Why have Tory MEPs rejected a free market solution to climate change?

By sabotaging reform of the EU Emissions Trading Scheme, Conservative MEPs have shown that they can't be relied upon to champion British interests in Europe.

It may surprise some on the centre left but there is nothing innate to conservatism that makes it less able to take pragmatic decisions in favour of sensible environmental policy. It has had a refreshing ability to acknowledge the intrinsic value of nature and stewardship even if it has become more conflicted about the means to deliver these outcomes. It is a broad church that spans from the one nation Heseltines to the radical free marketeers like John Redwood. But if there is one thing that unites them, it’s the belief that markets offer most of the answers. Which is why it is so baffling that Conservative MEPs voted down a measure that might have kept the European Emissions Trading Scheme alive. Trading is not the only way of tackling emissions but it’s the poster child of free market thinkers because it promises an economically efficient, non-regulatory solution to a giant supranational problem.

The back story is that, on Tuesday, the EU parliament voted against a minor technocratic fix that would have rescued the floundering European carbon market, which is struggling under the weight of too many pollution permits in the system. The fix would have involved 'backloading' the sale of some excess carbon allowances to 2019, so the number of allowances in the system would be reduced, increasing the price which has dropped as low as €3 per tonne of carbon in recent months. While more profound reform is required, it would have been a first step to putting the mechanism back on track. The vote failed by 19 votes. Twenty Conservative MEPs voted against it. In doing so, they failed their constituents and UK business.

A strong carbon price across Europe is directly in the UK’s interest. Its main benefit is to provide financial incentives for switching from coal to gas, with the costs being born by coal heavy countries like Poland and Germany and rewards flowing to those that have already made the switch, like the UK. One of  Thatcher’s less controversial legacies is an energy system which has less and less coal and a relatively high proportion of gas, so UK generators and fuel suppliers stood to gain significantly from the EU carbon market fix. By voting against it, Conservative MEPs have rewarded coal at the expense of gas and Germany at the expense of the UK. This will be the first of many negative consequences arising from the failure of EU emissions trading. At our Chancellor’s insistence, the government has also introduced a carbon price floor, which means we are paying higher carbon prices than our neighbours. It creates an attractive revenue stream for the Treasury but many British businesses will now feel aggrieved that it could now be at least a decade before there is a single carbon price across Europe.

This is part of a pattern of conflicting behaviour from different parts of the Conservative Party that should worry its leaders. There is no evidence that the British public sees climate or environment as a partisan issue. It is a 'valence' issue, like national security, in which voters expect any party of government to be competent.

Emissions trading may be too obscure for the public to notice but experts in business, NGOs and academia do and,  for many, this will be another worrying sign that the Conservatives are struggling to govern coherently on one of the big issues of our age. We’ve already seen this confusion with the Energy Bill, where the Chancellor agreed to spend £7.6bn a year on new low carbon energy (mostly renewables) but then opposed a decarbonisation objective for 2030 which would have ensured that much of the equipment required would have been built in new UK turbine factories.

The debate now moves on to what 2030 climate package the EU should adopt. The UK should be at the heart of the debate, fighting for an ambitious carbon goal that matches our own. But the prime minister has yet to get his ministers to agree a common position. Whether or not the British government takes a lead, the EU will adopt a new climate package at some point in the next 18 months under pressure from France and Germany. Yesterday’s action by Conservative MEPs has made it more likely that it will be focused on fiscal and regulatory measures, and less on trading. That may turn out to be a good thing, but Conservative MEPs have just shot themselves in the foot by making market trading solutions less attractive. They have also made it considerably more difficult for David Cameron to demonstrate that his party has championed British interests in energy and climate change effectively.

Matthew Spencer is director of Green Alliance

Exhaust rises from cooling towers at the Niederaussem coal-fired power station at Bergheim near Aachen, Germany. Photograph: Getty Images.
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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.