Thursday, May 18, 2006

The Green Switch

Chris Huhne has put the flesh (pdf) on his eco-tax bones. I discussed this at the time here and here.

1. An increase In Green Taxes As A Share Of National Income. Green taxes have fallen from 3.6 per cent of GDP in 1999 to just 3 per cent of GDP, and we are committed to reversing this trend. Revenue would be used to cut taxes elsewhere so that this is a green tax switch, not a rise in taxes.
Excellent. This is a very powerful statstic, and worth shouting about.

2. Reform The Climate Change Levy: The Climate Change Levy is a positive step forward but is too complex and bureaucratic. It should be restructured as a tax on carbon across the economy, but we support the Government’s intention for the first time to raise it in line with inflation. That should be the norm, not the exception.
This is good - it is simplest and least distorting to treat all carbon emissions the same. And as the package is to be revenue neutral, there will be direct benefits to low-carbon parts of the economy.

3. Raise Vehicle Excise Duty On Polluting Cars: The Chancellor has increased Vehicle Excise Duty on high polluting vehicles by less than the cost of half a tank of fuel. If it is to be effective as a measure to reduce emissions and encourage greener transport, VED will have to be radically redrawn to penalise emissions and reward clean cars. The top-rate of VED should be significantly higher than at present at £2000 a year for high emission cars.
This is a good measure. Fuel demand is not very elastic, but the choice of large inefficient vehicles is one that can be made to pay its way without hammering those who try to motor efficiently.

4. Keep Fuel Duty In Line With Inflation: Incentives to save fuel depend in part on developments in the oil market, but duty on fuel should normally keep track with inflation rather than decline in real terms. The failure to raise fuel duty since 1999 has led to a rise in emissions, and we support the Chancellor’s intention to raise fuel duty in line with prices in September.
Right, better than real terms cuts. And in my view aviation, industry, and domestic uses are higher priorities for real terms increases in eco-taxes.

5. Tighten Allocations in The EU Emissions Trading Scheme, And Auction 10 Per Cent Of The Permits. The recent fall in the price of carbon for industrial users reflects the unambitious overall cap set by the EU, together with the failure to allow national governments to hold back a part of the national allocation for sale to the highest bidder at auction. We will press for both reforms and for auctioning the maximum 10 per cent of permits currently allowed for 2011.
This may sound a bit dull, but it amounts to putting the cost of carbon up, and generating some more revenue.

6. Tax Emissions Not Passengers: We have led the way in calling for reform of the way air travel is taxed. Instead of Air Passenger Duty on each passenger, airlines should pay an emissions charge per flight. This would reward flights that were full and penalise those wasting a full tank on a few passengers.
This is a good step, and it is a framework that would allow us to move towards treating motoring and aviation more consistently.

7. Provide Help Where Cars Are Essential. In sparsely populated rural areas, cars are essential due to the lack of public transport. To reflect this need, we proposed an amendment to the Finance Bill introducing a 50 per cent discount on all but the top rate of VED for one car registered in such rural households.
I'm not a particularly rural-friendly person: I don't see why the rural lifestyle deserves subsidy any more than any other expensive lifestyle. But the promise was made and this is a good way of delivering on it. It is important that this sort of compensation should be in the form of tax cuts because otherwise you have to find money from elsewhere or lose the revenue neutrality of the package.

Of course this paper doesn't commit us to any particular totals - that would be treading too much on the toes of the tax commission. But I hope it makes a clear impression on that process.

We can see from the appendix that of £35bn eco-taxes levied in 2004, £32bn are taxes on motoring. (The climate change levy and air passenger duty are each less than £1bn.) Motoring is of course a significant environmental problem, but this seems disproportionate. What about industrial and domestic uses of energy? There is a perception that industry=jobs=good, domestic=pensioners not freezing=good, motoring=shopping sprees and school runs in chelsea tractors=bad. And of course there is a good dollop of truth to this, but it is not a balanced picture, and it distorts incentives to place almost the whole burden on motoring.

On the other hand we should probably subtract spending on roads, when considering how much of the £32bn is in fact an eco-tax, rather than a charge for the infrastructre that makes motoring possible. And we should also bear in mind that motoring imposes some specific externalities such as poor air quality that industrial and domestic uses of energy do not, to the same extent.

And before long people may well be charging batteries in their hybrid/electric cars from the mains. This will cause a dent in revenues and eco-taxes even if we go a long way to rectifying the imbalance.

So, it is a little disappointing that the nettle of domestic energy use has not been firmly grasped. The problem, I guess, is that it can't be done in a revenue-neutral way, without cuts elsewhere, if, as would be necessary, we want to compensate the pensioners who might otherwise freeze and various other needy groups. It would still be a good policy: it would promote efficiency and microgeneration more effectively than all the regulations we have (having just had a loft conversion I have immediate experience of this). But it would pour mud on the clarity of the "Green Switch" policy, so it doesn't belong in this paper. One for the following election perhaps.


Update: The carbon tax will include household emissions, with "provision" for the less well off. So my disappointment was due to not reading carefully enough. And of course if the "provision" amounts to a rebate on the carbon tax, then it needn't comporomise revenue neutrality despite what I said above.


Alex Wilcock said...

Excellent analysis, Joe; I've been typing all day and my eyes went all blurry when I tried to dissect it. So much handier to be able to turn to your version :-)

Ordinary Citizen said...

Anyone interested in analogous policy issues in the U.S. might be interested in the article on green taxes here:

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