Friday, June 09, 2006

If Green Taxes work

...won't they raise less over time?

This question is on many lips. Those of Nick Robinson for example.

Here's my answer: No they won't.

Demand for energy is fairly inelastic. Most users do not think much about the cost when switching on a light or driving to the shops. This means that we are a long way from the peak of the Laffer Curve in the eco-tax rates we're proposing to apply.

Prosperity is increasing, demand for energy is increasing, so the potential for eco-tax revenues is increasing and will go on increasing. The threat to prosperity is minimal or negative because we are reducing other taxes at the same time. So society will be richer in future and therefore willing to pay even more for energy.

This does not mean that eco-taxes fail. They succeed in reducing demand a little from what it would have been otherwise, and they succeed in raising revenue, allowing other taxes to be cut. These are both big positives.

Now perhaps there is a case for i) much bigger eco-taxes, that cause significant reductions in consumption, and ii) bigger still that lead to reductions in eco-tax revenues. And then we could have a lot more than 2p off income tax. Or perhaps that policy would be disproprotionate to the problem. But it is laughable to consider the hypothetical spectres of that policy to apply to this policy of only £8bn in eco taxes.

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Valerie said...

Thanks - good to see a sharp rebuttal.

Isn't it like tax on alcohol? If it was a lot lower, lots more people would probably be off their faces...

Joe Otten said...

I'm not sure that's a similarity. Much of the demand for alcohol is from discretionary spending - you have £20 left at the end of the week, and you go out and spend it all on alcohol, whether it is £1.50 a pint or £4 a pint. (But even in this example increasing the tax on a pint still increases revenue from somebody with that spending behaviour while decreasing consumption.)

Demand for energy is much less elastic because it is less often discretionary. You have to get to work. You won't turn off the central heating if it is cold, etc.

Anonymous said...

So, basically, they are taxes on things that it would be good to cut down on in order to save the planet but they won't actually have that effect.

I think, that may just be called a tax - the 'green' appendage is (suitably enough) wasteful; oh and a little fraudulent.

Joe Otten said...


How much consumption is reduced is obviously a function of how high the tax is. If you don't have the Green taxes, you won't get that reduction, so lets not sneeze at the idea, shall we?

For many things, just a stabilisation would be a big achievement, and do an exponentially increasing amount of environmental good over time.