Tim Worstall

Interesting Number

You can actually have quite a bit of fun with the numbers from the Stern Review you know. Really, you can.

He gives us a number for the damage caused by 1 tonne of CO2 emissions. Now, there’s all sorts of problems with the number he does give us, it’s a huge outlier on all of the other estimates and so on and so on. But the number is, $ 85 per tonne.

As he also points out, polluters should pay and we should have Pigouvian taxation to ensure that they do. Now, the important point is that such Pigouvian taxation should be set at the actual level of the damage being done. Not below, nor above, but at, so that we get the socially optimal level of said activity, not too much and not too little.

Just to point out to any greenies who might be passing, this is what Stern says so if you want to reject that thesis you need to reject his review.

Rightieho. What are my emissions if I should fly back from my hidey hole in the sun to see the parentals? Answer here, a round half tonne of CO2.

So that is $42.50 of damage I’m doing and which I should be taxed so that I don’t take more than the socially optimal number of flights, balancing my utility against that of the other 6 billion or so on the planet.

In real money, at around today’s rate that is £ 22.40 for the round trip. That’s the tax I should pay. Fine, I’m game. We should indeed have that level of taxation upon aviation.

But, please note, our Pigouvian taxes should only be the actual cost of our actions. Not higher….so, are there any other taxes that we do in fact pay upon our flights. Actually, yes, there are.


The Passenger Service Charge varies from airport to airport but typical charges are:

Heathrow – £13.00 (for international flights)
Gatwick – £7.60 (for international flights)

That’s the bit that deals with the costs of the airports and so on so that isn’t to do with CO2. However, there is also:

Air Passenger Duty
This tax is levied by the UK Government, and collected by the carrier
or agent issuing the ticket and charged to the customer at the time of
ticket purchase.

  • the duty on economy flights within the European Economic Area (EEA) is £5
  • the rate for club and first class fares for destinations in the EEA is £10
  • the rate for economy flights to all other destinations is £20
  • the rate for club and first class fares for all other destinations is £40
  • all flights from the Scottish Highlands and Islands are exempt from duty
  • all
    other UK domestic flights are subject to a £5 charge on each leg of the
    flight (so the duty for a UK domestic return flight is £10)      

Now, as we can see, longer flights pay more: so this tax is in fact to do with the amount of CO2 being emitted. And if I were to fly club class back to see the parentals I would pay £ 20 in such taxation. Given my huge blogger’s income, that fat pay check that you all, my darling readers, send me each month, I do indeed of course travel club class.

So, I do, by the very standards of the Stern Review,  pay almost exactly the correct amount of taxation for my aviation habits.

So, a question. How do we get from this analysis, showing that aviation by the standards of the Stern Review is currently correctly taxed, to those people who have read the Stern Review and who insist that aviation must pay more tax?

In

11 responses

  1. Cuchulainn Avatar
    Cuchulainn

    Tim,
    I would guess that the greenie response would be that they want the ideal amount spent to rectify the damage. That would translate to Pigouvian taxation PLUS whatever governments waste in agency cost to collect that amount, PLUS whatever governments divert to their own priorities.
    Tim adds: Ah, but the Stern Review pooints out that much rectification can be done at only $25 a tonne.

    Reply
  2. Matthew Avatar
    Matthew

    But the government couldn’t fund itself only on Pigou taxes! .
    Tim adds: Sure, that’s what all the other ones are for. But environmental taxes should be Pigou taxes.

    Reply
  3. Matthew Avatar
    Matthew

    But surely you’d need to levy VAT as well?
    Tim adds: Why? A Pigouvian tax is supposed to be at exactly the cost of the externalities. BTW, adding VAT on intra EU flights but not on extra EU (which would I think be impossible) would mean that the further you fly the cheaper it is: not what’s really wanted, is it?

    Reply
  4. Brandon Berg Avatar
    Brandon Berg

    Seems to me that the Pigouvian tax has to supplement, not replace, any general taxes levied on other goods and services; otherwise you fail to create the desired market distortions.

    Reply
  5. MikeinAppalachia Avatar
    MikeinAppalachia

    Ummmm………just what is done with the $85 USD do to “rectify” the tonne of CO2? Plant trees? Build dikes? Cover the subsidies for wind/solar? What?
    Tim adds: That’s not the point of Pigouvian taxes at all. They are to make explicit in the price system the external costs. That’s all. The money raised is just general revenue.

    Reply
  6. MikeinAppalachia Avatar
    MikeinAppalachia

    Yes, granted. I’m clear on that and that such will supposedly result in less activities of the kind subject to the tax. I doubt that, but recognize the theory. So, the goverment receives increased revenue and, e.g., carbon equivalents of CO2 originating in UK are reduced and goverment has a windfall of revenue to …..well, leave that aside. I assume that in future, when the inevitable claims for the next ice age arise, then there will be tax cuts to encourage CO2 emmissions.

    Reply
  7. Matthew Avatar
    Matthew

    My point is the same as Brandon’s. There’s going to be market distortion from general taxation, surely the Pigou tax needs to be on top of that?
    Tim adds: You need to separate out the two cases. Only Pigouvian taxes can be justified by environmental reasons. General taxation has to be justified by the fact that you need the money to spend on x, y or z.
    So you cannot justify general taxation for Pigouvian reasons.

    Reply
  8. Matthew Avatar
    Matthew

    Of course, but if some things attract VAT and others don’t. There’s nothing special about a paying a Pigou tax – if the government put VAT onto airline flights and then one day renamed it a Pigou tax nothing would be different.

    Reply
  9. sortapundit Avatar
    sortapundit

    Tim, I think the airlines may have beaten you to the punch with a random stealth tax to cover everything from emissions to the complimentary peanuts. This is a conversation I had this afternoon with a lovely lady at the Manchester Airport reservations office:
    Ria: Hi, I’m just calling to let you know there is a little problem with your booking to New York on Friday. We’ll have to charge an additional £55.76.
    Me: OK… Why?
    Ria: Well, because you made the booking after midnight we were unable to secure your fare. I could put you on an earlier flight for an extra £32.50 if you’d like, or we could cancel the booking if you’d prefer.
    Me: (Is there an emoticon for ‘lower trousers, bend over, and think of England’?)
    They could cultivate the Sahara for the current cost of a ticket to Newark. I say burn the airlines to the ground, and when you’re done burn ’em some more. Bah.

    Reply
  10. mark T Avatar
    mark T

    Given it is about relative pricing, they could of course lower the taxes on good things. Silly me.

    Reply
  11. hmj Avatar
    hmj

    How do we get from this analysis, showing that aviation by the standards of the Stern Review is currently correctly taxed, to those people who have read the Stern Review and who insist that aviation must pay more tax?
    Well, one valid argument might be that there are supposed to be “non-CO2” effects of aviation which exacerbate climate change, such as contrails. I don’t really understand the science behind that, but I have heard the argument.
    But you are right – some pressure groups leap onto aviation fuel tax as an article of faith. The Stern Review seems from my reading of the Exec Summ to be far more interested in trading than taxation, and argues that this should extend to aviation emissions.

    Reply

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