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Saturday 22 November 2008

Budget 2008: Green gimmicks?

Ian Mulheirn on the Government's green taxation

Reports abound that a central plank of Alistair Darling’s first Budget will involve increasing Vehicle Excise Duty on the most polluting cars by around £1,000. Squarely aimed at reducing unnecessary vehicle emissions, the gas-guzzler grab forms the latest part of a patchwork of green taxes designed to help the Government make progress on its target to reduce CO2 emissions by 20% on the 1990 level by 2010. Simultaneously we can expect the Chancellor to make an announcement on fuel duty. The 2p increase pencilled in for this year looks set to be postponed in the face of strong opposition from hauliers and motorists already labouring under record oil prices.

But these mixed signals point to the problem with green taxes as a concept. A green motive is a necessary but insufficient condition for government action to raise the price of polluting activities. Political realities mean that those undertaking the activity to be taxed must be politically weaker than alternative targets for taxation. In this latest instalment, for example, anyone who’s been run off the road by a pristine 4x4 hogging the highway won’t be getting their placards out to protest against higher VED; but hauliers could still bring the country to a standstill, as they did in 2000, if further squeezed by fuel duty.

Further, if the speculation is accurate, there is a degree of contradiction in the Budget announcements. The vehicles targeted for higher VED are identified by being the most polluting ones and yet the Government already has a much more efficient mechanism for taxing car emissions: the fuel duty it wants to postpone raising. The upshot is that the patchwork of taxes is only partially green and full of holes.

Even fuel duty itself is not without problems. There has been much disagreement over how much of an improvement hybrid cars represent over the traditional model. This is because, detractors claim, the carbon cost of manufacturing such cars is a large proportion of the lifetime carbon emissions of the vehicle. Could this mean that, perish the thought, the durable gas-guzzlers are just as green as their ingenious but more frail high-MPG competitors? If so then relying on fuel duty alone to encourage customers to take the green option may not be effective.

Personally, I have no idea which kind of car is better for the environment. But the point here is that neither does Mr Darling or his legions of technocrats at the Treasury, and the planet can’t wait for him to work it out. Unless the Chancellor is omniscient, he can never be sure that he’s doing the best thing for the planet by picking off certain polluting activities with distortionary taxes or subsidies. In a timely demonstration of this fact, recent reports have suggested that biofuels, once thought to be the answer to global warming, may in fact be substantially more harmful than even fossil fuels. In recognition of this, there is speculation that Mr Darling will scrap the tax breaks for biofuels that were due to come into force next month. All this serves to reinforce the point that, in trying to pick winners, the government all too often ends up picking losers.  Meanwhile pollution grows. So are we all doomed? Far from it.  The EU Emissions Trading Scheme – which our Government had a huge role in creating – offers a real solution.

It makes no sense to impose different costs on CO2 emitted from different sources, since both do the same amount of damage to the planet. The EU Emissions Trading Scheme sets a uniform price for CO2 emissions at the level where it matters – the international one. In doing so, it solves the problem of governments having to guess about what are and are not ‘bad’ activities. Rather it allows the price signals of the market to help individuals and companies prioritise emissions reduction in areas where it can most painlessly be achieved. Further, as Simon Linnett argued in a recent SMF essay, this model is readily exportable to the rest of the world in a way that taxes are not.

The remaining problem is that the EU ETS only covers CO2 emissions from limited number of sources – the power sector and heavy industry. It’s now time that, instead of being subject to fuel tax, transport along with aviation and all other emissions be brought within the scheme. Some argue that transport should not be included in the ETS since the cost of emissions abatement here is high compared to that for industry. But that is exactly why they should be included. A universal scheme would ensure that consumers prioritise CO2 emissions across all the polluting activities in which they are engaged, ensuring that we only pollute when it’s really necessary.

The patchwork of green taxes therefore threatens to distract from the real solution to climate change. Governments can never know enough to correctly identify all the areas for priority action on climate change. Even where they can, political expediency may distort or thwart their good intentions. Moreover, there isn’t time for the trial and error approach evident in the Chancellor’s plans. The Government needs to recognise that its own creation, by harnessing the power of the market to solve the problem of global warming, is the only game in town. The EU ETS now needs urgently to be expanded both at home and abroad.

Ian Mulheirn is Chief Economist at the Social Market Foundation think tank.

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