By David Coombs

Following the cautious optimism of COP 26, as an investor, one of the questions I’m asking is does Britain risk dragging the economic anchor should politicians heed calls to impose a carbon tax on meat and dairy in a bid to achieve net zero greenhouse gas emissions by 2050?

In the shadow of COP, politicians are coming under pressure to compel people to adopt more environmentally friendly lifestyles and diets. Nothing wrong with that. However, doing so through higher taxes could put too much pressure on consumers whose disposable incomes will already be feeling the strain. Perhaps a more constructive approach through incentives is needed.

The economic rebound from the coronavirus pandemic provided Chancellor Rishi Sunak with a windfall in his Autumn budget and spending review, into which he added tax rises that lift the tax burden to its highest since the early 1950s. He plans to use these revenues to fund a large increase in public spending, while reducing the budget deficit to pre-pandemic levels. But there has to be a squeeze somewhere, and the question is whether consumers can wear it.

To put this in perspective, the Office for Budget Responsibility (OBR) expects the economy to grow by 6.5% in 2021, regaining its pre-pandemic level around the turn of the year, and 6% next year before returning to more normal rates of growth (2.1% in 2023, 1.3% in 2024 and 1.7% in 2025).

However, a high risk of policy error could quickly derail economic recovery. At a time when interest rate increases appear inevitable amid inflation that remains well above the Bank of England’s 2% target, households are facing a triple threats to their finances: higher housing costs, whether mortgage or rent; higher food costs; and higher fuel costs, whether for heating or transport.

I hope Mr Sunak has done his homework. History has shown that raising interest rates and taxes in unison can be calamitous. A good example of this is Japan, which introduced its first consumption tax in 1989, at the same time as it started to tighten monetary policy. To this day, it suffers deflation, and its stock market is yet to recoup the sharp losses it sustained.

Contrary to the OBR’s punchy predictions, could the UK economy in fact be heading for an even tougher time than tit has faced in the last 18 months with Covid-19?

As a country, we need to have a much more nuanced debate about how to achieve this holy grail of net zero emissions by 2050. Surely, the carrot is likely to be more effective than the stick?

Using taxation to compel people to change their behaviour has been shown to be ineffective. It took decades of increases in tobacco duty before smoking prevalence started to fall in 2011. Likewise, oil has been heavily taxed for a long time yet the number of cars registered in Britain has climbed by 42.5% over the past 25 years. The only year over that timeframe that recorded a decline was 2020 – likely to be related to the pandemic.

Using incentives to encourage companies and people to develop and adopt more environmentally friendly practices would undoubtedly be a far more effective way to address the climate crisis, while not jeopardising the economic recovery.

As an example, companies could be encouraged through lower taxes to undertake research and development to improve the efficiency of ground and air source heat pumps. Households could be offered subsidies for using low-carbon ways of heating their homes, as was the case in the early days of solar and wind power.

Agriculture accounts for 25% of our greenhouse gas emissions, making it a key area to tackle. Farmers could be subsidised to use more expensive but higher quality feed for animals so that they release less methane and more expensive, organic fertilisers to improve crop yields or to maintain woodlands.

As investors, we have little exposure to the UK – gilts or equities. Where we are finding opportunities though is among global companies that are involved in the promotion of more sustainable practices.

We own Chr. Hansen, a Danish bioscience company that develops natural solutions for the food, beverage, nutritional, pharmaceutical and agricultural industries; Tomra, a Norwegian company that builds sensor-based recycling sorting machines as well as ‘reverse vending machines’, which collect, sort and handle the return of used beverage containers for recycling or reuse; and Trimble, a US-based technology company that enables farmers to increase efficiencies, enhance productivity and improve crop performance while protecting soil and waterways from exhaustion and over-fertilisation.

To me, products and processes that cause less damage to the ecosystem are the future.

David Coombs is fund manager of Rathbone Greenbank Multi-Asset Portfolio Funds