December 9th, 2006

Pale green tax plan mocks Stern’s call to arms

After the Chancellor’s omission of Stern or climate change in his speech to the captains of British industry [below], I wasn’t surprised, but I was disappointed. The Pre Budget Report environmental package [see chapter 7] was no more than tinkering-as-usual. There was absolutely no sign of the urgency that the Stern report should have inspired – as Stern concludes: A range of options exists to cut emissions; strong, deliberate policy action is required to motivate their take-up.

But there is nothing there:

Press coverage says it pretty well: Brown failed green test say critics in the Guardian and Modest package of green tax rises in the FT. And there were plenty of stronger but real world proposals on the table: like these from accountants Ernst & Young. Maybe he is saving it for the 2007 Budget or his much anticipated ‘first 100 days’ as Prime Minister?

The chart above adapted from an excellent summary presentation (PPT) by the venerable Institute of Fiscal Studies shows one indicator of the strength of fiscal measures – the (declining) share of GDP taken in green taxes of various sorts since 1997. Not a perfect measure – there are other economic instruments like emissions trading – but revealing all the same. Since 1997, the Treasury has talked the talk: Statement of intent on environmental taxation (1997) and the follow-up Tax and the environment: using economic instruments (2002). But the delivery has been weak and the transformation undetectable – in fact it has gone backwards.

Fuel duty puzzle…
The Chancellor decided not to raise fuel duties in real terms – despite the recent fall in oil prices (yesterday the Brent Crude price was 19% off the August peak [market data] and the earlier justification for easing off duty increases being high oil prices. But one interesting question I’ll have to come back to is the level of tax on road fuel. Fuel duty (equivalent to c. £750/tC with VAT on top for unleaded petrol) far exceeds the estimates of the social cost of carbon, whether Stern’s (see Stern FAQ – giving $85/tCO2 = about £159/tC at current exchange rates) or the earlier lower estimates (see Defra summary – £70/tC). What then is the case for increasing fuel duty?

2 comments to Pale green tax plan mocks Stern’s call to arms

  • Clive Bates

    Well that’s like opening presents before Xmas! There’s probably three reasons:
    (1) other externalities, including congestion, air quality, noise, waste, accidents, impact on mobility of non road users; opportunity cost of land take etc.

    (2) paying for the cost of maintaining and developing the infrastructure where direct user tolling isn’t possible;

    (3) the SCC itself depends on the expected future impacts and might be higher. Though Stern’s estimate of the current SCC for business as usual ($85/tCO2) is higher than most, it is worth asking what this means, given his view accepting that risks and uncertainties become very pronounced above 550ppm. Though not totally clear to me, it looks like Stern has used the central estimate of a 13.8% GDP loss by 2200 as the basis for calculating the BAU SCC – but the 95th percentile is 35%. There is an argument for taking a risk averse approach and using more pessimistic assumptions (eg. 75th percentile expected damage). A further point is that the model used to assess BAU impacts is incomplete in that it does not include ‘socially contingent’ impacts… ie. wars.

    Note there is something absurd about expressing impacts in percent of world GDP 100-200 years from now. If the world economy continues to grow at its current rate, then it would be 36 times its current size by 2100 – one suspects the world economy of 2100 may have hit constraints other than just the absorption capacity for carbon.

  • Chris Yiu

    Clive Bates said: “What then is the case for increasing fuel duty?”

    Second-best alternative to the optimal road user charge (which always seems to be 10 years away…). Fuel duties should be higher than the social cost of carbon because we also need to – albeit imperfectly – price in the external costs of congestion.

    Sorry if I’ve ruined the surprise!

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