Global warming and tax cuts on petrol

The other day, I had a quick glance at the newspaper headlines, whilst in a service station.

1. UN Report on global warming states global warming is a real threat to the future of the planet. To contain these changes will require “substantial and sustained reductions of greenhouse gas emissions”.
2. Chancellor announces yet more freezes on fuel duty.

It seemed a paradox to have both headlines on the same day. At the very least, we could enable a small increase in tax on fossil fuels causing the problem.

Costs of global warming

In the summary of the UN document on global warming.

• The report states that for a doubling of CO2 in the atmosphere, the increase in the global temperature is forecast is to be 1.5C to 4.5C.
• The scientists say that sea level rise will proceed at a faster rate than we have experienced over the past 40 years. Waters are expected to rise, the document says, by between 26cm (at the low end) and 82cm (at the high end), depending on the greenhouse emissions path this century. (BBC link)

Political benefits of tax cuts

The chancellor has announced more freezes on fuel duty because it believes it will be politically popular. He is probably guessing that concern over the cost of petrol is greater than concern over the future of the planet.

Tragedy of the Commons

This situation could be classed as a classic example of the tragedy of the commons. People pursuing their self-interest but ignoring the common shared resources – leads to a loss in economic welfare. The problem is that with many individuals maximising their short-term welfare, there is a high cost to the future sustainability of the common resource.

Inequality of outcome

Some people most affected by rising sea levels are those least able to do anything about it. Islands like the Maldives and Micronesia are fighting for survival. In the west, we are somewhat insulated. If you scourge the comments section of the Daily Mail, you will probably find something along lines of global warming is good because Britain gets quite cold during winter.

The other inequality of outcome is that decisions made today will affect future generations. It is future generations which will face the consequences of our actions, but that have no say in the decisions which will affect their lives.

Freezing fuel on petrol is a missed opportunity for many reasons

1. Opportunity cost – ceteris paribus, if fuel duty is freezed, we will have to increase taxes elsewhere. Or another way of looking at the issue is if we allow fuel duty to increase, it will enable an equivalent tax cut on say VAT.
2. Freezing tax on fuel will slow down the moves to alternative fuels. Rising tax provides an incentive for firms and consumers to develop new technology which doesn’t rely on fossil fuels.
3. Freezing fuel duty will also tend to increase congestion.

Related

• 10 reasons not to cut petrol tax