While plenty of CentreRight readers have voiced their support for our report (PDF), others have criticisms or questions. I'll try and address those here.
Is Fuel Duty a 'green tax'?
Peter Franklin argues that Fuel Duty and Vehicle Excise Duty should not be considered green taxes as they predate concern about climate change. That is both irrelevant and misrepresents the history. Fuel Duty may have been conceived in the global cooling era but it is a big tax, raising lots of revenue, because of the fuel duty escalator. Remember that we have subtracted road spending from our total green taxes estimate, that is clearly the major item of spending that pre-escalator Fuel Duty is designed to cover. When the escalator was introduced by Ken Clarke - as a 5 per cent, real terms annual increase - in a 1993 statement to the Commons he framed it explicitly as a measure to address climate change. He described it as completing "Britain's strategy for meeting our Rio commitment".
Of course, that might have been as much of a con as Darling's recent increases in Vehicle Excise Duty. Maybe it was just another device to raise revenue. However, it is a premium charged on top of the rate of tax that is judged fair on other goods and services, VAT is charged on motor fuel. Even if that premium had been imposed entirely at random it still makes the polluter pay; it still does all the things, in terms of creating an incentive to change behaviour, that green taxes are supposed to.
It is a green tax, whether it was intended to be one or not. It's just that it imposes far too large a burden. Whether you call that an excessive green tax or just an arbitrary imposition on motorists because they're an easy target is really just a matter of semantics. Either way it is an unfair burden and politicians who try to pass off increasing Fuel Duty, or maintaining it at its current level, as a 'green' measure are attempting to con the public.
If you cut green taxes, wouldn't other taxes rise?
This assumes that spending is held constant. In the last ten years taxes have risen, across the board, by 50 per cent in real terms. A broad range of taxes have increased. Unless you think that we were radically undertaxed under the last government - and that government spending needs to keep swallowing economic growth - then there is no reason to assume that over time the reverse can't happen.
If you're talking about long-term, optimal policy then the ideal is not to discriminate between different products in the market. Unless there is some market failure for the government to address, and our report shows that the government has over-corrected for the externalities associated with climate change, then intervening and taxing one set of activities like driving is distorting, unfair and generally harmful. Additional taxes above the rate of VAT felt necessary across the broad spectrum of goods - without justification - are clearly suboptimal.
Finally, there is the question of political economy. If politicians have a form of tax at their disposal that is less politically costly - because it can be sold as an environmentalist measure rather than a tax hike - then that changes the balance of political incentives between restraining spending or pushing up taxes. The final result will, over time, be higher taxes.
What about other externalities?
This is covered, in detail, in section 2.4 of our report (pg. 12). If I were to reply to Peter's point I'm not sure I would do anything other than copy that section here so I would suggest you all go and read it if you're interested.
The basic method is wrong
The calculations for producing this report were rather complex and are explained in detail within the full text. However, the basic equation underlying it all is the following:
Excessive green taxes = Green taxes charged minus (social cost per ton multiplied by number of tonnes emitted)
Peter and Andrew Lilico both suggest that there is some flaw with that reasoning.
Peter suggests that we should really be looking at the number of tonnes of carbon saved and comparing that to the amount charged. He suggests that my reasoning is flawed because I'm interested in reparation, not prevention. That isn't correct.
The idea behind green taxes is that when people buy petrol, or other goods that create environmental harms, they should also pay the cost to wider society, now and in the future, of the associated contribution to climate change – the externalities. That way, they will only buy each gallon of petrol or watt of power if the benefits to them of using it outweigh the costs both to themselves and the rest of us. The socially optimal amount of fossil fuels will be used.
Therefore, if we buy the logic of green taxes then they should be set at the social cost of greenhouse gas emissions. As an interesting side note, there is a powerful Coasean case against green taxes in general, discussed in the introduction to our report. I won't discuss it here but it is important to understand that, while we have accepted the logic of green taxes in our report, the economics are not uncontroversial.
Andrew has a rather more complex criticism. I'm not sure how to make it easily intelligible for someone without an economics training but, essentially, he argues that the social costs of emitting an additional ton of greenhouse gases are likely to rise as more greenhouse gas is emitted.
Therefore, the cost of the next ton of greenhouse gas emissions is much higher than the, per ton, cost of the total emissions so far this year. As green taxes are designed to affect whether people emit the next ton total green taxes should be higher than total social cost.
Andrew is right that the harms of emitting the next ton of greenhouse gases are expected to rise as total emitted greenhouse gases rise over time. That is why, for example, the DEFRA estimate of social cost increases between 2006 to 2007 from £24.30 to £25.50.
However, that does not pose a significant problem for our study. The total that each ton of carbon emissions is added to (global emissions over a number of years) is so large that a single social cost value - like the shadow price estimated by DEFRA - is sufficient for a given year.
The basic method that we used in this year's report and last year's, illustrated by my simple equation above, has not only been deployed by the TPA. The Department of Transport, in their Aviation Emissions Cost Estimate published last month, described their method as the following:
- "take the most recent available Greenhouse Gas Inventory estimates of UK carbon dioxide emissions from all domestic flights and departing international flights;
- indicatively account for the non-CO2 climate change effects of air travel, applying a multiplier value of 1.91. To reflect the degree of uncertainty around this value, a sensitivity range of 1 to 4 will also be presented; then
- multiply this by the appropriate monetary value based on the Government’s Shadow Price of Carbon, again using a sensitivity range to reflect the uncertainty; and
- compare this range of values with the air passenger duty/aviation duty and aviation gasoline duty receipts for the year concerned."
Clearly, they took exactly the same approach we did.
Aggregating
Finally, Adam in London repeats Peter Franklin's charge that Fuel Duty isn't just about addressing climate change and argues that aggregating the green taxes obscures a picture of low taxation on other activities.
This is not the case. The Department of Transport have, in the Aviation Emissions Cost Estimate linked above, admitted that flights are overtaxed. The IFS have argued the Landfill is overtaxed relative to the externalities it creates. Industrial energy use is massively taxed by the combination of the Emissions Trading Scheme, the Renewables Obligation and the Climate Change Levy.
Regardless, we have addressed this point. As we mentioned in the report:
"This study focuses on aggregate taxes and the aggregate cost of emissions, whether across the country or in a local authority area, and different activities are taxed to different extents. There might be a case that there is room to do more to correct for the externalities associated with emissions from agriculture, for example, which is currently actively subsidised. If someone is to take that line though, they have to also accept that green taxes such as Fuel Duty are currently set too high and should be reduced."
Agriculture and home energy use are the two significant sources of emissions that quite possibly aren't facing the green taxes their social cost warrants. Policy is clearly predicated on both activities having massive positive social effects, i.e. keeping farmers in work and the countryside rural and keeping old people warm and alive. Even domestic energy use faces significant green taxation now, though.
