Saturday, January 14, 2006

The Orange Booker Slur, part 5

Before proceeding I should mention an omission in part 4. Cable suggests that Liberal Democrats should pursue the idea of privatising the Post Office distribution network. And the idea has been so pursued. Is there anything more to be said?

Chapter 6: Harnessing the market to achieve environmental goals, by Susan Kramer.

Kramer discusses a variety of market-oriented alternatives to regulation that might achieve the similar environmental ends, and a more efficient use of resources. She also criticises "traditional taxation approaches" such as the landfill tax and fuel duty, pointing out that fuel duty is both insufficiently effective and widely hated.

While of course it is right to look for better ways of doing anything, I wonder if there is a little dogmatism here when it comes to a choice between a mechanism that mimics markets and one that doesn't.

One example used is the trading of carbon emissions permits, as contrasted against a flat levy on carbon emissions. I must say I am somewhat unconvinced. A market will end up determining a cost of using carbon based on the demand curve and the centrally determined fixed supply. And participating in that market will entail additional costs, particularly onerous for small businesses. If one can predict the price, a flat levy would achieve much the same result much more efficiently.

More seriously, there is no particular logic to a fixed quota of carbon emission. It is not the case that achieving, say, 20% reductions will stop global warming, and 19% will not. There is a cost to carbon emissions, that we should try to quantify - perhaps adding the economic costs to a notional cost based on the political preference that we do not want to damage the environment. A levy seems then to de-externalise that cost correctly and efficiently. What benefit, then, does emissions trading bring? Compensation through grandfathered rights? (I am not addressing here the question of trading within Kyoto, that presupposes national targets already exist for political reasons.)

As Kramer points out with respect to fuel duty, such a levy might be painfully high and still ineffective. And she may be right. But this is not a failure of the mechanism. A price determined by trading would be just as high and painful. What it reflects, I think, is that whatever the impact of carbon emissions, energy remains extremely useful.

Another example given is road user charging. Civil liberty concerns aside, I support the principle. It is a good way of increasing the efficiency of the usage of our tarmac acreage. But it is only indirectly related to broader environmental goals. Yes, more people may move to public transport. But if fuel duties are cut, more people may start driving gas guzzlers. So we should be careful not to consider road-user charging as a smarter version of fuel duty.

On the other hand road fuel is taxed rather more than other carbon sources, such as domestic fuel which is seen as a greater necessity. If there were some way of rebalancing this equation without more people dying of cold in the winter, that may be a big step towards reducing carbon emissions without putting all the burden on transport. Instead we are driven towards ever greater regulation for home energy efficiency. But I digress.

All said, it is clear from the tone of the chapter that it is not about giving up on the environment for the benefit of business, but rather finding better ways to protect the environment. So my verdict is not guilty.

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