Road pricing and stealth taxes - 6 comments

Could have been a contender has alerted me to the fact that the road pricing (or "travel tax" - whatever) e-petition at the Downing Street site has attracted a bit of interest, with the number of signers now over 300,000 (something like 50,000 have been added in the past day, if you think that's credible). The petition's statement is as follows:

The idea of tracking every vehicle at all times is sinister and wrong. Road pricing is already here with the high level of taxation on fuel. The more you travel - the more tax you pay.

It will be an unfair tax on those who live apart from families and poorer people who will not be able to afford the high monthly costs.

Please Mr Blair - forget about road pricing and concentrate on improving our roads to reduce congestion.

Let me summarise why the petition is flawed, and the 300,000 people wrong to waste precious Government bandwidth, starting with the principle of road pricing.

That principle must be to solve the economic problem wherein the financial costs that drivers pay are not the same as the cost of the entire driving experience - from vehicle ownership, to parking, maintenance, fuel, the taking-up of road space, the damage caused by vehicles and drivers, the clearing-up of dumped vehicles, and the emissions produced - that impacts on society, and which is not immediately quantifiable in terms of money. Because the societal costs are almost certainly far higher than the money costs, and because traffic jams and additional tonnes of pollutant cost drivers no money, not only is there no incentive for individuals to reduce their emissions or reduce the road congestion, the lack of pricing information makes it impossible for drivers to know exactly what price they are paying as a result, and even for voters to know the social costs or benefits of any policies they might advocate for reducing car usage, building new roads, etc.

So the primary purpose of road pricing must be to collect the information, and devise the formula, by which we can determine the cost to society of an individual's driving experience. This will be more complex than calculating the cost of someone's use of public transport, though this must also be done, given that a Government keen to reduce emissions must know that increased public transport use will not actually harm society (it's hard to believe this could be so, but it's best not to have to guess). Once we can determine these costs the Government/local authorities can charge drivers an amount of money that's as close as possible to the 'hidden' social cost that they've been imposing on society. Once that's done, the economic problem has been solved, and drivers will able to make an informed decision about their vehicle use, it being a pretty good bet - and borne out by the evidence so far - that the increased cost will encourage them to switch to public transport, reducing congestion and emissions.

At no point have I had to say anything about the total tax take. That could either rise or fall, depending upon how individuals' behaviour changes. If Governments decide to increase or decrease tax revenue, by making driving cheaper or dearer than it should be (the total cost to society), perhaps because they want to dramatically reduce emissions, then that's nothing whatsoever to do with the principle of road pricing. Nonetheless this diversionary argument will be used time and time again to distract from - as well as politicise - what should be a pretty mundane and uncontroversial (hate to break it to you...) debate about road pricing.

Personally, I'm fine with the idea that road pricing could be 'rolled-out' and run in a revenue-neutral way, with the cost of vehicle licensing reduced to better represent the cost to society of that vehicle simply existing and being parked, with the revenue from emission charges increased to match.

So what does the petition say about the principle?

The idea of tracking every vehicle at all times is sinister and wrong.

Well it's patently not wrong - pricing, whether it's applied nationally using tracking, or implemented in (hopefully more and more) cities, solves a problem that causes jams, accidents, pollution, has serious health implications, and damages our economy. There's nothing inherently sinister about tracking by GPRS, if this kind of tracking is even required, and if you use your free choice to start your engine. It could be sinister if run by a sinister Government (and who says it has to be?), in which case you may have more worries than this one.

It continues:

Road pricing is already here with the high level of taxation on fuel. The more you travel - the more tax you pay.

I've already shown this is wrong. It only covers one cost of driving - and besides, if drivers were charged the full social cost, the need for the Government to charge fuel duty would be lessened - and ignores the fact that jams can be extremely costly even though the distance travelled can be very short. Needless to say it doesn't answer the question of why non-drivers must pay the price of polluted air, of having our cities clogged with traffic, and of being run over by drivers, whether drunk, drugged, speeding, or just unlucky (to say nothing of the victim).

It will be an unfair tax on those who live apart from families and poorer people who will not be able to afford the high monthly costs.

I must say that I did make allowance for this in my earlier piece on carbon trading, where I argued that poor people with polluting vehicles would be penalised by road pricing, on the basis of their relative inability to sell/replace the vehicle, and suggested that the Government compensate the poor prior to launching such a scheme. On the other hand, I happened to reach the chapter in the Undercover Economist that has a nice graph (admittedly a few years old) that clearly shows that in the UK - in clear contrast to the USA - the proportion of income spent on fuel increases with income, rather than decreases, therefore road pricing (the fuel component, at the very least) would in itself redistribute money towards the poor, making a compensation scheme unnecessary.

Please Mr Blair - forget about road pricing and concentrate on improving our roads to reduce congestion.

I think the credibility of the petitioners is pretty threadbare by now, but we can add a veiled threat, and a policy suggestion which - when implemented on its own - has been thoroughly discredited. There's absolutely no reason why road improvement could not take place alongside, and without conflicting with road pricing. Therefore to suggest the two policies are in opposition is illogical and diversionary, along the lines of "How can you even think of doing when there's much poverty in the world?".

I'm not hearing much in the way of reasoned argument from the opponents of road pricing - though I'm all ears (you can also discuss it here, or here) - which inclines me to believe this petition is being promoted by pricing opponents in order to 'scare off' what they believe to be a timorous Government, and to attract a bit of tabloid publicity. There are other criticisms here, some of which are obviously silly, but we could discuss those if there's sufficient interest.

* * *

I've actually heard the term "stealth tax" applied to road pricing, and perhaps you have too if you read the Evening Standard or suchlike, but this couldn't be more wrong. Road pricing adds information that couldn't be quantified before, and makes the component parts of the social cost of driving clear. The only "stealth tax" here is the one that drivers inflict upon society every time they switch on their engine.

Carbon Trading - no comments

This post was partly inspired by Polly's piece (via S&M) on carbon allowances/trading, as well as the one on Labour's front page (now disappeared, though this covers an earlier draft of the Government's plans). I did start it about a fortnight ago, which is why everyone's moved on to other topics. Anyway, key quote (from Polly's):

Miliband's electric radicalism comes in his plan for personal carbon allowances. Here is where social justice meets green politics for the first time. Give every citizen the same quota of energy and let them buy and sell it on the open market. The half of the population who don't fly will make money from selling their quota to the half who do. Drive a gas-guzzling 4x4 and you will have to buy a quota from the third of the population with no access to a car. Who could complain about such transparent fairness?

I can't deny that the liberal side of me would be interested by the establishment of a free market in carbon units. Labour supporters are both accustomed, and quite correct, to attend to those who lose from market outcomes, when so often the result of systematic injustice, but what would 'exploitation' look like in a market like this - with equal allocations of resources for all, and that leaves people free to buy/sell in a rational manner? Having provided equality of opportunity, there must be less of a moral imperative to compensate those who made themselves worse off by buying or selling unwisely, or by missing opportunities that were open to all. If that sounds too cold, compare that scenario with one of a society that seeks to promote equality of opportunity (rather than outcome) without a prior equalisation of assets/resources (as radical as that would be), even though every aspect of it is imbued with the results of past inequalities. If ours is to be an "opportunity society", then surely it must be judged on the basis of the results of - and our attitudes to the results of - just such a carbon market.

* * *

How could such a market work, and what might be the consequences?

I'm assuming, for this, that the Government sets a "fixed exchange rate" between a "carbon unit", which I'll call CU, and, say, a kg of produced CO2; that it establishes the market by calculating the total CU entitlement from the year's emissions target, then distributes those CUs equally among all CU account holders (all of us), either in one go, or - ideally - monthly portions. Presumably all (carbon-using) energy bills would require a payment in CUs, in addition to the monetary cost.

The next assumption that the carbon market has sufficient public support/Governmental commitment that people can assume it's unlikely to disappear any time soon (what would be the point, otherwise?) I'm further assuming that, because the Government's overall aim is to reduce carbon emissions (albeit in a roundabout way), annual/monthly CU distributions will fall over time. Both premises introduce an element of risk - in the sense that people who continue to produce/contribute to high emissions may find it harder and more expensive over time to obtain the CUs they need to fuel their lifestyle, as the supply of CUs decreases. One more assumption: that CUs "live" longer than a year (or a month, as discussed), and therefore that a CU issued in Year 1 can be 'sold' in Years 2 or 3, for example. If so, an opportunity arises within the CU market for those on low incomes to use their relative numerical superiority and (given equal allocations) high proportion of CU ownership, to produce a redistribution of income. Fund managers, working on behalf of the poor, could sell CU options to affluent, high-emission individuals. By purchasing options - the right to buy, months or years in the future, CUs from the poor at a particular price, decided today - the high-emission rich would be able to reduce the risk that they are unable to afford to maintain existing fuel usage in the future, at the cost of paying the poor an 'option premium'. This would redistribute a small amount of income (minus a fund-management fee) to the poor very quickly. The downside, however, is that the bulk of the redistribution will be moved into the future, for that is when the options expire and the high-emission rich finally buy their CUs.

'Congestion charging' and tax changes could happily coexist with the CU market provided the aim was to ensure that what motorists paid reflected the full environmental/social cost of their motoring. Road tolls and fixed-rate congestion charges would go further to reduce vehicle usage and emissions, and would almost certainly have more of an effect on emissions than the CU market. However, the burden would hit the poor hardest. Even with CUs offered equally to all, individuals would still hold different levels of capital, with differing capacities to liquidate that capital: for example, compare a rich individual's ability to sell a high-spec, gas-guzzling vehicle, with a poor person's inability to replace an inefficient heating system with a more modern one that would allow them to make better use of their CUs. While the affluent would be able to switch to public transport out of choice, perhaps claiming to have done so 'for environmental reasons', the poor would be more likely to do so out of compulsion, because they are in much less of a position to replace a polluting lifestyle with a less polluting one. If the Government did go further down the road of legislation in order to make the greatest impact on emissions, it would only be fair if the poor were compensated. It would be fraudulent - not to mention counterproductive - to claim to be establishing a "free" market, where economic decisions can legitimately attributed to a free choice, and not to do so.

For more on this, here's an article from the US Congressional Budget Office on "Who Gains and Who Pays Under Carbon-Allowance Trading?".

As an aside, it would be nice in theory to have a system in place whereby CUs could be traded for free. The Government could fill this role, allowing the poor to sell CUs without transaction costs. As to whether the Government could legitimately involve itself in the option trading mentioned above, that seems unlikely. Well, let's face it, the whole carbon allowance scheme sounds pretty unlikely, but if it did exist, I don't see any reason why the poor couldn't be organised, and the above trading scheme operated for nothing - by trade unionists? - or by a firm that charged an overall fee, rather than many individual ones.