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September 19, 2007

Aviation Taxation

Well, yes, this is indeed the logic:

If, for argument's sake, you accept Sir Nicholas Stern's estimate that the environmental cost of each tonne of CO2 we emit should be priced at $85 (£45), then you can start to put a sensible environmental price on aviation. Therefore, one London-Miami return flight emitting broadly two tonnes of CO2 per passenger would need to add £90 to the current price - a hike that would surely make many passengers rethink the need to do that journey.


Crucially, I think that any revenue raised should be ring-fenced for environmentally positive initiatives such as grants for improving the energy efficiency of your home, or simply lead to tax cuts elsewhere so that green taxes are seen as "revenue neutral".

The latter: hypothecation is not a good idea. But the crucial point is that, having included the true cost of flying into the decision of whether to fly or not, that's all you do. No other action is either necessary or desirable. For once everyone is indeed paying the true costs of their actions then we'll get the socially optimal outcome. Reducing airport expansion plans, for example, is entirely unneccessary, providing taxation is at the appropriate level.

As, for argument's sake, (using the above numbers) it already is for short haul flights within Europe.

September 19, 2007 in Climate Change | Permalink


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Forgive my primary-school economics; can you just walk me through this? (That's not sarcasm, btw.)

For the sake of argument:

(a) we accept that a plane emitting oodles of CO2 is harming the environment - driving the greenhouse effect and leading to global warming -


(b) we need to factor in the cost of externalities such as pollution, which are not currently being paid by passengers.

So we

(c) make people pay the 'true' cost of their actions through Pigouvian taxation. Good.

But if passenger numbers, and therefore emissions, continue to grow despite these extra costs (and if we accept that that's harmful, etc etc), how are we in an 'optimal' situation?

*If* we start from the premise that rising emissions from aviation is killing the planet, surely the only optimal scenarios are ones where emissions are reduced - and making passengers pay the true cost for their flights can't guarantee that.

Or can it? Does the cost per tonne of CO2 rise as our failure to cut emissions overall becomes more acute? Genuinely confused on this.

Tim adds: What we're trying to do is maximise utility. That's the basis of the whole game. We need to balance the interests of that drowning Bangladeshi farmer in 100 years time against the interests of you and me now. Getting the best possible result, adding together all of these interests, is the "socially optimal" one.

We could, for example, stop all flying now. Today. That would load all of the cost onto us, now, and while it would have an effect on Bangladesh not one large enough to cover the costs to us now. And it would also reduce the wealth of Bangladesh in the future as well.

That's what all this $85 per tonne CO2 is about, what the discount rate Stern uses is and so on. Trying to get to the number which we need to plug into the economy in order to balance the interests of us now and them in the future. And various uses now and various thems in the future.

We're not, in fact, trying to stop climate change. We're trying to get to the point where the costs of it are equal to the benefits of all the things we do which cause it.

Posted by: Mr Eugenides | Sep 19, 2007 10:21:47 AM

"...a hike that would surely make many passengers rethink the need to do that journey."

Yes they'd do something closer to home, would that use less CO2? How would we know?

Will that industry that replaces tourism in other countries emit less CO2?

A cap and trade might sort it out efficiently, a straight tax on CO2 might save marketing costs, but no-one will ever really know.

All we do know is those who force us to do it won't stop flying, and we'll all have to pay extra for it.

Posted by: Forester | Sep 19, 2007 10:46:54 AM

How does a cost imposed now become a benefit in the future?

Tim adds: The cost now can avert a cost in the future.

Posted by: Peter Risdon | Sep 19, 2007 11:06:33 AM

The attractiveness of using market forces here is obvious, but I'm not sure that there are any good precedents. High taxation of road fuel and cigarettes have not obviously affected either rates of driving or of smoking. There's a possibility that all we'll get is higher taxes now that people simply feel they have to bear, and costs in the future that are at best marginally affected. I understand you're trying to find the solution of maximum utility, but these precedents surely indicate that straightforward arithmetic doesn't achieve that.

Of course, set the present costs high enough, or target them effectively (as with congestion charging), and you will see a result: the artificial loss of the gift of travel for the less well off while the better off just carry on as before. That's not very desirable.

If intervention is necessary, it would be better to intervene to encourage the sort of technology shift that saved us from twenty foot deep drifts of horse manure in the streets of London.

Technology shifts solved every environmental problem in the past. That's the precedent we should be eyeing. It's what the Victorians - those indefatigable futurists - would have done.

Posted by: Peter Risdon | Sep 19, 2007 11:44:42 AM

Yes they'd do something closer to home, would that use less CO2? How would we know?

Well, that thing would have a Pigou tax on its CO2 emission too. We don't have to "know" anything - once we have included the external cost of the activity in its price, we're done. Whether or not the holidaymaker choses to fly to Miami, arse around on a jetski in the Channel or whatever, becomes an externally neutral choice. We don't care whether he goes to Miami or not - we either get the benefit of less CO2 emitted, or we get the benefit of some cash.

If intervention is necessary, it would be better to intervene to encourage the sort of technology shift that saved us from twenty foot deep drifts of horse manure in the streets of London.

...and a Pigou tax on CO2 does exactly that. It makes emitting CO2 more expensive, so provides a financial incentive to develop technologies that emit less of the stuff.

It also keeps people honest. If the problem is CO2, and the thing that you tax is CO2, then there is a financial incentive to build offshore wave farms, say, but there is no incentive to support the farmers' welfare programme that is growing corn for bioethanol. If you try and subsidise particular technologies, you are vulnerable both to the difficulties of picking winners, and to the pork associated with political lobbying from, for example, corn growers.

Posted by: Sam | Sep 19, 2007 3:55:15 PM