor.

    Given the low trust governments have giving these rebates would make introducing a carbon tax much more palatable to a public who do seem to be tired of the ‘geen crap’. It wins over those on the right wing liberal side as well as those who favour greater action on climate change. Building coalitions across the aisle is the key to successfully action.

    1. Exactly, and since fuel taxes in Britain are so resented, it would be a great place to start with a more positive approach to reducing emissions. It shouldn’t be about punishment, but about having a stake in a shared resource – in this case the carbon budget. That’s a different way of thinking about tax, which so easily framed as the grasping hands of the chancellor.

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