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October 28, 2006

Petrol Taxes Are Too High

A couple of days ago I made the point that possibly petrol taxes in the UK are too high.

The reasoning is that such taxes should be Pigouvian....they should charge the creator of the externalities (noise, congestion, CO2 etc) the value of those externalites and no more. The aim is to bring those very externalities into the price system so that markets do indeed account for all matters: in the jargon of the enviros, that the price paid equals the 'true price'.

All of which means that someone has to go and do the hard sums to work out just what those externalities really do cost. As the blog Environmental Economics points out, someone has:

This paper develops an analytical framework for estimating the second-best optimal gasoline tax, accounting for passenger vehicle externalities and the efficient balance between excise taxes and labor taxes in financing the government’s budget. We estimate the optimal tax for the United States at $1.01/gallon, which is 2.5 times the current rate; for the United Kingdom, the optimal tax of $1.34/gallon is about half its current rate.

So all my little greenie friends and readers (of whom there might in fact be very few) the correct petrol tax for the UK, for environmental reasons, is actually about half what we currently pay. Stick that in your fuel price escalator and smoke it.

The paper also goes on to point out that road pricing is a much better solution.

October 28, 2006 in Climate Change | Permalink


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Did you notice the news (yesterday I think) that Guernsey has just voted to abolish vehicle tax and put 14p on a litre instead?

Posted by: Jock | Oct 28, 2006 12:36:57 PM

I can accept why CO2 and noise should be classed as externalities here... but I'm not sure that congestion should be so classed.

Posted by: Blithering Bunny | Oct 28, 2006 1:06:27 PM

Why worry if this tax is too high or this tax is too low? The government decides what money it needs to spend and taxes us until it gets that cash. If you buy an electric car and avoid the road tax, then you'll be taxed somewhere else. Going green won't be allowed to threaten the pay and pensions of the bloated public sector.

Posted by: Pete | Oct 28, 2006 1:52:08 PM

Bunny, the externality in congestion is surely "time".

Posted by: Jock | Oct 28, 2006 2:03:02 PM

Pete - That is true. However, I find British fuel tax arrogant, hectoring and self-righteous. It's mean-spirited and, in a strange way, envy-driven. Before everyone had a car, it was to punish people who did have cars.

Now that everyone has a car, it is to control them. "Don't think you can just go anywhere you want as often as you want just because you have a car. We are going to require money from you."

This whole car thing in Britain is bizarre. The government seems to think that having a car is a privilege, which carries the sour, fusty fumes of class envy. They make the driving test as complicated and arcane as possible. In the US, you get a friend to let you drive their car around the supermarket parking lot a few times, have a read of the rules and then go down to the local branch of the Texas Highway Department. There you take your very uncomplicated written test and have your photo taken. You take a number. When your number's called, you go out, get in the car you came in and a Highway Patrol officer tells you to parallel park, to drive fast and brake fast when he says "stop" and a couple of other things.

If you seem to be in control of the car and have quick reactions, you walk out with your driver's licence.

The British are bossy and controlling. Everyone wants to be in a position of power over everyone else. There may be jobsworth's in other countries, although I have never encountered any, but Britain is blanketed with them.

Posted by: verity | Oct 28, 2006 2:15:55 PM

Surely the externality of congestion is one entirely born by other motorists. So any tax you pay for this cost should be refunded to other motorists; and likewise with the costs they impose on you. The most sensible way of doing this would surely be to rebate a portion of your petrol tax which would be exactly equal to the amount you would pay for your own congestion - making it the most pointless redistribution in history.

Tim adds: Nah, remove other taxes: put up the personal allowance for income tax for example. You're then moving taxation from a 'good' (employment) to a 'bad' (pollution).

Posted by: Mark Adams | Oct 28, 2006 3:26:58 PM

I thought just a few months ago you were telling us that we should tax good things and not tax bad things, because you'd read it in The Times?

Tim adds: different good and bad things, obviously. Yes, we should tax externalities to make the price reflect the true costs.

Posted by: Matthew | Oct 28, 2006 4:31:21 PM

Verity: that's why we have so many fewer road accidents than you guys.

Posted by: sanbikinoraion | Oct 28, 2006 5:17:05 PM

(iirc by a factor of ten or twenty or so but I'll happily be corrected)

Posted by: sanbikinoraion | Oct 28, 2006 5:17:39 PM

American road deaths - 40,000
British road deaths - 3,200

US population - 300m
British population - 60m

Land area US - 5,984,685 miles²
Land area Britain - 94,525.53 sq miles (for example, the entire British Isles would fit into the state of Texas three times)

As you can see, we are talking of vast differences in scale. British drivers are way too cautious, which causes accidents and they're always busy changing gears.

Posted by: Verity | Oct 28, 2006 5:50:34 PM

The tax on petrol by volume is, largely, a tax on how far you drive (miles per gallon) and how much your vehicle wears out the road per mile driven (weight/mass). To a lesser extent, there is also a tax element on how powerful is your vehicle (bhp, acceleration etc) and how economically you drive it.

Road charging adds additional elements. These are broadly on WHERE you drive and WHEN you drive. Ostensibly, these additional taxes are to reduce congestion, by forcing one off the road.

However, an alternative view is that congestion is the fault of government, by building insufficient roads, by building roads of insufficient capacity, by building them in the wrong place, by not building them when/before they are required (with road widening later than appropriate adding to congestion), and by not predicting the future demand for "road space" that matches economic activity.

It is also, in particular with respect to commuters to work, a failure by government to provide public transport that is adequate (in the whole sense of that word) in terms of timeliness, quality/comfort, going from/to the right places, and (of course) at a price competitive with the considerable advantages of the motor car (and other forms of personalised transport).

Best regards

Posted by: Nigel Sedgwick | Oct 28, 2006 8:55:13 PM

The problem with Tim's argument is that it doesn't take into account the fact the roads and especially the land on which they are built, are an asset. If privately owned, the owners would want a return on the value of the asset (as they did in the old days of toll roads)

Because roads are publically owned, we forget this. But they belong equally to to the little old lady who doesn't drive as they do to the 50,000 miles per year salesman. Fuel tax has the merit of being very roughly proportional to use and so should be set at a level to produce a reasonable return on the asset, so that other taxes can be reduced. The old lady would benefit more than the driver - and this is how it should be. At present, she is effectively subsidising the driver.

Posted by: HJHJ | Oct 28, 2006 9:42:39 PM

Indeed, road pricing is a far much better way to price these externalities - fuel tax affects the poorest lot (apparently, the lot leftists are suppose to champion) hardest. Why? The price of everything (unless you happen to live off the fields) is affected by transportation costs.

And guess what? Transportation companies absorb very little, if any, of the fuel tax.

Yeah, big lorries on highways have their (unproven, based on the theory/postulate of antropogenic global warming) externality, in effect, fuel taxes hurt the poor further downstream much more than they do lowering externalities (fuel prices is inelastic, especially if you're a shipping or a lorry company).

Posted by: Rajan R | Oct 29, 2006 7:35:01 AM

I suspect that Verity's arguing hopelessly here, but I should point out that I read an article the other day that doubted the official govt figures for road deaths: the reporter suspected that they over-estimate recent declines. Whether the American figures also have New Labour levels of honesty and accuracy, I dunno.

Posted by: dearieme | Oct 29, 2006 11:18:17 AM

No, Dearie Me, the Americans don't cook the statistics books. There are too many checks and balances in the US, plus the country is far too big for micromanagement.

Posted by: Verity | Oct 29, 2006 4:15:14 PM

Nice to see some proper numbers. Last time I did a back of the envelope calculation on what fuel duty should be it came out as 3.95p per litre, based on the cost of off setting the carbon produced.

Posted by: chris | Oct 30, 2006 9:28:07 AM


So are you saying that road users shouldn't pay for the use of roads through fuel duty? Everyone should pay regardless of the amount they use roads, inorder to subsidise drivers?

Posted by: HJHJ | Oct 30, 2006 11:26:06 AM

It would be nice if road users paid for the use of the roads (plus the various externalities), however at he moment drivers subsidise everybody else. More money is paid by drivers to central government than goes back into the road system. Rather than as happens at the moment they pay for the roads, they pay for the externalities, and they then have to pay some more.

Posted by: chris | Oct 30, 2006 2:35:15 PM


It isn't clear that this is the case at all. Comparisons between road taxes and spending on roads published by lobby groups rarely take a number of factors into account. Before the fuel dispute a few years ago, the government commissioned an independent report (which they decided not to publish, surprise, surprise) that concluded that fuel taxes for cars roughly covered the costs, but for lorries they were 10-20% too low (a single heavy truck damages roads more than thousands of cars).

However, even this report didn't allow for a 'return on asset' figure.

I'm not against road users or arguing for penal taxes. I just want a taxation or charging system that correctly assigns costs. Otherwise we encourage either more transport use than is economically efficient (if we charge too little) or prevent transport use that would be economically efficient (if we charge too much).

Posted by: HJHJ | Oct 30, 2006 6:58:52 PM

Verity, as I said, I'll happily cede the point on the numbers (I think I must have been getting confused with the murder rates or something) - however, I would say that the fact that you can hit things three times more often when there's more than ten times less of you per square mile surely indicates that you're worse drivers on its own!

Posted by: sanbikinoriaon | Oct 31, 2006 9:51:13 AM