Yesterday the Liberal Democrats attacked our study on green taxes. They make two arguments:
1. More recent studies, they cite the example of the Stern Review, show a higher cost of carbon.
2. We haven’t properly accounted for externalities other than CO2 emissions from road transport, their examples of others they give are congestions and congestion.
Do more recent studies show a higher social cost? Let’s look at the total social cost of UK emissions estimate from the four studies we used – in date order:
Tol – 2005 - £9.1 billion
Stern – 2006 - £30.5 billion
IPCC - 2007 - £4.3 billion
Nordhaus – 2007 - £2.7 billion.
Stern isn’t the most recent. He’s actually one of the older studies. The lowest estimate comes from Nordhaus who released his study this July. Stern’s estimate isn’t significantly higher because he uses more recent science but because his work is (as eminent climate economist Richard Tol described it) “alarmist and incompetent”. To find out more about the problems with Stern see Box 1.3: “Stern versus the IPCC” in our report.
The second argument assumes the simplistic view that all externalities are the same and should be responded to with increased taxation. This is not the case and is not accepted in other parts of the economy. We do not place special taxes on sports classes because someone can injure themselves playing sport, and is almost certain to playing some sports like Rugby. We don’t place special taxes on nightclubs and factories on the grounds that they are noisy although this is also an externality.
For most local externalities our response has always been regulation to ensure that they do not go beyond safe levels. We do regulate road transport: we limit speeds, require that people get regular safety checks for older cars, force people to wear seatbelts, test people’s ability to drive, prosecute those who drive unsafely. All of this is designed to control casualties (we have other rules to control noise and pollution). There is no reason, beyond political victimisation, why this should not be enough for road transport while it is accepted as sufficient in other activities.
A regulatory approach means that we can avoid penalising ordinary people who drive safely and, barring accidents they don’t deserve to be singled out for any more than the unfortunate who falls down the stairs, impose little burden on anyone. They are the majority who do not deserve this excessive and regressive tax.
Fuel Duty and Vehicle Excise Duty are entirely unsuitable to correct for congestion. If you drive on a deserted road in the Scottish highlands during the small hours of the morning you pay exactly the same rate as someone fighting their way to work through an urban rush hour. This means that the tax doesn’t create an incentive to drive at times and in places where you do not create a cost to other drivers.
The problem of congestion could be solved by building roads. The number of drivers doesn’t change that much over time so demand for roads is limited by the number of miles they can drive. Fuel Duty and Vehicle Excise Duty could be cut massively with plenty of room in the budget to get plenty of new roads built.
Huhne finishes his response by setting out Liberal Democrat plans to increase excise duty for some cars and compensate this with a cut in the basic rate of income tax. We’ll leave aside the fact that if he expects to raise much revenue from this tax then it can’t be doing much for the environment; revenues will only be significant if people don’t stop buying high-emissions cars. Instead, let’s ask a question. Do you trust Huhne that this tax will genuinely be revenue neutral?
Sure, in the unlikely event the Liberal Democrats win an election they might introduce a compensating tax cut initially. However, they have never been a party averse to taking our money and once the new taxes are introduced and as unreformed public services continue to swallow more cash how long before they start using it as a device to increase the burden of tax faced by hard-working businesses and families?