Mr. John McCarthy:

One of the flaws of the ETS sector is that there was an excess supply of credit following the collapse of the European economy after the crisis of 2008-2009. The price of carbon fell by approximately €5 per tonne within the ETS. An argument was made by some economists that a floor should be introduced but, in the past 12 months or so, there has been a move by the European authorities to mop up some of the excess supply of credits, as a result of which the price has moved from €5 per tonne to over €20.

In the context of the carbon tax, there is an OECD hierarchy of taxes. The OECD and the IMF tend to suggest taxing bad things and outcomes, and not taxing good ones. This mean taxing negative externalities but we have models which show that, if one increases carbon tax and uses the proceeds to reduce labour tax, it is a win-win situation, because reducing the tax burden on labour is positive for labour supply and creates growth. We are conscious of this sort of thing when we provide our analysis, although, as Mr. Watt said, we do not make decisions.