The green car tax grabs that dont add up

According to Tom Worstall at The Register, the recent budget increases in fuel duty simply do not make sense. I am inclined to agree and here’s why (from The green car tax grabs that dont add up):

Alistair Darling has missed his big chance to show that he’s both serious about climate change and that he understands the arguments. He’s delayed the previously announced 2p per litre rise in fuel duty and then added that it will rise 0.5 p per litre each year thereafter. This simply isn’t acceptable, it’s putting us all at risk, for what he should have done is cut fuel duty by 12p per litre.

The outcome of the Stern Review (ie, the advice the Government commissioned to tell them what to do about climate change) was that there is a correct level of taxation upon carbon emissions: the alarming thing being that this correct level is lower than the price we already pay.

So what is the correct price that we should be willing to spend to reduce the future damages? Well, obviously, the cost of those very damages. We don’t want to spend more to solve the problem than the problem will cost, after all: no one pays £100 to insure a £90 problem, do they (with the possible exception of extended warranties on electrical items)? And spending less would mean that we are imposing our costs upon those to come in the future, something really not very nice to do.

From the Stern Report the figure is $85 per tonne CO₂-e (more on how this is calculated in the full article at The Register – link at the top of this article). As long as everyone pays this on their emissions, and as long as this externality is incorporated into market prices, we’ve solved our problem.

So if we have our emissions price, and all we need to do is add it to the things that emit, what does this mean for the price of petrol? It’s trivial to calculate that $85/tonne CO₂-e gets you into the 10-12p region per litre. In order for drivers to pay the costs of their driving they should pay that sum per litre on their petrol: no higher bands for higher emitting cars are needed, no £25 a day rate in London’s congestion zone, just that 11p (ish) on a litre.

However, this doesn’t mean that it should be 11p higher than now: we’ve already had the (intermittent) fuel duty escalator for 15 years now. This was introduced in 1993, just after the Earth Summit, the UNFCCC and all that which led to the Kyoto Protocol.

Quite specifically, fuel duty was raised so as to make drivers carry the costs of their CO₂ emissions. By 1997, it had added 11p: so, job done, problem solved. However, between then and now, another 12p has been added. (For those who are going to bring up the inflation objection, Stern’s calculations were in a later year than these tax rises. In other words that 1997 11p is higher than Stern’s required 11p in real terms.)

So in order to have the correct amount of taxation, the correct internalisation of externalities and thus the right amount of climate change in the future, fuel duty should be cut by 12 pence on the litre: further, all other taxes on higher emitting cars should be abolished. For at the moment, we’re paying more in tax than the problem itself will cost in the future and that just isn’t sensible, nor is it in agreement with all of the advice that the Government has been receiving, even the advice that it itself commissioned.

Not that this is an entirely unusual state of affairs you understand. This is the pesky little problem with any logical argument which leads to the identification of an optimal or perfect level of tax. Such rationality all too often leads to the answer, that perfect rate, being lower than the one necessary to feed the politicians’ appetites to waste our money.

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