DJ: In the American election the cost of petrol has become a big issue because of the economic down-turn, and all the candidates are now promising cheaper petrol. This suggests that Nigel may have a point, that even in a country where people understand the issues, the moment they feel the pinch, their green credentials go out of the window and they start worrying about the cost of petrol.

OL: Well, of course Nigel has a point that there is political resistance to be anticipated to any tax. Even I, only having been shadow Chancellor, am conscious of that. But it’s a very different thing to propose to tax environmental “bads” if you’re going to do what Gordon Brown has typically done, which is to use the money as a form of stealth tax revenue, rather than what George Osborne is proposing, which is to tax environmental bads and simultaneously to reduce other taxes on families pro rata, pound for pound. In the second case, I don’t pretend that there are no political difficulties, but it seems to be a very different proposition. And I think there is scope, therefore, for judicious, progressive efforts to switch the burden away from direct taxation of families towards taxing environmental bads.

NL: By environmental “bads” you mean petrol and electricity generated by conventional power stations.

OL: Carbon. I’m trying desperately not to gazump the very careful judgements that George Osborne will have to make about exactly what form those taxes will take, but it’s perfectly possible to find ways of taxing carbon output and using that money to reduce other taxes. And that shift is, I think, one that we can sell successfully to the British public, not least because it will be very difficult for the Labour party, which happens to agree with us about these matters even though Nigel doesn’t, to attack us.