It is tempting to view anything emerging from Davos with suspicion. My normal reaction when I hear that a corporate executive has attended the conference is to sell the shares in his or her company because it normally means that the executives are more concerned with their personal position and with virtue signalling than with running their companies. Corporate disaster can’t be long off once they have taken their eyes off the ball.
Three key speakers last week were Greta Thunberg, Donald Trump and the Prince of Wales. Yet each of them said something to which the rest of us should pay attention. Thunberg that we need to care about the environment, Trump that technology will be vital in dealing with climate change and the Prince that there is a role for green taxes. Green taxes, at first sight, look wonderful. They discourage anti-social behaviour while raising revenue. What’s not to like? It’s only when you look at the detail that issues emerge.
The fundamental problem is that if they succeed in discouraging the anti-social behaviour, they don’t raise revenues. But they have other problems.
The biggest is that normally they are applied fairly selectively and affect only one part of behaviour. For example, in the UK green taxes bear much more heavily on motoring than on other forms of carbon emission. There is a whole economic theory (the theory of the second-best, see Lipsey, R. G.; Lancaster, Kelvin (1956). “The General Theory of Second Best”. Review of Economic Studies. 24 (1): 11–320) which points out that this doesn’t necessarily produce a more optimal allocation of resources.
More practically, there are three other main problems. First, if you use the price mechanism to make people behave in a more environmentally appropriate way, the burden of adjustment is placed on those most sensitive to such economic mechanisms, who typically turn out to be the poorest. Although, to be fair the rich lose consumer surplus from paying higher taxes. Is it really appropriate to price out poor people while the rich go on polluting?
The second problem is that green taxes can often be fairly ineffective. For example, even the green pressure group ‘Greener Journeys’ has estimated that the freezing of fuel duties since 2011, which they estimate to have reduced fuel prices by 11%, has only raised traffic by 4% (The Unintended Consequences of Freezing Fuel Duty by Professor David Begg and Claire Haigh). This means that you need quite swingeing increases in tax, with in this case major negative distributional consequences, to change behaviour significantly.
Finally, while the theory is that revenues from green taxes are used to cut other taxes (the issue of the optimal level of taxation is contentious but I cover the literature on it in my book The Inequality Paradox), in reality, fiscal authorities normally use the extra tax to raise the overall tax burden. So in practice, green taxes normally mean higher taxes.
Despite these problems, it does look as though we are moving towards more extensive use of green taxes, except perhaps in motoring where technology is causing fuel duty revenue to decline and where it will be difficult to tax electricity for powering motor vehicles differently from other forms of electricity usage. UK CO2 emissions have actually fallen by 39% since 1990, mainly through falling heavy industry production but also through a changing mix of fuel usage away from coal. Some of this is effectively exporting our emissions to other countries and it is interesting that to counter this the EU is proposing to introduce a ‘carbon border adjustment tax’ – a tax on imported products with a high carbon footprint – for selected industries by 2021.
It is important that when green taxes are imposed, they should be applied equally on all forms of emissions, and that their unintended consequences on, for example, the distribution of real income, are addressed through reduced taxes elsewhere.
Contact: Douglas McWilliams firstname.lastname@example.org phone: 07710 083652