Thursday, February 02, 2006

Sackcloth and eco-taxes

Simon Mollan has clarified his assertion that eco-taxes are "sackcloth".

Oddly, however, the arguments he goes on to make are about social justice, not prosperity in general. Yes, pensioners, students and unemployed people will be hit by fuel taxes. Perhaps there will be specifics in the Huhne manifesto as to whether all these groups will be compensated. Even so there will be winners and losers, but if that were going to stop us we would never change tax policy at all.

Simon also argues that "a certain amount fuel consumption is inelastic – both for business and people, and therefore increased taxation will not have the behaviour altering effects that Huhne thinks it will have." Yes, I agree. I have low expectations of eco taxes to change behaviour. They will a little, but lets not forget the good they do by raising revenue.

"In this scenario ... business will be less competitive..." Well obviously, if any particular tax is too high, there will be a cost to prosperity. (But not to overall competitiveness because exchanges rates will adjust.) But within a fairly wide range one tax can be substituted for another will little overall effect on prosperity. If we are already at the point where energy is so expensive compared to, say, labour or land, that economic choices are being grossly distorted, I would like to hear the case made before damning eco-taxes.

And although I am doubtful of the prospect of eco taxes changing individual behaviour an awful lot, they can change investment and lifestyle decisions in the long run, and investment in renewables is what we want.


Simon said...

But Joe, my concern is always primarily about social justice...

As for investment in renewables - it is you who rightly point out that there will be little overall effect by substituting one tax for another - but then there will be little extra revenue either. Unless, of course, eco-taxes will increase the overall burden of taxation. If so, I'm against, for reasons I have stated elsewhere.

Joe Otten said...

I think there is a danger of restricting policy choices if every measure in isolation is judged on social justice. What matters is the overall package.

Of course you would be right to say that if you compensate students, pensioners and so on for the burden of eco-taxes out of eco-tax revenue then you can no longer be revenue neutral.

My point about investment in renewables is that taxing carbon emissions will improve their attractiveness in the private sector.

Simon said...

The core of my concern is that for the heaviest users of carbon-emitting energy (in particular) business, their consumption is mostly inelastic, or sufficiently inelastic so that the levels of tax required to curb use would be so high that ordinary users would be hit in an unbelievably hard way. This level of taxation us unlikely to be adopted. As a consequence I doubt that eco-taxes will affect overall consumption very much.

Assuming a more modest level of eco-tax, a strong possibility is that for some on the lowest incomes consumption is somewhat elastic, leading to a reduction in energy use for them - in some cases this would be a bad thing (going cold etc...). Differently, however, some people (particularly the elderly) would not reduce consumption, but instead would reduce other expenditure - another bad thing for those who live around the poverty line.

As you say, an expanded disbursement to vulnerable groups to allow for the increased cost of energy would ameliorate some of the social problems caused by higher consumer fuel costs - but, again, this would not reduce actual fuel consumption and, moreover, is something that I anticipate Government may have to do anyway to a greater extent than it does at the moment (cf. the winter fuel payment that pensioners receive) because of generally rising energy prices.

The argument then for renewables is that with a price floor introduced for carbon-emitting fuel it might be worth investing in renewable R&D to a greater extent and expand production - the market therefore providing the innovation to drive down the unit price and increase the volume of production of clean energy. But this might only be part of the market response - higher fuel prices might simply increase the R&D on dirty fuel efficiency, which while better for the environment is mitigated by rising overall usage on the one hand, and limited changes in behaviour on the other (i.e., that if we all started driving round in 1.0 litre engine cars rather than 2.0 litre cars, this would be rather offset if 40 million new Chinese motorists started driving).

Joe Otten said...

Simon, you make some good points.

Yes in general elasticity is low, and higher taxes don't do quite enough to reward efficiency rather than simply discouraging use.

Something that might work for energy intenstive industries is a system that offers a rebate for, say, every tonne of product produced based on the amount of energy it requires today. The rebate keeps the industry competitive and still rewards efficiency improvements.

If R&D on "dirty fuel efficiency" were promoted, that would be a good thing too; perhaps I don't quite see your point there. I don't agree that more efficiency would be bad if it meant that extra Chinese people could afford to drive. The more efficiently fuel is used, the more economic work it does for the same cost to the environment.

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