Monday, October 23, 2006

The Inexorable Call Of Duty

And lo the tax proposals came to pass. Amidst all the media bluster about the amendments and the challenge to Ming, no-one really mentioned that the proposals themselves were always going to sail through.

But the whole thing did leave me wondering what the endgame would be. Big ticket flat taxes are surely the way to start, but what do we want or need environmental taxes to turn into?

So allow me now to open a debate; I’ll describe a reasonably comprehensive environmental tax system, then you can tell me why it’s a load of twaddle that would never work. I’ll probably lose, but you’ll have to ask yourself the question, which is probably the more important thing.

The mechanism I would choose is VAT. Yes, it’s regressive, but it is a tax directly levied on behaviour and behaviour is what we are seeking to modify. Moreover, the regressiveness can, at least politically, be tempered by the process.

In my system, we consider all goods and services according to three criteria;

  • Delivery – This considers everything that gets the goods or services to the point of sale. Primarily this will be the energy cost of producing and transporting the item on the manufacturer’s and vendor’s part and the resulting environmental impact.
  • Utilisation – This considers the environmental impact of using the product as sold. In some cases (e.g. petrol) this will be a direct emissions impact, but it largely refers to waste output and the cost of disposal.
  • Social Impact – This considers the cost to society of the use of a particular product. Through this category, things like alcohol and cigarette duty become empirical quantities rather than political footballs.

For each quantity, a points score is assessed, initially on a rather generic basis (for example, Delivery = Production Energy + (Mass x Distance Transported)), and these are added to produce the VATable rating. The government then assigns a percentage value per point to give the rate of tax levied on any particular item.

Once the generic study is completed, companies may then apply for specific certifications where their products are better than the assessed standard; for example, if the average car is 40% recyclable but the car I produce is 80% recyclable, I apply for recertification and the VATable rating of my product goes down.

The result is a VAT system that, far from being flat and arbitrarily regressive, is scientifically assessed and socially, if not academically progressive. It provides a direct financial incentive to consumers to improve their behaviour and to producers to improve their products.

The primary downside, from a liberal perspective, is obvious; the initial assessment and management of the scheme requires an independent agency on an unimaginable scale using an IT system that would make the iSoft debacle look positively puny.

But the question remains; what is the endgame? President Bush loves to tell us that technology is the way to beat global warming. This is a solution where we have the technology; can we rebuild him?


Tristan said...

I dislike including the energy consumption of production as its paid for in the cost the the consumer, better to seek to charge for the costs of production at the sources.
Of course, this needs an international regime, especially as we are committed to free trade.

Transport: ideally this would be taken into account with the tax on fuel, but that is unlikely in the international arena. There may be scope for charging for environmental costs of transport in international trade at the point of entry, but that will just come back to hit the consumer and in any case could land us in trouble with the WTO and could amount to tariffs.

The principle of charging for the economic impact of externalities like pollution is well founded, and is what we should be seeking to do (economic does not simply mean direct financial costs, it also means health affects, impacts on the environment, anything which affects people really - it all has an effect on people and therefore on the economy).

A great use for any extra income would be to set up a prize fund (with other countries perhaps) for (specific) developments in technology which help preserve (or even reverse damage to) the environment.

Joe Otten said...

A few thoughts...

1. VAT is effectively free to businesses. Doesn't this make it inappropriate? Business emissions are not more or less damaging than private emissions?

I can see the point that, like with VAT, products eventually get to a consumer, and that is the correct point to levy. But that seems to imply assessing, say, estate agents for their use of petrol and paper, rather than just assessing petrol and paper - surely much simpler.

2. In that vein, rather than assess every product for its use of energy, why not just apply a flat tax to the use of energy, upstream. Much, much, much simpler.

The problem of course is with imports. So perhaps your generic formulae are right for imports, if that won't cause a trade war.

Are we really in the situation where a bureaucratic nightmare of complicated downstream levies is OK in trade diplomacy, but efficient upstream equivalents are not? A question for the trade wonks, I suppose.

3. I am nervous about formulae based on virtues and vices (such as recyclability) rather than outcomes such as impact on global warming, urban air quality, etc. These new environmental virtues and vices are obviously designed to promote the right outcomes but they are unnecessarily blunt for our purposes here.

Auberius said...

Sorry I've taken so long to respond, you'll notice from other posts that things are getting mildly stressful.

The business point is true and I haven't yet got a decent mechanism for overcoming it. VAT would always be levied on the product though; the outcome of the rating is a percentage rate to be applied on the product at point of sale.

Flat energy taxes are the bane of my life, not least because of the experience of the Climate Change Levy. To take that system, because it's flat it doesn't allow for fuel switiching (coal, oil and gas are considered as bad as each other when that isn't true) and it has the particular problem that nuclear is considered to be a carbon emitter when it isn't. One of my motivations in proposing this type of system was to get away from that type of arbitrary mistake.

Trade is the biggest single issue I've left outstanding; I've written another blog piece on that subject, will post it once I've managed to purge myself of LDYS stress.

On virtues vs. outcomes, you could I'm sure have an outcome-based system, the important characteristic is simply that there be a reliable baseline for everything.

Joe Otten said...

Of course I should have said flat tax on the emission of carbon rather than on the use of energy.

With that change, do you still prefer downstream to upstream?

Auberius said...

A flat carbon tax is certainly the next step in the process. On upstream vs. downstream, I just think you levy the tax at the point where it does most to affect behaviour, the economic arguments aren't my forte.