A proper carbon tax would lower the cost of petrol

As I\’ve been saying for years now:

The Office of Fair Trading today published a report concluding that the reason petrol prices have risen so high is due to fast-rising taxes and higher oil prices.

If the Stern Review\’s carbon tax had been implemented that would have meant around 11 p on a litre ($80 per tonne CO2-e x emissions from one litre).

The fuel duty escalator was introduced back in the 90s and we were told that it was \”to meet our Rio commitments\”. I.e, that it was indeed a carbon tax. That escalator has added over 25 p to the cost of a litre.

Ergo, a proper carbon tax would lower the price of petrol. For here\’s the point about Pigou Taxes. They do not mean that tax rates must be higher. Rather, they argue that there is an optimal tax rate: which can indeed be lower than the one currently charged.

We can go further. A proper carbon tax would apply to all of the UK\’s 500 million tonnes of emissions. Say, $40 billion a year. Or around £25 billion say. £28 billion maybe.

And a carbon tax is indeed the complete and total solution to climate change. It is not necessary to do anything else at all.

The thing is, we\’re already paying that carbon tax. We already pay \”green taxes\” of that amount. Not quite on all the right things, we pay too much on petrol and not enough on some other emissions.

But a proper carbon tax, that complete solution to climate change, all we\’ve got to do is move around the taxes we already pay. And then we\’re done.

Interesting, isn\’t it?

37 comments on “A proper carbon tax would lower the cost of petrol

  1. And a carbon tax is indeed the complete and total solution to climate change. It is not necessary to do anything else at all.

    What makes you think that?

    Tim adds: Economic theory? A Pigou Tax is the correct and only necessary response to an externality.

  2. The fuel duty escalator was introduced back in the 90s and we were told that it was “to meet our Rio commitments”. I.e, that it was indeed a carbon tax.

    That’s not exactly true. What Lamont said was:

    The largest contribution to the growth in United Kingdom carbon dioxide emissions in the coming years is expected to come from the transport sector. I therefore propose to make clear today the Government’s long-term intention on road fuel duty. We intend to raise road fuel duties on average by at least 3 per cent. a year in real terms in future Budgets…

    …in order to meet the commitment that we entered into at Rio, action will be required not just in the transport sector, but across the whole economy, and in deciding how best to meet our carbon emissions target, we will need to ensure that the right incentives are in place throughout the economy – encouraging people to consume less and conserve more. Above all, it is crucial to avoid taking measures that will have a disproportionate impact on the competitiveness of British industry.

    He went on to introduce VAT on domestic fuel, at 8%, to be increased later. Brown cut it to 5% instead.

    Let’s suppose we do the sensible thing and impose a duty on all fossil fuels, based on the carbon dioxide produced by burning them. Road fuel would get cheaper, fuel for everything else would get more expensive. We’d be resolved to ignore complaints from industry and farming, but we’d have to do something about domestic users – increases in pensions and other benefits to make sure vulnerable people don’t freeze.

    And then there’s the roads. With cheaper fuel there’d be more cars and lorries on the road. Road use would be rationed less by price and more by time available to sit in traffic. That seems economically inefficient. Are you up for more congestion charges to address the problem?

  3. “Tim adds: Economic theory? A Pigou Tax is the correct and only necessary response to an externality.”

    If we are completely sure about the “externality”, ie, are we convinced that man can “control” climate change?

    In the absence of certainties then, economically, might a stronger focus on forms of adaptation be a better response?

    If one applies the concept of carbon taxes (on supply of energy) on a worldwide basis, is this not potentially a more regressive form of taxation, helping to keep the impoverished in their existing state?

  4. Is the fuel duty not also a congestion charge – albeit imperfect e.g. rural areas? Given current congestion levels, in the absence of time-variable congestion charges, one could conclude it is not high enough.

  5. That escalator has added over 25p to the cost of a litre.

    Is this true? Petrol duty (on unleaded fuel) was 25.76ppl in 1993, which taking inflation into account is worth about 43.8p today. Petrol duty is now 57.95ppl, so I make it about 14p which the escalator has added to the price of fuel, or probably about 16.5p if you allow for the extra VAT as well.

  6. No carbon tax and no taxes on fuel at all.

    That might do more than a little to get the economy going and cut down the cash available to help the political and bureaucratic scum lord it over us.

    And finish off their high speed train crap as well.

  7. Tim adds: Economic theory? A Pigou Tax is the correct and only necessary response to an externality.

    Well I don’t have a problem with Pigou taxes per se but I would dispute that they are the “only necessary response” to a problem, particularly a complex and global one such as climate change.

    Making people pay the economic costs associated with their contribution to climate change (assuming that one can even realistically make an accurate assessment of such costs) is not the same as “solving” it.

    Tim adds: Yes, it is the solution. For it means that we therefore get the right amount of climate change.

  8. The right amount for whom?

    Tim adds: Everyone. The right amount is that which maximises aggregate human utility over time.

    Thus the Stern Review which tells us that the carbon tax should be $80 per tonne.

  9. Economic Theory?

    Theory is just that, it is not fact no matter how plausible it might be nor how many people like it.

    Pigou Tax supposes there is perpetrator(s) and victim(s). To assess the tax there has to be a quantifiable cost to the victim(s) which can then be transferred to the perpetrator(s), the idea being it will be cheaper for the perpatrators to change what they do so as not to incur all or any of the cost.

    This relies on two things. First, there must be a victim, second there must be a viable, cheap enough means whereby the perpetrator can change what they do to reduce or balance off the tax.

    Since there is no ‘carbon’ induced climate change in the present era, there are no victims. Putative victims will not be born for another 50 or 100 years so it is impossible to assess what the cost will be to them, not least since it is impossible to assess what climate change will take place, how it will affect putative victims, or how those victims will be able to mitigate those effects.

    So it is impossible to calculate the Pigovian Tax.

    Secondly, there is no means for the perpetrators, which includes the entire population of the Planet, from avoiding the Tax or neutralising it except decreasing their current activities and reducing the population size. Even if by some marvel we ‘use energy’ less, there will be more of us using ‘less’ as population increases and other Countries develop.

    Given the effect of reducing our activity and reducing population will have on putative victims, some of whom will not now be born of course, plus born i to poverty becasue of the arrest of the advance of civilisation, future generations will be victims of the very tax which was supposed to save them.

    The Pigou Tax is then an externality and should be taxed.

  10. Andrew adams: yes but, no but. By definition, the Pigou tax revenue will cover the costs of the damage caused by the externality (or whatever remains after the tax has changed incentives).

    The right amount for whom? Everybody who gains by the activity, individually. Either pay the tax because it’s still worth it, or don’t because it isn’t. If it’s worth it, the tax will provide revenue to repair/adapt to the damage caused, so those affected by, but not involved in, the activity are no worse off.

    Whether a government will spend the revenue on fixing the damage is a separate question, as is whether people will still find something to complain about.

  11. Tim means the economically efficient amount. We could reduce carbon emissions to near zero (given the political will) but that would be economically disastrous. Or we could carry on emitting carbon dioxide regardless, but that too would be economically disastrous (not everyone here agrees with the science on that). Or we could look for a way to strike a balance between the extremes – a carbon tax.

    I’d like to think there would be a mechanism to use at least some of the money raised to compensate flooded Bangladeshis. Perhaps Tim is envisaging a massive programme of foreign aid.

    Tim adds: Correct up to a point. Which is that it doesn’t matter what you spend the revenues on. A Pigou tax works by changing prices and thus incentives. It is *not* necessary to spend the revenues on remediation.

    Indeed, there’s no particular reason why climate change should lead to more government or higher revenues overall. So the Pigou tax should be revenue neutral: change what is taxed, not tax more.

    As to foreign aid: trades the best form of that.

  12. I’m sorry, but I don’t get this.

    IF one assumes that mankind can exert full control over climate change through controlling emissions of carbon (“whether or not” I accept is a separate argument), then surely you are talking about a worldwide Pigou tax? Are we serious?

  13. All well and good except that CO2 isn’t a pollutant and doesn’t need to be worried about, hence the introduction of a tax on such emissions is nothing more than outright theft concealed behind a greenwashed veil of lies.

  14. As others point out, there is a portion of the duty associated with the externality of carbon emissions but there is also the other portion of the duty to cover a range of externalities, noise, health, emergency services, courts and prisons for related offences, congestion and standard of living.

    The person who suffers the externality cannot usually be directly compensated but when drivers pay the proper costs the rest of society has generally lower taxes, eg we could say that some amount of the duty goes to paying for the NHS, therefore that amount does not have to be paid by non-drivers.

  15. Paul R’s point here is important. If there were a congestion charging scheme set at the level that it, on aggregate, paid the costs of road infrastructure, then Tim’s right – fuel duty should be set at the carbon price. At the moment, fuel duty is a crude way of doing both.

    Also, can people who believe CO2-induced warming isn’t a thing please sod off out of threads like this?

    Tim is willing to concede for the purposes of debate that it exists; he highlights well that a great many ‘green’ policies are environmentally and economically stupid.

    Basing things on Tim’s principles rather than Greenpeace’s principles would lead to the same degree of dealing with climate change, but much less deadweight loss and fascist stupidity.

    I don’t rock up on denialist websites and say “but it’s obviously real”, because it’s pointlessly rude and the evidence has been done to death and nobody will change their ideology. That isn’t the same in terms of methods of mitigation.

  16. PaulB (and others),

    I agree that ultimately we will have to find a point between the extremes of carrying on emitting CO2 regardless of the consequences and immediately reducing emissions to zero. But there are a number of different issues – political, economic, technological, which will determine where that level ultimately lies and where we end up may not coincide with the level which “everyone” agrees is desirable, in fact it almost certainly won’t and I would dispute that any such level exists at all.

    I don’t dispute that carbon pricing in some form will be an essential part of any meaningful strategy to address climate change, but to claim that it is the answer in itself and in the absence of any other measures is wishful thinking, it begs so many questions it’s frankly getting into underpants gnomes territory. The impossibility pointed out by John B above of actually knowing the what the proper level of a Pigovian tax should be is one problem (no disrespect intended to Stern whose work is still valuable nonetheless), but there are too many complicated questions surounding action on climate change which simply aren’t addressed by a carbon tax.

  17. IF one assumes that mankind can exert full control over climate change through controlling emissions of carbon (“whether or not” I accept is a separate argument), then surely you are talking about a worldwide Pigou tax? Are we serious?

    You are correct – even if it can work it only does so if everyone does it.

    Tim adds: Nonsense.

    Assume:

    a) Climate change is real, we’re causing it, we must do something.

    b) Everyone in the peer group (ie, advanced industrialised nations) is going to do something.

    We therefore have to make a choice about what that something is going to be.

    We could:

    1) Try every piece of damnfoolery thought up by Greenpeace and their pet monkey.

    2) Have a carbon tax.

    Which would work better? “Work” here being reduces emissions at least cost to everything else.

    Clearly, a carbon tax. And once this has been running a few years and everyone else sees that this is so then so too will they take that path.

    And we do indeed know that a carbon tax works. Note, for example, much higher petrol duty in Europe than the US. We all drive smaller engined cars shorter distances. Pigou taxes work.

  18. @ John B:

    “Basing things on Tim’s principles rather than Greenpeace’s principles would lead to the same degree of dealing with climate change, but much less deadweight loss and fascist stupidity.”

    Can you help me here – would this substitute Csrbon tax (or principle) be introduced by the UK, EU, or worldwide? Tim appears to suggest the UK in his commentary?

    However, unless it is worldwide, I am not sure that anyone (at all) is suggesting that there could be any impact on the externality that Tim “concedes” here (as you put it)? Or am I missing something really obvious – which is quite likely!?

  19. Apologies – my post at #21 is now duplicating over comments at #20. Seems Tim is suggesting worldwide (or in the fullness of time) rather than simply UK, which answers my question.

    I’m not convinced myself that worldwide is practical, but I accept that’s a quite separate discussion from the straightforward economic principle being made. Similarly, not sure I agree with assumption b) in #20. What about China and not so advanced industrial nations (and non industrial nations that want to become industrial)?

  20. And a carbon tax is indeed the complete and total solution to climate change.

    Sometimes I forget – are you trying to persuade people that thinking economically is a useful intellectual tool for solving humanity’s various problems? Because you sound like a Victorian quack peddling his remedy for all known diseases.

    “The right amount is that which maximises aggregate human utility over time.”

    Fine. So, in other words, we have to gaze into the indefinite future, average the entire human experience over the whole globe over the entirety of eternity, and compare the results under every conceivable emissions scenario. We have to know a huge amount of stuff that we don’t in fact know about how the climate will change over the long run, what effect this will have on various deeply complicated ecosystems, and how human society will deal with the complex and unpredictable fallout. We have to make meaningless and arbitrary economically sophisticated decisions about the “utility” of the polar bear not being extinct, or the Maldives not disappearing beneath the waves. And we have to encode this mass of data, most of which we can never know, and much of which is entirely subjective anyway, into a single number: the magical, optimal Pigou tax level.

    I think a carbon tax is a fine idea. But let’s not pretend that it’s anything other than the crudest of shoves in what we hope is roughly the right direction.

    Tim adds: “So, in other words, we have to gaze into the indefinite future, average the entire human experience over the whole globe over the entirety of eternity, and compare the results under every conceivable emissions scenario. We have to know a huge amount of stuff that we don’t in fact know about how the climate will change over the long run, what effect this will have on various deeply complicated ecosystems, and how human society will deal with the complex and unpredictable fallout. We have to make meaningless and arbitrary economically sophisticated decisions about the “utility” of the polar bear not being extinct, or the Maldives not disappearing beneath the waves. And we have to encode this mass of data, most of which we can never know, and much of which is entirely subjective anyway, into a single number: the magical, optimal Pigou tax level.”

    Yup.

    Which is exactly what the Stern Review does. That’s the point and the whole of it.

  21. A proper carbon tax is a ruse by political mountebanks to extract money from the populace by pretending to control the weather – a swindle of mythological proportions.

  22. “Which is exactly what the Stern Review does. That’s the point and the whole of it.”

    And like all over-arching grand-designs, it is a flimsy basis for doing anything at all, in the face of an improperly-understood set of circumstances – I was going to say problem, but that is too subjective for this situation, especially since there is a lot of concern for potential losers but none for potential gainers.

  23. Tim,

    This will probably have to be my last word on this. First of all, saying that a carbon tax is better than some unspecified alternative being pushed by Greenpeace is not much of an argument. As far as I know Greenpeace supports carbon taxes and I don’t know what other “pieces of tomfoolery” you are referring to. And it’s not as if we only have to choose one single policy.

    I have a couple of problems with your argument that “Pigou taxes work”. I’m not disputing that they can have an effect, there may be some cases where they work perfectly, and I’m certainly not against them in principle. But if they were always sufficient in themselves then we presumably wouldn’t need things like environmental regulations to prevent pollution and other regulatory constraints on behaviour. Also, the current level of fuel taxes in the UK doesn’t seem to have had much of an impact on behaviour, people are still choosing to drive, or rather they would probably say they don’t have a choice. That’s fine if the sole concern is to make people pay for the externalities generated by their behaviour, but not so good if you are seeking to actually change people’s behaviour. And I think there are reasons other than lower fuel prices (although these are probably a factor) that people in the US have bigger cars and drive more than we do.

    As for Stern, I think his report was a serious piece of work, probably as good as anyone could have done, and I am not making any criticism of him. But Larry makes perfectly good points and given the huge uncertainties over the extent and impacts of climate change and the necessarly subjective nature of attaching economic costs to some of those impacts (and that’s before you get into arguments about discount rates) I think the confidence you attach to the $80 per tonne figure is unwarranted. Just one example I picked from the executive summary “The additional costs of making new infrastructure and buildings resilient to climate change in OECD countries could be $15 – 150 billion each year (0.05 – 0.5% of GDP)” – that’s a pretty big range.

    And Stern certainly does not himself claim that carbon taxes themselves will be a sufficient response. He mentions international frameworks, emissions trading, technology co-operation, action on deforestation, economic support for poorer nations.

    The thing is I’d love to believe you – I have had plenty of arguments with people who say that any meaningful action of climate change is impossible. I think they’re wrong but unfortunately it’s not as simple as you say either.

  24. Which is exactly what the Stern Review does.

    You missed the bit where he obviously doesn’t, because it’s self-evidently an impossible task.

  25. Surely you measure and adjust the carbon tax based on its effect, so knowing the exact figure beforehand isn’t all that important. Having a good starting point is important, having a measurable quantity to monitor is important, then let the calculating engine of the market figure out what the rate should be.

  26. “And we do indeed know that a carbon tax works. Note, for example, much higher petrol duty in Europe than the US. We all drive smaller engined cars shorter distances. Pigou taxes work.”
    Oh get real, Tim. Europeans were driving smaller cars & driving shorter distances decades before carbon taxes were a gleam in enviroswindlers eyes. Cars in the US answered markedly different needs in the US. In recent years US cars have been smaller as the requirements for US cars have been changing.

  27. @ Matthew L
    “having a measurable quantity to monitor is important”

    My apologies if I am missing something here, but in the context of this particular externality, this presumably means measuring the extent to which the carbon tax is directly changing climate?

    I am not sure even the most fervent “science settled” advocate would suggest that this is something that can be genuinely delivered?

    Like others, I am not trying in any way to rebut the principle / concept of Pigou at all, I simply struggling with the practical delivery given the – let’s say – many complexities of this particular externality.

    Tim adds: OK, just to go through the carbon tax again.

    We think that human emissions are warming the planet. We think this is also a bad thing. OK, many around here reject one or both of those contentions but let’s leave that aside for a moment.

    So, how bad a thing is it? That depends upon the number of emissions, what emissions do and the reaction of feedbacks to what those emissions do.

    Now, before we do anything at all we need to know those three things. If the answers are not much, very little and nowt then we need to expend zero resources now to avoid what won’t really affect very much. If the answers are lots, lots and lots, then we need to do something.

    Quantifying these three is vital whatever it is that we decide to do. Whether we use regulation, cap and trade, the dismantling of industrial civilisation or a carbon tax, we’ve still got to work out how bad it might get. For only then can we think about what resources, if any, we should be devoting to avoiding that either not very much or that catastrophe.

    We should add a bit of a risk factor too. And look at discount rates and all that. But it still is true that before we decide how much we should do, how much treasure we should spend on avoiding climate change, we need to know the value of what we’ll lose before we do things. For only then can we know how much to do.

    And again: this is true whatever method it is that we decide to use.

    So we’ve got our numbers then. However much they’re estimates, they’re still the best that we’ve got and they are vital to the taking of any decision at all.

    But if we’ve got these numbers then setting the carbon tax is simple. It should be at the future cost of the emissions.

    No, it doesn’t matter how much people do or do not change their behaviour as a result of the tax. If the tax is at the future cost of the emissions then the only emissions that take place are the ones where current benefits exceed future costs. And that is thus maximising human utility over time.

    To recap: we need to know future costs in order to make any decision at all about what to do, or indeed whether to do anything. But if we know future costs then a carbon tax is simple and utility maximising.

    QED. A carbon tax is the sole solution required.

  28. I wouldn’t bet the farm on the Stern Report – he, after all, was a civil servant at the time who produced the sort of conclusions that his tax-rapacious, AGW-enthusiast employers needed.

    If one may be allowed to quote Richard Tol, who is I believe a much more eminent economist than Stern:

    “In sum, the Stern Review is very selective in the studies it quotes on the impacts of climate change. The selection bias is not random, but emphasizes the most pessimistic studies. The discount rate used is lower than the official recommendations by HM Treasury. Results are occasionally misinterpreted. The report claims that a cost-benefit analysis was done, but none was carried out. The Stern Review can therefore be dismissed as alarmist and incompetent.”

    I also seem to recall a somewhat less eminent economist being very scathing about the Report when it was first released. I can’t quite remember his name, Tim Wor-something I think it was…

    Tim adds: Indeed. And as Tol has said even with all of those things that Stern got wrong it’s still true that a carbon tax is the lowest cost way of solving the problem. And even with all of the things Stern did to nudge up the price of the carbon tax it’s still vastly cheaper than what we’re actually doing.

  29. While I am all for efficiency I cannot quite see how taxing carbon (or rather carbon dioxide) can be efficient until we have a better idea of what, if any, effect CO2 and its reduction would have on temperature. (And, as a prior question, what the optimum temperature is and how we might measure it.)

    At the moment what a carbon tax would be doing is pricing guessed at externalities. To price emissions you have to have a pretty solid idea of emissions relationship to temperature – which we don’t – and what temperature increase is “bad”. (Living in Canada I am inclined to the view that temp increase is generally good.)

    Amusingly, in the absence of solid attribution studies or a definite answer as to the correct level of temperature increase, every “pricing” reflected in a carbon tax will be wrong and hence inefficient. Will it be less inefficient than putting up giant bird killing fans or paying big subsidies to solar in sun challenged places like Germany? I have no idea. Even calculating relative inefficiencies in the absence of hard data is a fool’s paradise.

    Here’s a suggestion: begin by reaching an economically sound justification for a particular temperature (that should keep the boffins harmlessly occupied for the couple of decades) then determine, with precision, the precise amount of temperature rise associated with the emission of a ton of CO2 at the margin. Make sure both numbers are robust and observationally tested.

    When you are able to, with engineering precision, give us those two numbers, we can begin the discussion of what policy prescription – adaptation, taxation, technological innovation – will set the now properly calibrated thermostat to the “correct” temperature.

    (By the way, the polar bears are just fine and the low lying islands of the Pacific are still with us because (as near as can be seen) the oceans are not rising or, at least, not rising much. There is plenty of time to get the policy right.)

  30. BiS: petrol taxes have been much higher in Europe than in the US for generations. Originally that had sod-all to do with carbon, but that doesn’t matter in the slightest for Tim’s argument (“more expensive petrol” > “less car dominated culture”).

  31. Pingback: GreenGeld | Jay Currie

Leave a Reply

Name and email are required. Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>