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October 30, 2006

Stern Report: Implications.

So, some interesting numbers to crunch. So, the recommendation is that (as we knew it would be)there should be either taxes or cap and trade arrangements so that the externalities of the use of carbon are indeed captured in the prices paid.

Good, excellent, I've always been in favour of that anyway. People should indeed pay for the external costs of their actions. The Question always is, how much should they pay?

We get our estimate of the costs of CO2 emissions from The Guardian report on the Stern report:

Each tonne of CO2 we emit causes damages worth at least $85, but emissions can be cut at a cost of less than $25 a tonne.

We'll take that higher figure shall we?

How much CO2 per litre petrol?

Petrol performs slightly better in this regard: about 2.3 kilograms of CO2 emitted per litre consumed.

So, the correct level of taxation of petrol to deal with CO2 emissions is 19.5 cents US $ per litre. Presently, with a little rounding, tenpence.

Current taxation on petrol in the UK is:

50.9 pence per litre for conventional unleaded petrol

So, if we were being taxed purely upon the CO2 externalities of our consumption petrol should drop in price in the UK by 40 p a litre. Ready for that my greenie friends?

Of course, we are not taxed purely and solely on that one externality. There is also particularate matter, NOX, congestion, noise....can we get those out of the numbers? Why, yes we can:

27.1 pence per litre for biodiesel and bioethanol (to encourage conversion)

As we know, El Gordo is indeed the all seeing all wise one, so the level of taxation upon those fuels includes all of those other externalities, but not the CO2 one. Good, so that means that the current level of CO2 taxation upon petrol is in fact 22 pence or so. When this lovely great big new report states that it should in fact be tenpence.

So, by the logic of the report duty on petrol should drop by 12 pence per litre.

Just remember children, if anyone tries to use this report to tell you that it proves that petrol taxes have to rise you can rest assured that they are either uninformed, lying or David Miliband.

October 30, 2006 in Climate Change | Permalink


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Posted by: dearieme | Oct 30, 2006 3:23:32 PM

You might be right (I know nothing of the numbers involved) if petrol tax were there purely for the Co2 effects, but surely it should also be paying for the other relevant externalities: road building and maintenance, transport police, and so on. Shouldn't it also include compensation for those who die in road accidents?

I'd be interested to see you factors those into the numbers.

Tim adds: As Josh says, those should already be in hte biofuels taxatrion. So hte extra must only be for CO2 (assuming, of course, that G. Brown knows what he is doing=.

Posted by: Alex Gregory | Oct 30, 2006 5:41:04 PM

But the externalities as well as the revenue should be included in the bio-ethanol tax. So, Tim is essentially correct. Fuel tax already covers pollution, global warming, congestion and a bit extra for the revenue.

Posted by: Josh | Oct 30, 2006 5:41:51 PM


Could you point me in direction of some numbers that show that the bioethanol tax is high enough? It could (possibly, again, I don't know the numbers) be the case that all petrol taxes are too low.

Posted by: Alex Gregory | Oct 30, 2006 5:46:01 PM

You are starting from the premise that all the tax currently on fuel is directed at remediation of environmental impacts. It patently isn't and even Brown doesn't claim otherwise. Like every other tax it is there to raise revenue.

The goverment's argument in favour of (still) higher taxation on fuel is to try and change behaviour. You might not like that but it is a different case to the one you try to ascribe.

Posted by: ian | Oct 30, 2006 6:23:28 PM

Hold on a minute. What is says there is that emissions can be cut at $25 per ton, yet everyone can agree that the current tax on fuel isn't doing much to cut emissions. We are therefore left with two conclusions: a) those figures are too simplistic and don't take into account the particularly inelastic demand for road fuel, or b) they're wrong.

There certainly is a case for more of petrol tax being spent on combatting climate change, but that's a different argument. If we're serious about reducing demand, we have to raise this tax.

Posted by: James Graham | Oct 30, 2006 6:52:26 PM

Poor Tim. You are arguing as if the eco-tax approach had anything to do with the environment or raising money. If that were true, we'd see a tax on CO2. But we aren't: we're seeing a littany of direct (and counterproductive) measures like parking permit fees, direct levies on energy-inefficient lightbulbs, etc. It's all about minute control of people's lives, that neverending Socialist dream.


Posted by: Kay Tie | Oct 30, 2006 6:53:22 PM

Of course, all this misses the really

Posted by: Josh | Oct 30, 2006 7:30:05 PM

Timmy, you're blog has gone nuts today.

This is the url I was posting/plugging.


Posted by: Josh | Oct 30, 2006 7:31:16 PM

"Could you point me in direction of some numbers that show that the bioethanol tax is high enough? It could (possibly, again, I don't know the numbers) be the case that all petrol taxes are too low."

It could be. But you are treading dangerously close to horsechanging here, a fallacy of rapidly altering the terms of the argument after the conclusion does not come out in the way you wanted.

This is the situation:
A new report has quantified carbon costs. This new judgement should then be factored in taxation. Even from the position of the libertarian right, such as Timmy, this is justifiable.

Now we compare this quantification to the current situation. We have a convenient baseline: the bioethanol tax, which should include everything but carbon costs (and possible a bit extra since I don't think bioethanol burns as cleanly as octane). Based on that comparison, we reach the conclusion that the petrol tax is already above what it needs to be.

Now, it may be true the quantification of other externalities is off. But that is not what this report is discussing. For the sake of today's thinking, we take those as correct. We surely could commission a new report tomorrow to check, and that would be fine.

But for now, we have carbon costs computed by Stern and other costs + revenue using the baseline bioethanol tax.

Based on presently available information, Timmy has reached the right conclusion.

Posted by: Josh | Oct 30, 2006 8:06:02 PM

But the "currently available information" is best treated as complete tosh. Given that we can't do real science, i.e. controlled experiments, we have to settle for mathematical modelling to try to understand what might happen in future. There are two good ways to try to assess the virtues of such models. (1) Check their internal consistency e.g. do they close the material balance on CO2? Answer: not even close, dear boys. (2) Run them backwards: do they give a good account of the historical records/estimates? Answer: no. It follows that it's folly to put any weight on them: the phenomena are so intricate and ill-understood that using this stuff is like using medieval medical theory - bloody silly. Arguments about it's being all we've got are quite beside the point; we'd be fools to use it.

Posted by: dearieme | Oct 30, 2006 10:25:08 PM

they are either uninformed, lying or David Miliband.

Or all three

Posted by: Richard North | Oct 30, 2006 11:54:48 PM

This Have Your Say section on the topic on the BBC website is illuminating.

It is almost without exception utterly dismissive of the proposals as yet another way for an incompetent government to tax ordinary people even more. Given that this is on a BBC website, I'd say this is significant. If Cameron isn't taking note, he should be.

Posted by: Tim Newman | Oct 31, 2006 12:20:05 AM

The tax regime for biofuels explicitly includes a subsidy, so I think it would be more sensible to assume that it is set at a level lower than the non-carbon costs.

Tim adds: Perhaps but I'd like to see the figures.

Posted by: dsquared | Oct 31, 2006 8:03:41 AM

Fuel excise in the UK already overpays for road maintenance, pollution and accident externalities (noting that many of these are born privately, the government doesn't pay for property damage) on a marginal economic cost basis - but not in terms of congestion. The answer to that is congestion pricing where it is efficient to do so (clearly London and other major cities but only at certain times and not using the sledgehammer approach London has). Beyond that the fuel tax system is a hienous rip off that has a small effect on demand and means motorists in rural areas especially are being vastly over taxed (which in turn means a wealth transfer to urban areas which disproportionately are a drain on public spending).

Posted by: libertyscott | Oct 31, 2006 9:35:56 AM

If Stern's 700 page report is too much like hard work try Lord Lawson's Report from last year. Link is a pdf

Posted by: Kit | Oct 31, 2006 11:16:23 AM