Professor Alan Barrett:

I will not personalise it to the ESRI. It is not quite a mantra but economists have a fundamental block when it comes to this. Hypothecation is normally promoted on the basis of encouraging the political acceptability of a particular tax. It is a perfectly reasonable argument. People are more willing to pay the tax if they feel that they will see an immediate and direct link. That is a fair and perfectly understandable argument. Economists, however, come from the perspective that if a tax is important - in this instance the case can be made that carbon taxes are very important for environmental purposes - then political support should be forthcoming on foot of the inherent importance of the issue. When a revenue stream is generated, we are not being prescriptive as to how the money involved should be spent.

Typically, however, we want revenue to go into the pot so that it can be best applied. It could be invested in housing at a particular point. If money is being raised by means of a carbon tax and it is restricted to a particular environmental purpose while there is a yawning gap in investment in another area, then it is terribly unfortunate to miss out on the opportunity to do that. That is on the spending side. My colleague, Dr. Curtis, touched on this already, as have others. People make the argument that their carbon taxes reduce economic efficiency or competitiveness. If, however, it is possible to compensate by using the revenue from carbon taxes to reduce business rates, increase grants to farmers or do different things like that, that again gives flexibility. Almost inevitably, without hypothecation, we have flexibility and scope to do more imaginative things in a more reactive way. That is what I mean. It is not just an ESRI view, it is a common view among economists.