An interesting and important question for Nick Stern


We're willing to go along with the concept here but can we please have an actual number?

With oil prices currently at a low level, now would be the ideal time to introduce levies that remove the implicit subsidy for pollution from petrol and diesel. The revenue from these levies could more than compensate the poorer members of the community for the price increases, give a boost to research and innovation, and contribute to the cleaner and more attractive investments that we need.

We know, we're rather keener on Pigou Taxes than many others are. But, following the IMF report on subsidies to the energy sector (please note, it wasn't an IMF paper, it was a paper by people at the IMF. It's not purely about fossil fuels, it's about the energy system. And it does depend on the idea that the tax system should be hugely regressive in order to reach its totals about how much tax should be raised by consumption. For example, it argues that the lower rate of VAT for domestic fuel is a subsidy. And you can think of it that way if you like. But two points: that subsidy also applies to renewables and can you imagine the furore from the usual suspects if we argued that to save the planet we must charge 20% on domestic fuel?) we have the above from Lord Stern. And the obvious question is, well, how much?

For there's a very important point about Pigou Taxes. The entire logical case for them, the justification, is that there is one just and righteous rate at which that tax should be levied. Add up the costs of all of the externalities and that is that tax rate. You cannot, not if you are being intellectually consistent, march around shouting "more". You must, in each circumstance, calculate what the rate is.

So, some 80% of the cost of petrol these days is tax. Is that enough? For example, Stern's $80 per tonne translates into a righteous carbon tax of 11 p on a litre of petrol. Ken Clarke introduced the fuel duty escalator to "meet our Rio committments". Which we take to be a synonym for a carbon tax. That escalator has added 23p or so to a litre of petrol. So, purely on the carbon emissions basis we are already paying too much in the UK.

This newer calculation tells us that there's more. Air pollution and so on. OK, that's fine, so, what's the number? What's the righteous Pigou Tax for that? They also say that a significant portion of the costs of petrol is congestion, accident damage etc. That's not something that can be attributed to the fuel: if we were all driving electric cars those things would still be there. That's a cost attributable to the transport system, not the fuel. And by far the largest part of the costs they attribute to this sector is the idea that consumer purchases should be taxed in order to raise revenue. And that if the tax is less than the amount they declare is correct, then that's a subsidy. But no one can say that UK petrol isn't paying tax. So that's out too.

So, in our calculation of what the correct petrol tax is in the UK we've got those two things. Carbon emissions, which are already being overpaid for, then pollution costs. So, what's the number, what should be the tax? And as above, "more" isn't a serious answer.

We have a very strong suspicion here. The reason we're not told what the number is is because that correct, just and righteous, number is actually lower than we're all being charged currently. Which is why Stern, the IMF and everyone else doesn't actually calculate it. Of course, we're willing to change our minds if they would calculate it and also let us see their workings....