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September 03, 2007

Green Taxes Already Too High

Or so says the Taxpayer's Alliance.

I wouldn't want to have to defend each and everyone of their calculations, although they seem reasonable enough to make their point.

For example, in their discussion of fuel duty they take off the cost of providing roads and then assign the rest of the money raised to CO2....when there's also congestion, particularates, noise and so on which are externalities which should also be paid for. But they're absoultely right that if fuel duty were indeed determined purely on environmental grounds then it should be lower than it is now (a point I've myself made elsewhere).

One thing the report does show up is that by using both the Nordhaus and the Stern numbers on the costs of CO2 there's an emphasis on the fact that quite what is the right level of CO2 taxation is as yet unknown. There's a huge variation between the two numbers and, as ever in such discussions, only the higher set are being used when calculating taxes.

Even if you use Stern's higher numbers, looking at the current level of green taxes as against the social costs of CO2 there's only another £ 9 billion to be raised from further green taxes. A pittance when compared with the £550 billion or so of the current budget.

I think they've missed a trick with the climate change levy....isn't that still charged on nuclear power? Showing up that silliness would be valuable.

They've also missed something very important about the landfill tax. Yes, they're right, methane is the only externality being paid for through this tax. But they're assuming that all of it is actually flared. We've already got a law in place which states that this must be collected, which in modern landfills it is, and used to produce energy. So the landfill tax is in fact being charged on an externality which no longer exists (or, if you prefer, given that energy production converts from methane to CO2, exists at one / 21 of the extent that the tax assumes).  It's thus grossly too high, not merely slightly, as they say.

On the EUTS I would have emphasised the most important point, that allocations are given, not auctioned. Thus the whole scheme is in fact corporate subsidy to those favoured with large allocations.

But putting aside these nitpicks, there's one hugely valuable point that they're making and one which the political classes don't really seem to have grasped yet.

Yes, we all agree, we should be taxing pollution: whether you want to justify it through Pigou, or just to say that obviously we should tax the things we don't want rather than the things we do, doesn't matter. But the whole set of calculations and assumptions that lead to green taxes lead to an optimal level of taxation. Not simply to one higher than now (nor even to one lower than now) but to a perfect one.

That optimal level is decided by whose estimates we believe for the social costs of a tonne of CO2 e emissions. We obviously get different numbers dependent upon whether we use the Nordhaus, Toll or Stern numbers. But we do still get to optimal numbers. And as the report shows, with some taxes we are already above them and even at the top end of the estimates we've not got too far to go.

As far as those who want to raise taxes go this is bad news of course. But that's always the problem with any logical exercise that leads to the perfect level of taxation: you might find out that it's lower than what you're already charging, as is currently true in parts, or that it's lower than what you want to charge, which is even more so.

And the very worst of such logical exercises is that once you have got that perfect or optimal level of taxation, that's all you have to do. For the very same logic that leads to the taxation also says that the taxation is the only thing you need to do. That's a lesson I'm certain that many really haven't grasped yet: even if we took Stern's numbers and raised another £ 9 billion in green taxes...that's it, problem solved, we ca all go back to sleep again. Then what will people use to keep us awake at night?

September 3, 2007 in Climate Change | Permalink


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Glad you liked the report.

On a couple of the good points you raise:

Methane emissions from landfill are still listed in the government statistics as a significant part of the UK's total greenhouse gas emissions. That's where we got our number for the extent of emissions. Does that mean those statistics are wrong?

Most of the other externalities from driving, noise for example, seemed far more analagous to externalities arising from other facilities like industrial plant. With localised externalities like that we have always used planning permission to create sensible limits. That's why there are special provisions for roads and any development likely to affect the volume of traffic within the planning acts. Otherwise you could justify all manner of bizarre taxes on nightclubs, factories and anything else with an externality.

Using both regulation and taxes to control localised road externalities seemed unfair. Using Fuel Duty and Vehicle Excise Duty to control congestion or noise is rather blunt as it doesn't adjust with time or location. As such, we decided that road spending and CO2 emissions were the externalities they could credibly correct for.


Posted by: Matthew Sinclair | Sep 3, 2007 9:31:00 AM

Then what will people use to keep us awake at night?

Global cooling of course!

Posted by: Mark Wadsworth | Sep 3, 2007 10:28:25 AM

Re landfill tax. This was initially set at a level of £7/tonne (back in 1998), which was estimated at the time to be equivalent to the marginal damage costs associated with landfill. This is circa £8.50 at today's prices, certainly far below the current rate of £24/tonne, which is scheduled to increase further to a medium term target of £48/tonne.

Of course the reason the tax is set to rise to over five and a half times the government's own social cost estimates is to help meet European waste targets.

Posted by: JH | Sep 3, 2007 1:47:45 PM

Taxes also raise revenue, and unless there's the same amount of negative externalities (less positive ones really) as the amount you want to raise in taxation, then obvoiusly it will have to exceed that.

Tim adds: Yes, but we're trying to justify taxation higher than current levels on the grounds of greenness, aren't we?

So, let's have the green taxes we should have for Pigovian reasons....then lets go and have the discussion about the other taxes we need to cover our spending desires. Let's not confuse the two issues, eh?

Posted by: Matthew | Sep 3, 2007 2:50:51 PM

JH, this landfill tax is completely nuts.

It works out to be millions (or certainly hundreds of thousands) of pounds per acre. Given that agricultural land in the UK is practically worthless (the market price is roughly equal to net present value of CAP subsidies plus IHT breaks), the externality of completely cacking up one acre of land can't be worth much.

If a landfill site owner allows poisonous stuff to seep into a neighbour's field, he should get his arse sued off, is all.

Yup, harvesting methane seems to be a good idea, if it makes commercial sense, but that's a different topic.

Posted by: Mark Wadsworth | Sep 3, 2007 3:30:49 PM