Tax system is making net zero more costly

The tax system has a key role to play in the government’s commitment to achieving net zero by 2050 according to a new report from the Institute of Fiscal Studies (IFS).

The report states taxation is used to incentivise households and firms to reduce their emissions but the current system imposes wildly different effective tax rates on emissions from different sources. The IFS notes that emissions from electricity are taxed much more heavily than emissions from gas especially if the energy is used by a business creating a clear incentive to prioritise reducing emissions from businesses’ electricity use even if (ignoring the tax) there are cheaper ways to reduce emissions by cutting their use of gas.

Households also face a higher effective tax rate on emissions from electricity than from gas which discourages them for example from switching...