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August 18, 2007

Pigouvian Taxation

Readers (yes, that's you lot out there...perhaps I should modify that, you participants in my ongoing education) will know that I've not got a lot of faith in the ability of politics and politicians to solve problems like climate change.

Today we have another quite wonderful example.

The DfT paper considers ways for aviation to meet its "full climate change costs".

It says: "Putting an appropriate price on carbon, through taxes, trading or regulation, means that people are faced with the full social cost of their actions. In the case of aviation, this means reflecting climate change costs in the price of air travel.

"If this is not done, prices will be too low and hence demand for a good or service too high to achieve a long-term sustainable outcome."

Yes, this is absolutely correct. An excellent summation of the argument.

Underpinning the prospect of yet more aviation taxes are two Government reports, the Stern review on climate change and Sir Rod Eddington's transport study. Both argued that the travelling public should pay the full environmental cost of their journeys.

Indeed, correct. And from the Stern Review we also get a price for each tonne of CO2 emitted. $85. There are those who think it is much less (Nordhaus, for example) but let0s stick with Stern shall we? That report is indeed the one being used as justification here.

A spokesman for Virgin Atlantic said: "Air passenger duty more than covers the cost of CO2 emissions already....

Indeed, it does. It's a trivial exercise to plug distance flown into an emissions calculator, to multiply that by our $85 a tonne and come up with what the correct level of taxation. Which is indeed, as mentioned, just around and about the amount currently charged.

Despite the doubling of Air Passenger Duty, government calculations suggest that the gap between the tax paid by passengers and the cost of climate change could be as much as £1.6 billion a year, a gap that could be bridged with a £13.50 levy on every flight.

So what are these idiots doing then? See, you simply can't trust the political process to get these things right.

August 18, 2007 in Climate Change | Permalink


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They're fucking us over as per. Tax this because it's bad for you, tax that because its bad for the planet, tax the other because economic stability requires high taxation.

I've years of this crap ahead of me and I'm losing patience already.

Posted by: Philip Thomas | Aug 18, 2007 3:48:31 PM

Sorry to be difficult and academic but a subtle point, often overlooked with estimating and applying Pigovian taxes intended to help fulfil the necessary market conditions for reaching a Paretian efficiency optimum (or moving towards it), is that to devise the correct taxes it is essential for the fiscal (or regulatory) authorities to know the aggregate demand function of consumers and the private costs of suppliers as well as the extent and costs of the (claimed) damage inflicted by the activity in order - and this is important - to assess what the optimal solution is.

The information requirements are therefore fairly steep and likely to be costly to achieve. Depending on the market context, suppliers may well have an incentive to mislead regulatory or fiscal authorites about their costs and likely responses to taxes - which led on to the analytical notion of "regulatory capture" in so far as official regulators were successfully mislead (or duped) by the regulated or new tax payers.

These were among the reasons that Coase thought it better in general to leave situations where private and social costs diverged to private bargaining - or to litigation in the courts - between suppliers and those adversely affected by an activity instead of invoking governmental fiscal intervention. But that bargaining (or litigation) solution was predicated on an assumption that consequential bargaining (or litigation) costs are negligible in comparison with the costs of the potential damage, which is hardly realistic for an issue like climate change where the potential damage would be pervasive.

The bottom line is that we shouldn't underestimate the practical problems connected with introducing Pigovian taxes when Coasian solutions won't work because of the likely magnitude of bargaining costs between affected and affecting parties.

A classic analysis of the issues is Ralph Turvey: On Divergences Between Social and Private Costs: Economica 1963 - unfortunately, online access seems to be restricted to subscribers to academic libraries although exerts from the paper are included in various readings, like Dorfman and Dorfman (eds): Economics of the Environment - Selected Readings. But see Turvey on: What are marginal costs and how to estimate them

Posted by: Bob B | Aug 19, 2007 2:43:16 AM

Btw if climate change stuff is boring, how about current Russia-China war games and the energy reserves of Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan in central Asia?

Posted by: Bob B | Aug 19, 2007 3:13:28 AM

I've just discovered an accessible online link to Ralph Turvey: On divergences between Social Cost and Private Cost:

Posted by: Bob B | Aug 19, 2007 4:42:44 AM

Tim, I don't have trackback enabled, so I'll just post a link to my comments on this at Picking Losers. Basically, I agree with Bob (very interesting comments, by the way), but from a more Austrian perspective.

Posted by: bgp | Aug 19, 2007 8:53:01 PM