Tony Blair is not the only senior Labour politician whose carefully manicured image has been somewhat bashed about by the fuel tax protesters. Gordon Brown came into office determined to be the green Chancellor. Within months, he had published a statement of intent promising that “over time, the government will aim to reform the tax system to increase incentives to reduce environmental damage”. In his first Budget, he put our money where his mouth was by raising, from 5 to 6 per cent above the rate of inflation, the fuel duty escalator imposed by the previous government. The protests may not lead to any fuel tax reductions, but they have certainly driven a stake through the heart of any new proposals for British, or indeed European, carbon or energy taxes.
This is causing consternation among Britain’s environmental organisations, which have long been wedded to the belief that only dramatically higher energy taxes could save the planet from the ravages of climate change. They have praised Brown’s green credentials, and relentlessly criticised Blair for his lack of interest in environmental matters. Much of the British environmental movement’s political strategy has been based on working with Brown to promote a shift from taxing “goods”, such as capital and labour, to taxing “bads”, such as pollution and resource consumption.
This strategy now lies in ruins. But this matters a lot less than most environmentalists think. It was underpinned by two alluringly simple ideas. First, if you increase the price of something, people will consume less of it; second, because market prices did not account for free goods such as the environment, the government must intervene by adding on taxes in order to reflect these “externalities”. Hence the environmental rationale for the fuel duty escalator: motorists do not bear the full environmental costs of using their cars, and by ensuring that fuel prices rise in real terms, year on year, we send a strong signal to consumers to drive less or demand more fuel-efficient cars.
This always was a triumph of hope over experience: great theory, but lousy politics. In fact, even the theory is not that good; Gucci undermined the simple idea that putting prices up always reduces demand, by putting prices up and then discovering that it actually increased demand. In any case, the formal expression of economic theory always contains the caveat that all other things must remain equal. In the real world of real people, nothing else ever does remain equal.
The Department of the Environment has been unable to find much credible evidence that eight years of continuous real rises in the tax on fuel have done anything to reduce vehicle use. One reason is that the real cost of car use today is exactly what it was in 1974; meanwhile, real disposable incomes have risen by 80 per cent. Motorists have simply offset rising fuel prices against the falling costs of other goods and their rising incomes, and gone on doing what they wanted to do – a normal response by most people to any attempt to change their behaviour against their wishes.
Even if the theory had not been jejune, the politics would still have been terrible. Chancellors of the Exchequer are, on the whole, not to be trusted. The environmental case for introducing the fuel duty escalator was always the tiniest of fig leaves, visible only to true believers in the cause of green taxation. Michael Howard, the then secretary of state for the environment, first heard of the fuel duty escalator, which the then chancellor Norman Lamont was about to introduce, when he was briefed on the next day’s Budget announcement prior to boarding a plane for India.
As the public has quite rightly discerned, the fuel duty escalator was always a revenue-raising device. It might have helped to maintain the green fig leaf for this tax had any of the £10bn in additional taxes extracted from us actually been spent on the environment. But that is not the Treasury’s way. The result is the resentment that expressed itself as near-universal public support for a tiny gang of fairly prosperous road hauliers. It is nicely ironic that the political bill for the Treasury’s revenue rape should have arrived only months after the Chancellor had abandoned the offending escalator under pressure from the hauliers and motoring organisations.
Having listened once, and responded positively, it is understandable that the Chancellor is unwilling to listen again. What is more difficult to understand is why environmentalists ever believed that a modern democracy, particularly one led from the left, would be able to pursue a policy of relentless consumption tax increases, whose burdens would inevitably fall hardest on those least able to bear them. Taxes require public consent, and the levels of taxation required to alter fundamentally the cost of energy by price effects are simply undeliverable.
Furthermore, the minute you increase the price of anything, a lot of very clever people immediately go to work to put them right back down again, although not always in the way you expect. You may well get improvements in energy efficiency from higher energy prices, but you also get improved extraction techniques that lower the cost you have just raised. As the price of oil or gas increases, areas that were previously too expensive to exploit become worth developing, so the supply increases and prices go back down again. Fiscal weapons are notoriously inaccurate.
But even these dark clouds have a green lining – several, in fact.
First, the seductive notion that we can use environmental taxes both to prevent pollution and increase public revenues will no longer distract environmentalists from searching for more effective policy instruments. There is nothing wrong with using well-designed regulation to achieve environmental goals. Legally binding negotiated agreements clearly have a role to play, as does emissions trading. And we might even consider occasionally spending some public money.
Second, Opec has accomplished something that no western government could have come close to doing with taxes – it has nearly quadrupled the price of energy in less than a year. As Sheikh Yamani, the former Saudi oil minister, has pointed out, this will accelerate the transition out of fossil fuels, especially for vehicles.
Third, this latest price increase has not brought the global economy to a shuddering halt and shows little sign of doing so. This comprehensively destroys the economic case of those American politicians who have been so obstructive to US ratification of the Kyoto Protocol of the UN Convention on Climate Change.
Fourth, the protesters’ success in bringing the country so quickly to its knees was a function of our increasing dependence on just-in-time logistics.
Companies no longer carry stock in expensive warehouses and storerooms, and on their balance sheets, but in the fleets of constantly moving juggernauts and white vans that congest our roads and pollute our air. This system works fine, as long as nothing interrupts its constant motion; but, as we have now seen, when something goes wrong, everything goes wrong. If Jack Straw’s task force carries out a proper assessment of the real economics of just-in-time logistics, the environment will be a big beneficiary.
All in all, it has not been such a bad week for the environment.
The writer is a visiting professor at Imperial College, London, and a former special adviser at the Department of the Environment