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The Sad Truth About Pigou Taxes



The standard economic response to an externality is the addition of a Pigou Tax. This activity here, this one, has some effect over there. Which isn’t currently included in the price people pay to do that activity. So, we get too much of it. Add a tax top reflect the price of the externality and we’re done – the right amount of whatever will happen.

This is true, logical and effective. It also suffers from politics:

New green taxes on motoring and flying are likely to be introduced as part of proposals to reduce Britain’s transport emissions, the Government has suggested.

Road transport already has a Pigou Tax applied to it. The “fuel duty escalator” increased duel duty in order to reflect “our Rio commitments”. It has added some 25 p to the price of a litre of petrol. The correct tax (at the stern rate of $80 per tonne CO2-e) is 11 pence.

Do note that this is already additional tax – duel duty already paid for the roads etc anyway.

Air Passenger Duty does the same for flying and yes, it’s also already above the Stern rate.

So, they want to increase this all again even though they’ve already added the correct amount and more. Which is the political problem. Politicians are never, when they find they can tax something, going to tax it only the correct amount.

Further, yes it gets worse:

The document says further “carbon pricing” for flights could be introduced and suggests new motoring taxes could offset the anticipated loss of fuel duty from electric vehicles.

It adds that the Government will need to ensure that “revenue from motoring taxes keeps pace” with the switch to electric vehicles “to ensure we can continue to fund the first-class public services and infrastructure that people and families across the UK expect”.

They’re not going to allow us to have back that portion of fuel duty that is only there to reprice the externality once the externality is gone.

Which would seem to be the death knell for carbon taxes then. Except, well, this is only one of the ways in which politics can screw up. When we consider all the other plans they’ve got for the economy this is actually the least bad of them…..



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in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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