# The green calculator

This is really rather interesting.

From the Taxpayers´Alliance, a calculator to find out how much you pay in green taxes. They´re trying to make visible the taxes you pay that are embedded in your energy bills etc.

That is a total bill of more than £740 for taxes and regulations

That´s calculating two flights and the use of the most modest Ford Focus. So that´s actually someone with rather below average emissions.

And as we all know the point of such taxes and regulations is to make implicit in the market prices the external costs of the actions. Once this is done then we´ll get the socially optimal amount of said emissions.

Note that this argument comes directly from the Stern Review. OK, let us then take Stern´s number for the social costs of emissions. \$80 per tonne.

What are the average emissions of a Brit then? 11 tonnes it appears.

Multiply and divide and the average Brit should be paying £590 a year as Pigou Tax on their emissions.

As we can see above, they´re already paying more than this.

Which means that, by Stern´s logic, we´ve alreadfy solved climate change. We added the appropriate Pigou Tax and will thus have the socially optimal outcome.

Hurrah!

(I´m willing to agree that the number are pretty rough and ready. However, for those who would like to argue, I´m much more interested in someone attempting a refutation of the logic rather than the numbers).

#### 26 comments on “The green calculator”

1. Serf says:

Tim, I agree with the logic of your argument, but I question the use of the cash generated.

After all, if we are creating a loss for someone, probably in a far off land, shouldn’t the money go to them, rather than the W*nking Husband of the Home Secretary.

Tim adds: That isn´t the logic of Pigou Taxation, no. It doesn´t matter where the tax money goes.

Our analysis is that there´s something wrong because people are not paying the full costs of their actions. Thus, just as when we subsidise things, we´re getting too much of that action. If we make people pay the true costs of their actions then we get the right amount of it.

This is entirely dovorced from what is the correct level of general taxation or whay the money raised is spent upon. Weve corrected the market imperfection, that´s all we need to so.

2. PC says:

Assuming of course that this AGW stuff isn’t just a load of baloney propagated by useful idiots…

3. Kay Tie says:

“Assuming of course that this AGW stuff isn’t just a load of baloney propagated by useful idiots…”

It doesn’t matter. Tax has to be levied, and taxing CO2 is no more illogical than taxing wages or chocolate biscuits.

4. The TPAs position is based on a straw man. I’ve never heard a politician say “we’ve set green taxes at the optimum Pigovian level.”

If the setting of taxes above the socially optimum level is so distasteful to the TPA, I’m confused as to why they aren’t focusing their criticism on income tax and VAT, which are taxes on activities with no direct externalities and therefore should optimally be set at zero.

When the TPA addresses the overall tax level and wasteful spending, it serves a useful purpose, but when it addresses the tax mix rather than the total tax burden, it seems to lose its way.

To address Tim’s poing about CO2 – that’s reasonable if the only thing being priced is CO2, but, for example, fuel duty creates an element of road pricing. Without privatised roads with the price set by the market, there has to be a counterbalance to our socialist road system

5. Paul, whilst politicians may or may not have said that green taxes are set at an optimum Pigovian level, they do justify their existence and their increase on the specific grounds of offset. We explored that back in the Autumn and found that even using the IPCC’s or Stern’s estimates of the social costs of Britain’s carbon emissions, green taxes are massive revenue raisers. With regard to your point about the cost of roads, we even deducted that from the total, too.

In terms of the issue of the overall tax burden, I do think that green taxation is an important issue here – it is one of the fastest growing arease of revenue raising in recent years. As it is being used to increase the overall burden it’s important to scrutinise and reveal that.

The other key aspect is the fact that in this sector in particular, many of these tax and regulatory costs are covert – hence the calculator. It’s important to inform people of how much the state’s activities are costing them in order to allow them to properly hold the state to account.

6. Mark Wallace: “Paul, whilst politicians may or may not have said that green taxes are set at an optimum Pigovian level, they do justify their existence and their increase on the specific grounds of offset.”

I wouldn’t say that’s true for most of the taxes. The general justification used is that it’s better to tax “bads” than to tax “goods.”

“With regard to your point about the cost of roads, we even deducted that from the total, too.”

Only a market can determine the true value of road use, so while the estimates might be well reasoned, there’s no way of knowing if they would tie in with what a private road provider would charge.

“I do think that green taxation is an important issue here – it is one of the fastest growing arease of revenue raising in recent years.”

I think that tends to be overstated. For instance, fuel duty makes up the majority of the quoted figure, but that’s been pegged below the rate of inflation in recent years. Income tax revenues have been growing much more rapidly.

“The other key aspect is the fact that in this sector in particular, many of these tax and regulatory costs are covert – hence the calculator.”

Many are, but others such as VED, are among the most overt taxes. I wouldn’t say that, in the main, green taxes are any more covert than income tax, NI or VAT, particularly the latter.

“It’s important to inform people of how much the state’s activities are costing them in order to allow them to properly hold the state to account.”

I agree, so why focus on one small subset of taxes and rather the far more damaging taxes which collect far more revenue?

7. Matt says:

The refutation of the logic is pretty simple – most of that tax is fuel duty, which has always raised money for general purposes. It was 60% of a gallon in 1950, and 1986 (under Mrs Thatcher), before CO2 was even a concern.

8. > It doesn’t matter. Tax has to be levied, and taxing CO2 is no more illogical than taxing wages or chocolate biscuits.

Kay,

Normally I agree with you but on this you are stunningly wrong. Oil and Coal are productivity multipliers so in effect you are taxing higher productivity (and killing the economy), this could even be worse than taxing the time people exchange in it’s economic destructiveness.

9. The social cost of carbon cannot be calculated to any useful degree of precision, because of the extent of the uncertainty. It could be \$0.8, \$8, \$80 or \$800 per tonne of CO2. We need a risk market to discover the current value of the risk of future damage. Then we’d find out what people really thought the chances were. http://www.forever-fuels.com/files/u3/carbon_or_harm_split2.pdf

Whatever the social cost is, it is not different at a given point in time for different sources of carbon. One of the many points this calculator illustrates is the disproportionate weight of green tax on road-vehicle fuel, compared to other sources of carbon, particularly domestic heating-fuel.

10. Serf says:

Anticitizen One.

You may be getting it the wrong way around.

By taxing inputs you are rewarding the efficient and punishing the inefficient. The end result will undoubtedly be growing efficiency.

11. BP: “Whatever the social cost is, it is not different at a given point in time for different sources of carbon. One of the many points this calculator illustrates is the disproportionate weight of green tax on road-vehicle fuel, compared to other sources of carbon, particularly domestic heating-fuel.”

The key point there is that carbon production isn’t the only externality created by road-vehicle fuel use. Fuel duty also reflects some of the value of road space, which is provided by the public sector. In contrast, the infrastructure for domestic fuel is provided privately, so the value of it is reflected in the underlying cost of the product rather than the tax.

12. Paul, That’s true, and I took your point earlier. Mark has partially addressed it, but your response was also fair in theory, that the market price of roads might be higher than their cost, if one could establish a practical, competitive market.

But my point is a matter of degree. You could take out whatever you choose to take out of the costs imposed on drivers for the factors you mention, and still be left with a decent sum of money, which would have little justification other than the “green” benefit. Conversely, the cost of carbon applied to domestic heating is probably negative in reality (an area where TPA have probably not got their calculator right), because the government applies no significant mechanism that might reasonably be supposed to embody a carbon cost, and a specially-low rate of VAT. Whatever the numbers are, they are not in the same ballpark.

13. Bruno, an interesting one to look at from that perspective is diesel, which carries duty of 9.69p when used as a heating fuel, but 50.35p when used as a road fuel (and of course the VAT is different, as you say).

On that basis (ignoring the VAT for simplicity), you can say that the price you pay for the pollution and CO2 created by burning a litre of diesel is 9.69p and the charge for the amount of road use you get from a litre of diesel is 40.66p.

As we seem to have agreed, it is impossible to say if those are the right levels, but instinctively, neither seems unreasonably high to me.

14. Paul,

That’s a fair bit of maths, although you have left off vehicle excise duty, which presumably is also part of the price of using the roads. But why stop there? We can go one step further, along the lines you suggested. (Data from http://www.dft.gov.uk/pgr/statistics/datatablespublications/tsgb/2008edition/sectionsevenroadsandtraffic.pdf)

Vehicle fuel duty yields around £23 billion p.a., implying around £18.6bn for the road-use charge aspect (using your suggested ratio). Vehicle excise duty yields another £5 billion or so (equal to around another 10p/litre, if we were putting this all on the fuel), making £23.6bn of total road-use charges (net of the carbon-price) and 50.66p for the net road-use charge per litre.

Government spending on road construction and maintenance is around £6.6bn, leaving around £17bn of the road-use charge, attributable (presumably) to the other externalities and to simple profit (if roads were private) or revenue-raising (in the current publicly-owned model).

In other words, of the 50.66p/litre, around 14.17p/litre goes to operating and capital costs (construction and maintenance), and 36.49p/litre goes to other externalities and profits/government-revenues.

As you say, who can say if these are the right levels? But my instinct is less positive.

15. Bruno,

The ONS says that vehicle miles in 2007 were 320bn, so the figure of £23.6bn, would equate to about 7.4p per mile. So the question is, if fuel was 40p per litre cheaper and there was no VED, would a private road operator charge at least 7.4p per mile and would drivers be prepared to pay that much?

Of course, there’s no way of knowing for sure, but given that the cost of using the M6 Toll is already well in excess of that figure, it sounds reasonable.

16. Paul,

Again, fair point. Yes, I think drivers would be prepared to pay that much.

But in a competitive system (we are creating a competitive road-charging system, I take it?), the price will not be solely determined by what drivers are prepared to pay, but also by what providers are willing to accept. And in a competitive system, unless there is some artificial barrier to entry that limits supply below demand, what providers are willing to accept should tend towards the price that allows them to make an acceptable return on capital.

7.4p/mile seems very low. But I suggest that, as 7.4p/mile represents a profit of upto 250% (23.6bn – 6.6bn / 6.6bn), the price would be driven even lower by competition.

17. Bruno,

I agree with the principle that both supply and demand will determine price and your point about return on capital is correct, but the one additional bit you need to add in to your figures is the capital value of the road. The 250% figure is profit as a percentage of on-going maintenance costs plus a small amount of new development. That’s a bit like saying that the percentage profit for a landlord is (rent-maintenance costs)/maintenance costs, without making any allowance for the initial cost of buying the land or building the property.

The land used for the road will also have scarcity value, so, for example, if motorway use fees fell very low, owners might start ripping up the tarmac and building houses instead to get a better return, which should then see prices on the remaining roads increase.

The other point that is worth considering is that major routes might have multiple roads with different pricing structures. One road might deliberately set a very high price in order to keep congestion low and attract drivers for whom cost is less important than journey time. That could also push the average cost up.

18. Paul,

250% is profit as a percentage of maintenance and capital expenditure, at a rate of capital investment that is reasonably representative of past expenditure within a timescale that is relevant to capital recovery.

Most of these roads were built so long ago that most of the initial capital expenditure should have been recovered/depreciated. Certainly, the Government has had a lot of revenue from drivers – more than would be needed to recover that cost. Should we have to pay again? If we did, would that cost represent a charge for the benefit we had obtained (and already paid for)? Or would it simply be a way of government taking drivers for what they could get?

In one sense, the relevant capital value is what an operator would have to pay to the Government for a road when it is privatized. And what the Government can charge will be determined by their view of what they can get. If they create a genuinely competitive system, bidders will have to take account of competitive pressures on their revenues and bid a value that allows them to make a return if road-use charges are driven towards operating costs. This will result in low bid and therefore low capital values, as would accurately reflect the reality of the situation that most of the capital has been recovered from charges to the “customers” and that ongoing capital and maintenance expenditure is embodied in their share of the £6.6bn.

If the Government creates a system where competition is limited, then bidders can rely on monopoly benefits to keep their prices high, and consequently bid a high price for the privilege. That, however, would not be a reflection of the capital value of the roads or of the benefit to users, but of the benefit of monopoly privilege.

This, incidentally, is why government monopoly auctions, such as for 3G, may be good money-raisers for the government, but are bad for the economy, and should be avoided so far as possible.

Yes, land used for roads has scarcity value. But a significant part of the value of other uses depends on accessibility, so it’s not a simple choice to dig up a bit of the road to build a house. A road’s value is substantially reduced if you cut it at any point, so to take that decision, the operator would have to build enough properties to compensate for the sacrifice of most of the road-use charges. And all of those properties would need access, so the operator would probably end up having to maintain at least as much road and more, without the benefit of passing traffic. In reality, I think we know this wouldn’t happen much, and that people would prefer to build next to a road (thus having their cake and eating it) rather than on it.

Also, you would have to be clear about your model. This would only work if we are literally selling the freehold or long-term leasehold of roads, effectively privatizing them. Most road-use charging schemes don’t work that way, and the operator would not have the right to dig up the road and redevelop.

I agree pricing structures will vary in a hypothetical, privatized system. It is not clear, though, that freedom to price drives up average costs to customers. Markets tend to work in the opposite direction, or at least that is a basis of free-market beliefs.

19. Bruno: “Certainly, the Government has had a lot of revenue from drivers – more than would be needed to recover that cost. Should we have to pay again?”

Plenty of people who rent out houses have received more in rent than would be need to recover the initial cost of the house. Does that make it illegitimate for them to carry on collecting the market rent?

“This will result in low bid and therefore low capital values, as would accurately reflect the reality of the situation that most of the capital has been recovered from charges to the “customers” and that ongoing capital and maintenance expenditure is embodied in their share of the £6.6bn.”

The capital value would have nothing to do with how much has been received from previous users. Your comment seems a bit like saying that, if I buy a house with a tenant, I can expect to pay less the longer the tenant has been in the house and repaying the capital value.

“This, incidentally, is why government monopoly auctions, such as for 3G, may be good money-raisers for the government, but are bad for the economy, and should be avoided so far as possible.”

I find this comment extremely odd. What else would you propose to do to allocate the use of spectrum, which is a scarce resource? The government hasn’t created a system where competition is limited in the case of spectrum, it is inherently limited.

“It is not clear, though, that freedom to price drives up average costs to customers. Markets tend to work in the opposite direction, or at least that is a basis of free-market beliefs.”

For me the core basis of free market beliefs is that markets ensure efficient allocation of resources by reflecting the value of different uses to the potential users. If state ownership deliberately supresses the effect of scarcity value when resources are put to a particular use, then it is perfectly reasonable that a free market would result in a higher price for that product.

20. Paul,

We can all work by analogy. I could argue that this is more analagous to paying off the mortgage (at a very high rate of interest) and then having the house sold from under you by the lender. I suppose the question would be: whose assets are these, ours (the taxpayers) or the government’s?

“What else would you propose to do to allocate the use of spectrum, which is a scarce resource?”

I agree with your distinction between natural scarcity and artificially-enhanced scarcity. This wasn’t the best example for me to pick. I should have used the example of the Non-Fossil Fuel Obligation, which was the first case where I became aware of this problem, but it’s rather obscure. In the case of NFFO, government created artificial scarcities of unknown quanta for a dutch auction. Their monopoly position was so effective that they drove prices down strongly. The problem was that it was so effective and people were thus so desperate to win one of the unknown number of contracts that would be let for their technology, that the optimists bid down the price below where most projects were viable and many realists were shut out. NFFO ended up being a tremendously successful way of driving the price down to a level at which it prevented development of the thing it was supposed to encourage.

The 3G auction nearly had the same effect, delaying roll-out, and nearly bankrupting some of the winning optimists and shutting out some of the realists. But in this case, the water is muddied because the scarcity, as you say, is genuine. Someone would have taken the profits from the excess of demand over supply, and who better than the government on our behalf? All the same, I would have structured it in a different way, separating the natural-monopoly infrastructure-provision part from the service-provision part more clearly (analagous to the structure of the electricity industry in that brief halcyon period after supply and distribution had been split but before Sir Callamity McCarthy allowed the competitive market to be undone by vertical-integration), and creating a more flexible market for accessing the infrastructure. This would have maintained the competitive threat from new entrants and removed the need for regulation of this part of the business, with tighter but limited regulation (of compliance with the rules, not of prices) over the natural-monopoly part. Having the revenue from sale of bandwidth-rights come in to the infrastructure-provider rather than the government in the first place would make the provision of that infrastructure well-funded and relatively low-risk, which would have helped to get the systems built, rather than being delayed by cash being sucked out of the system by the government maximising its revenue at auction. The risk and benefits could be further shared with society, by government-underwriting of minimum returns for the infrastructure-provider (highly unlikely ever to be needed), and provision for a proportion of profits above the minimum returns to go to the Treasury. This would have kept the cost of money as low as possible, getting the systems built, maintained and expanded as quickly and cheaply as possible.

You may say that if idiots want to overbid (or under-bid in a dutch auction), that is their lookout, it is the market working as intended, and not a sign of a bad mechanism. But we see it time and time again where government is letting contracts for monopoly positions. We have seen it in many public-sector construction projects, where standard practice is to bid a non-viable price in order to win the contract, and then hope to claw it back by renegotiation once the project is under way and the government is frightened to let it fail or be further delayed. That is the real reason why so many of these projects go over-budget and over-time – they were never going to come in on-budget and on-time. The amazing thing is that some occasionally do, not that so many don’t.

The incentives in government-auctioning are to drive honest men out of the market and encourage the crooks. It also tends to inflate ultimate costs, because it is more expensive to put right something done badly than to get it right in the first place. The government is in a unique position, and should try as hard as possible to design mechanisms that ameliorate this impact, even at the expense of reducing the amount of revenue raised. But of course, the public-choice incentives for the government strongly encourage the opposite behaviour.

[This is seriously OT – my fault, I admit – and I suggest, if we want to carry on with this topic, we move it to another thread. I can setup a thread at Picking Losers for the purpose, if you like.]

“If state ownership deliberately supresses the effect of scarcity value when resources are put to a particular use, then it is perfectly reasonable that a free market would result in a higher price for that product.”

We have both taken the revenues and costs and divided them evenly over every litre or every driver-mile. There is nothing to say that the revenue collected actually represents a division in this way. If we stick with that assumption, you are probably right that it underprices scarcity on busy roads during busy periods. But equally, it overprices (non-existent) scarcity on other roads and at other times. I still don’t see why we would assume that the net effect would be upwards.

21. Bruno: I suppose the question would be: whose assets are these, ours (the taxpayers) or the government

22. Sorry, part of that comment seemed to get lost.

I suppose the question would be: whose assets are these, ours (the taxpayers) or the government’s?

That isn’t the question I’d ask, as I think the two are effectively the same in this case, certainly with motorways, which I view as being the only part of the road network which can effectively be priced without overly invasive systems.

The question I would ask is: whose assets are these, the taxpayers’ or the drivers’? If it’s the former, the right strategy (while they are in government hands) is to get the maximum revenue from the roads. If it’s the latter, the right strategy is to charge the minimum that allows the system to be workable.

I still don’t see why we would assume that the net effect would be upwards.

I agree. It might be downwards. Without a functioning market, there’s no way of knowing for sure.

I’ll comment on the other issue over at picking losers.

23. Paul,

I agree with you completely (hooray!) about motorways as the only practical routes to price, and pretty much everything else in your latest comment. Is this dialectics in action, and we’ve reached a synthesis? 😉

24. On second thoughts, I have a quibble. Even if we are talking about taxpayer/government assets, I’m not sure the right strategy is to go for maximum revenue. Isn’t the right strategy to go for maximum welfare, which isn’t necessarily the same thing?

It’s similar to the question with the Laffer Curve: is the optimally-efficient option to try to target the peak of the curve (maximum revenue), or somewhere to the left of it, where the tax is yielding revenue efficiently but is not so close to acting as a deterrent? I’d have said well to the left. Is the job of government to maximise revenue or minimize burden?

25. It depends if you think the government is capable of knowing which approach will give maximum welfare. I don’t.

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