Saturday, November 12, 2011

Why petrol needs taxing more despite a lack of alternative transport

I had an interesting conversation last night about the necessity to tax petrol more. At least, partly conversation, partly me ranting, but that still counts. 

In the past, I have had conversations with a number of people who have expressed the opinion that petrol can only be taxed more when there are viable alternatives. American cities especially have been built based on petrol prices which do not represent its full marginal social cost. Therefore, there are sprawling suburbs and under-resourced and under-utilised public transport networks, which can be difficult to develop anyway in sprawling cities. People have to drive to get to work and to get to the shops because they live so far away and because they have few public transport options. You can't change this situation without a large change in the urban environment and in public transport alternatives. A sudden increase in petrol taxes would hurt dearly and hit productivity as it may prevent some people from being able to work in a place where they are most productive.

This is all true. Or mostly true. Here are a few counters:
1. A lot of journeys currently made by car can actually be made by other means and an increase in petrol prices should make people think twice about which journeys are most important to make and which to make in the car. 
2. I also wouldn't advocate a sudden sharp rise in petrol taxes but even a slower increase would have negative impacts allowing for behavioural and financial adjustments as well as giving time to develop useful public transport. 
3. I also think that increasing petrol prices would create demand for transport alternatives (including electric cars). It is far from obvious to me that creating transport systems first would work because it is not necessarily easy to predict how people or firms might relocate following a petrol price rise or, given this, what transport types would be most useful. Nor, is it obvious to me that we would ever reach this point of 'sufficient public transport infrastructure' to increase petrol taxes. It is a constantly moving target. Therefore, better to increase taxes and let a mixture of the public and private sector respond to the changes more organically.

But here is something stronger: even if people don't abandon their cars, even if there is no improvement in alternative transport, even if there is no shift to electric cars, even if there is no spacial reallocation of firms and households, petrol taxes still have to increase. And here is why:

The private cost of petrol does not equal the full cost to society; somebody, somewhere in the world is already paying. The suburban commuter might have to pay more for petrol but it is not enough to say that he has to have a good alternative right now because at the moment another person is subsidising his lifestyle. The farmer in Africa who loses his crop to flooding due to climate change really had no alternative. The small businesses that can't survive due to flooding or the child who drops out of school or the American state who has to issue debt to pay for water management to ensure people have enough to drink and water crops are already paying for the difference between the private and the public cost of petrol. These people are making a transfer to the suburban commuter now. 

In most of these cases, these are transfers from the poor to the rich. The poor are hit hardest by climate change and the effects of pollution. They have no choice about these transfers. In this respect, the current situation is comparable to plunder at the very least and potentially an act of war. It is a little as if the suburban American commuter is plundering a defenceless farmer's field and then complaining that his life would be difficult if he didn't do this and he cannot afford to do otherwise. And when we say that we need to provide him with better public transport (which might be true), we are validating his continued plunder. This is unacceptable and cowardly. 

Obviously, not all pollution should be banned and humans cannot exist without polluting but there needs to be a compensating mechanism. More money needs to flow from wealthy countries which do most polluting to poorer ones that suffer most. And individual people, including our suburban commuter, must think twice before infringing on others' rights. The best way to make sure that it is really worth it is to pay the full social cost. Taxes on petrol need to begin rising slowly starting now.

(HT: JM)