If the cap fits, share it

Instead of setting up a new currency in carbon, cap and share utilises the oldest rationing system i

It is strange how little British people know about what goes on in Ireland. The Irish government is just a few months away from introducing a scheme to tackle greenhouse-gas emissions which is revolutionary in its ambition and scope, and could be extraordinarily important as a model for the rest of the world. Yet no one here has heard anything about it. A search I conducted on a news database returned a grand total of zero documents.

Ireland's energy and environment ministers are both Greens, governing in coalition with the more traditional Fianna Fáil party. The Green Party's condition for entering the coalition was a climate-change bill - imported, as is often the custom, from the UK. This bill will be passed soon but, like us, Ireland at present has no coherent programme for actually getting the cuts in carbon emissions that the new legislation will mandate. Except that now the Irish may have invented just the tool for the job. It is called "cap and share". Remember the phrase - you could soon be hearing much more about it.

In previous issues of this magazine, I have argued strongly in favour of carbon rationing, under which every adult citizen would get a share of the country's carbon allowance to "spend" on fossil-fuelled things such as flights, heating and petrol. The idea is radical, and - with its wartime connotations - evokes images of shared sacrifice in the face of a great emergency. However, it would not be easy to implement: because carbon rations would have to be tradable in order to be economically efficient, the government would need to set up and police 48 million carbon accounts. This presents privacy as well as administrative problems. It also establishes carbon as a kind of parallel currency: people who are over their ration limit (or have already sold their share) would have to buy carbon at market prices in order to purchase fuel. We would, in effect, need to become a nation of carbon currency speculators - quite a tall order, when most people can barely even manage their mortgage.

This is where cap and share comes in. The proposal being considered by the Irish government - and likely to be announced in December's budget - takes a very different angle. Carbon permits are created not to regulate individual consumption, but to share among all adult citizens the revenue generated from carbon trading. In order to sell petrol, a company such as Shell would need to have sufficient permits. It would need to buy these from Irish citizens, who would then find themselves receiving £100 or more in the post in order to offset rising prices at the pump.

As Richard Douthwaite, an ecological economist who sits on the council advising the Irish government about the system, explains: "Cap and share is a way of upping the price of fossil fuels and recycling the money to citizens. It is rationing at the top level rather than at the level of individuals."

So, instead of setting up a new currency in carbon, cap and share utilises the oldest rationing system in the book: the price mechanism. You don't need a carbon credit card; petrol will still be bought and sold in plain old money. But the price will go up, because petrol entering the economy will be restricted in line with the legally established need to reduce greenhouse-gas emissions. Instead of going to the companies or the government, however, the extra revenue from these higher prices will be going back to ordinary consumers. The higher price establishes a clear incentive for people to adopt low-carbon lifestyles, while ensuring that the poor are not disadvantaged and that the rich - who tend to have higher emissions - pay more.

Cap and share would not cover the whole economy. The current Irish proposal is for only the road transport sector to be included at the initial stage. Nor need it regulate industrial emissions, which are covered by the European Union's Emissions Trading Scheme. Because of the ETS, cap and share need only cover those instances where consumers buy fossil fuels directly, generally for either domestic heating or transport.

If the cap and share scheme is duly implemented, Ireland will have invented an ingenious way of restricting greenhouse-gas emissions with a minimum of pain and fuss. Most people may even find themselves better off. Here in the UK, even though we, too, have a climate bill going through parliament, there is little sign from the government of coherent thinking about how any of it will actually be implemented. I suggest a trip to Dublin - by ferry, of course.

Mark Lynas has is an environmental activist and a climate change specialist. His books on the subject include High Tide: News from a warming world and Six Degree: Our future on a hotter planet.

This article first appeared in the 04 February 2008 issue of the New Statesman, God

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.