Pigovian taxes, good whatever the outcome

When it is suggested that duties be increased on alcohol and/or tobacco to raise revenue and/or decrease consumption for health reasons, there is often an outcry. One camp says that if people reduce smoking or drinking by too much, you get less revenue therefore the tax is a failure, another that people will continue to drink and smoke rather reduce or stop, therefore it is a failure. Pigovian taxes such as these need not be seen as for one purpose or another (raising revenue vs behaviour change). Either outcome is positive. If people smoke less, say, there is less cost to the NHS through treating them and others that inhaled their smoke (passive smokers). If they continue, revenue raised can be used to treat smokers and their victims, the passive smokers, and some revenue used for smoking cessation programmes. In addition, it is more likely that the smokers and heavy drinkers will pay for the harm they cause to themselves and others.

Other Pigovian taxes include congestion charges, fuel duties and parking charges. The same kind of arguments above apply to these, in that by correctly taxing externalities, the correct outcome will colme about

Remember when teachers, policemen, prison officers, ambulance staff, nurses, doctors and firemen crashed the stock market, wiped out banks, took billions in bonuses and paid no tax? No, me neither. Please copy and paste to your status/blog etc for 24 hours to show your support against the Government's latest attack on pensions and public sector workers

Response to the Observer's cost of driving article in the Cash section and comment on magazine's sustainability theme

Yesterday, there seemed to be a little irony in the Observer. I have just been reading the magazine, which has sustainability as its main theme, and makes for very interesting reading. Ignore those hoary tabloid and Clarkson myths about how sustainability=hairshirt; more like better quality if life if done right. Small simple steps can also make the neighbourhood dynamic, good looking and resilient to economic and energy shocks.

Now onto the cost of driving bit. The Observer was not explicity calling for fuel duty to be lowered like the Mirror and others, but it did seem to be sympathetic to motorists. The thing is, people who can drive can choose to or not, whereas those who cannot can suffer due to isolation, congestion, pollution and unsafe conditions in certain localities. Why should they suffer to make it easier to congest and pollute? The answer to high cost of driving is to ensure that susbtantial sums be invested in walking, cycling and public transport facilities, and perhaps gently encourage behaviour change like combining trips, driving fewer miles as not all car trips are necessary (can you get groceries and other goods delivered, or walk, cycle or PT it to shops, or grow your own?).

That is where TEQs, better electric vehicle technology and higher efficiency standards would come in. We are now in peak oil, so cutting fuel duty would be nonsense as people would not have the incentive to be more efficient and consume less oil. Also, would it not be good to not have to give you kids or other family members lifts all the time, thus hitting your wallet, your time and environment?

Steven Glaister is also mistaken in saying it is bad if revenue from fuel tax falls because it is set too high. If it does, it means that people are driving less and/or using more efficient vehicles. There would be fewer costs due to congestion, illness, accidents and social exclusion. Streets would be safer for non-motorised travel and public transport more punctual and cheaper to operate. Energy costs could fall with demand, climate improved...

I believe TEQs are better than carbon taxes, but as a quick measure, they are a good second best at east on road fuels, and if poor persons are given rebates and better PT. So let's have an increase in fuel duty in April but invest it wisely in future proofing.

Pigovian taxes and TEQs

This has been edited in response to a pertinent comment about my earlier non-discussion of TEQs

There has been much in the news about peak oil and other high commodity prices, often accompanied by calls to reduce fuel duty and/or VAT on fuel. This is probably as stupid as one can get, given all the evidence suggesting we are now in peak oil. According to David Strahan, Jeff Rubins and others, oil price spikes cause recessions, followed by a collapse, leading to reduced demand, cancelled exploration and renewables, then increased demand, then another spike upon recovery...

Besides, fuel duty is a Pigovian tax. They are taxes that affect behaviour and/or raise revenue, and internalise externalities. For example, increasing fuel duty would either cause demand for fuel to drop (good-less pollution), or raise revenue (also good-invest in better public transport, walking, cycling and anti-pollution measures). That is how to sell them. No need for 'one or the other'-a good outcome will come about. That would have been the best way to sell London's congestion charge, especially the £25 gas-guzzler charged proposed by Ken Livingstone and supported by Sian Berry. Either reducing congestion and pollution, or raising revenue to invest, are good outcomes. Let's take on the tabloids ladies and gentlemen. Follow me...

I would also class Alistair Darling's bonus tax as a Pigovian tax for the above reasons, along with other windfall taxes like inheritance tax. However, do let me know if you disagree with my thinking, and share more ideas but keep it civil.

Smarter than just using Pigovian taxes is Tradable Energy Quotas or TEQs, invented by David Fleming. The idea is that a carbon budget is set by an Energy Policy Committee of scientists, and each individual has a personal, tradable budget. If they use more than their budget, they buy extra units from a central account; those who use fewer units than their allowances can sell them. It would work by using smart card, chip or bar-code technology as we use already, or extra quotas could be bought or sold when we pay our energy bills by direct debit. The beauty of the scheme, unlike energy taxes, is that they would redistribute wealth from rich to poor as wealthier  persons tend to consume more energy, while poorer persons consume less. It could be a great way to reduce fuel poverty, and kick start renewable as they would compare better than carbon generation on cost grounds and be pushed down the learning curve. Green collar jobs would come about with more emphasis on skills, reuse, repair and practicality but we could have fun on the way too. Enjoy the ride; I intend to.

None of us are perfect, but Roosevelt once said: "Better the occasional faults of a government that lives in a spirit of charity than the constant omission of a government frozen in the ice of its own indifference".