The Office for Budget Responsibility has said that the UK Treasury will face a shortfall of £13bn in motoring taxes within a decade. Although car usage continues to rise putting increasing pressure on the road infrastructure, the greener and more fuel efficient cars being produced are driving down the tax revenues generated from motoring.
A report by the IFS has put forward the case for replacing the existing system of taxes on cars and fuel by a new road charging system. If no such change occurs, the IFS has forecast that with more electric cars and hence lower revenues raised from fuel and vehicle excise duties, the shortfall facing the Treasury would require an increase in fuel duty of some 50%. Instead of this, the solution could be to charge individuals for every mile of road they use, with the ‘price’ varying depending on the degree of congestion. For example, at peak times the price would be higher, where as for those in the countryside where roads are traditionally much quieter, charges would be lower. The IFS said:
‘Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.’
Government policy across the world has been increasingly focused on climate change, with targets for emissions reductions being somewhat ambitious. However, many car manufactures who were told to reduce emissions significantly are on the way to meeting these targets and this success is a key factor contributing towards this new road ‘crisis’ that could soon be facing the government. The following articles consider the possibility of a road charging scheme.
Report
The road ahead for motoring taxes? Institute of Fiscal Studies (link to full report at the bottom of the page) (May 2012)
Articles
Compelling case for UK road charging, IFS study says BBC News (15/5/12)
Fears tax shortfall may lead to road tolls Sky News (15/5/12)
Who’s going to pay to update Britain’s infrastructure? Guardian Business Blog (15/5/12)
Motoring taxes: a future headache for the Chancellor Channel 4 News (15/5/12)
For whom the toll bills – less traffic hurts M6 toll road owner Guardian, Ian Griffiths and Dan Milmo (14/5/12)
Charge motorists per mile, says IFS Independent, Nigel Morris (15/5/12)
Green cars to drive down tax receipts Financial Times, Mark Odell and John Reed (15/5/12)
Questions
- Illustrate the effect of a tax being imposed on petrol. What happens to the equilibrium price and quantity?
- Despite fuel duty pushing up the price of petrol, why has there been such a small decline in the quantity of petrol individuals use?
- Evaluate the case for and against a road charging scheme.
- Why are tax revenues from motoring expected to decline over the next decade?
- Climate change has become an increasingly important focus of government policy. To what extent is the current road ‘crisis’ a positive sign that policies to tackle climate change are working?
- If a road charging scheme went ahead and prices were varied depending on traffic, time etc, what name would you give to this strategy?
- Why would it be possible to charge a higher price at peak times and a lower price for cars using country roads?
- Is there an argument for privatising the road network? Is it even possible?
Centrica, owners of British Gas, has warned that electricity and gas prices in the UK are set to rise in the autumn. Centrica blames this on the expected rise in the costs of wholesale gas and other non-energy inputs.
One of the other ‘big six’ energy suppliers, E.On, has responded by saying that it will not raise energy prices this year. Whether it will raise prices after 1 Jan next year remains to be seen.
Last autumn, household energy prices rose substantially: between 15.4% and 18% for gas and between 4.5% and 16% for electricity. This spring, in response to lower wholesale energy prices, suppliers cut prices for either electricity or gas (but not both) by around 5%.
The government and various pressure groups are encouraging consumers to use price comparison sites to switch to a cheaper supplier. The problem with this is that supplier A may be cheaper than supplier B one month, but B cheaper than A the next. Nevertheless, switching does impose some degree of additional competitive pressure on suppliers.
More powerful pressure could be applied by ‘collective switching’. This is where a lot of people switch via an intermediary company, which sources a deal from an energy supplier. This collective buying is a form of countervailing power to offset the oligopoly power of the suppliers. Such schemes are being encouraged by the Energy Minister, Ed Davey.
The other approach, apart from doing nothing, is for Ofgem, the energy regulator, to impose tough conditions on pricing. But at present, Ofgem’s approach has been to try to make the market more competitive (see also), rather than regulating prices.
British Gas owner Centrica warns of higher energy bills BBC News (11/5/12)
E.ON to keep residential energy prices unchanged in 2012 Reuters, Adveith Nair (14/5/12)
E.ON promises to hold energy prices for 5million customers in 2012 This is Money, Tara Evans (14/5/12)
British Gas owner Centrica feels cold blast from critics ShareCast, John Harrington (11/5/12)
Gas and electricity price battle lines drawn BBC News (14/5/12)
Taking on the energy giants: The co-operative insurgency gains ground Left Foot Forward, Daniel Elton (11/5/12)
Group Energy Buying hits the UK Headlines Spend Matters UK/Europe, Peter Smith (11/5/12)
Think tank calls for competition to break Big Six rip-off Energy Live News, Tom Gibson (30/4/12)
Collective switching will not fix the UK’s broken energy market Guardian, Reg Platt (27/4/12)
Make your own small switch for cheaper energy The Telegraph, Rosie Murray-West (14/5/12)
Questions
- What are the barriers to entry in the electricity supply market?
- How competitive is the retail energy market at present?
- To what extent do price comparison sites put pressure on energy companies to reeduce prices or limit price increases?
- What scope is there for collective buying of gas and electricity from the six energy suppliers by (a) households; (b) firms?
- Assess Ofgem’s package of proposals for a simpler and more competitive energy market.
Cartels are formal collusive agreements between firms, typically to fix prices, restrict output or divide up markets. As in the case of monopoly, the lack of competition may harm consumers, who are likely to have to pay higher prices. This, as economic theory demonstrates, results in a reduction in overall welfare.
For this reason competition authorities throughout the world now impose substantial fines on firms found to be involved in collusive activities and participants also face the threat of substantial jail sentences.
One of the most famous cartels is the Organization of Petroleum Exporting Countries (OPEC). This is an agreement between 12 countries to limit their production of oil. The OPEC cartel has been in place for over 50 years. Arguably, the intergovernmental nature of the cartel and political ramifications of intervening have meant that OPEC has been able to operate free from prosecution for so long.
However, very interestingly Freedom Watch, a US public interest group founded by a former US Department of Justice lawyer, has this week filed a lawsuit against OPEC for violation of competition laws. Quoted in the above press release, Larry Klayman, the founder of Freedom Watch, says that:
These artificially-inflated crude oil prices fall hard on the backs of Americans, many of whom cannot afford to buy gasoline during these severely depressed economic times.
Furthermore, how some of the members use the profits gained from the cartel is also called into question. He also goes on to suggest that the lack of intervention from US government agencies may be because the leaders of both political parties:
… line their pockets from big oil interests and are just sitting back and not doing anything.
This is not the first time that Freedom Watch has served a lawsuit on OPEC. In 2008, at an OPEC meeting in Florida:
In a bold move in front of members of the news media, Freedom Watch Chairman and Chief Legal Counsel Larry Klayman literally jumped out from behind a line of TV cameras and microphones on Friday, October 24, to serve a complaint on an OPEC oil minister.
That complaint was unsuccessful.
It will be fascinating to see the outcome of this latest case and, if successful, the implications for OPEC – updates to appear on this blog in due course.
Articles
Profile: Opec, club of oil producing states BBC News (01/02/12)
OPEC accused of conspiracy against consumers WND World, Bob Unruh (09/05/12)
Freedom Watch Attorney Sues OPEC Oil Minister for Economic Terrorism Conservative Crusader, Jim Kouri (31/10/08)
Lawsuits
Lawsuit brought by Freedom Watch inc. against OPEC (7/5/12)
Lawsuit brought by Freedom Watch inc. against OPEC (9/6/08)
Questions
- Why are cartels so severely punished?
- Why might it be important to punish the individuals involved as well as fine the cartel members?
- Why is fixing the price of oil particularly harmful for the economy?
- Why do you think the OPEC cartel has survived for so long?
- What do you think might be the long term implications of the lawsuit for OPEC?
Binge drinking is a problem that has seen much attention, especially with regards to minimum price controls. However, in this blog, we consider attention in this sector concerning taxation on beer.
Alcohol is widely considered to be a de-merit good with negative externalities imposing external costs on society. This is one of the reasons why taxes are imposed on alcoholic beverages. By increasing production costs to the firms providing these drinks, prices rise and hence the policy aims to discourage consumption.
During the recession, many businesses have seen demand fall and one sector hit particularly hard because of this and very high tax rates has been the local pub community. Duty on beer has increased since 2008 by some 42%. As such, many rural and suburban communities have seen their local watering holes close down and this has led to a campaign by CAMRA to force a debate in Parliament, as a means of protecting ‘one of Britain’s oldest and best loved institutions’. Data suggests that 12 pubs per week are closing down, thus the future of the industry is now under threat. This may also have further damaging effects on local communities, as it may adversely affect the social aspect of communities. Camra’s Chief Executive, Mike Benner said:
‘Whether situated in a small village, city high street, or on the edge of a housing estate, pubs are so central to our society that whole communities can grow around a particular pub.’
According to a study, pubs in Lancashire and the West Midlands have been hardest hit by the pub closures. If pubs don’t pass the tax increase on to consumers in the form of higher prices, then they must bear the burden. If they do pass the tax rises on to consumers then the larger chain firms can increase their market share by selling at a lower price. They are also facing growing pressure from the supermarket industry, which are able to sell cheap alcohol, also contributing to going to the pub becoming an ‘unaffordable activity’. The following articles consider this industry.
Pub closures spark beer tax plea The Press Association (30/4/12)
A dozen pubs close each week Telegraph, James Hall (30/4/12)
Calls for beer tax rethink as 12 pubs shut every week BBC Radio 1, News Beat, Steve Holden (30/4/12)
Pubs in the West Midlands hit hardest by pub closures ITV News (30/4/12)
Questions
- Illustrate the effect of a tax being imposed on a product such as beer.
- In this market, would the tax be more likely to be borne by the producers or consumers? Explain your answer and illustrate on the previous diagram why this is the case.
- Why are supermarkets able to compete local pubs out of the alcohol market? Do you think a minimum price will have any effect?
- What is a de-merit good? Illustrate the concept of a negative externality on a diagram.
- Explain how a de-merit good causes the market to fail. To what extent does the tax on beer solve the market failure?
- Why are there likely to be adverse effects on local communities? Could this have an adverse effect on economic activity in the area?
The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.
Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.
But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.
Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.
What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!
The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation
Webcasts and podcasts
Can Cameron still claim the ‘greenest government ever’? Channel 4 News, Tom Clarke (26/4/12)
Energy Secretary: UK will meet green targets BBC News, Ed Davey (25/4/12)
Donald Trump attacks Scottish government’s green policy BBC News, James Cook (25/4/12)
Trump: Wind farms ‘bad for Scotland’ BBC News (24/4/12)
Tycoon Trump fights Scotland over wind farms near golf resortReuters, Deborah Gembara (25/4/12)
Wind power blows Siemens off course Euronews, Anne Glemarec (25/4/12)
Mexico inaugurates largest wind farm in Latin America BBC News, Carolina Robino (9/3/12)
BP’s Flat Ridge 2 Wind Farm in Kansas YouTube, BPplc (10/4/12)
Arnold Schwarzenegger: Green quest goes on BBC News (26/4/12)
Denmark Pioneers Clean Energy Green TV (18/4/12)
EU wind industry defies recession Green TV (16/4/12)
Wind Farm Issues – Compilation LiveLeak (15/4/12)
News articles
David Cameron commits to wind farms The Telegraph, Louise Gray (26/4/12)
David Cameron says wind energy must get cheaper The Telegraph, Louise Gray (27/4/12)
Could 2012 be year of the wind turbine? The Telegraph, Louise Gray (3/2/12)
Green energy vital, says David Cameron Independent, Emily Beament (26/4/12)
Cameron: renewables are ‘vital to our future’ businessGreen, Will Nichols and James Murray (26/4/12)
Green energy ‘must be affordable’ – Cameron BBC News (26/4/12)
Wind farms will kill tourism, says Donald Trump Independent (25/4/12)
Donald Trump accuses Salmond of ‘betrayal’ over wind farm plans The Telegraph, Simon Johnson (25/4/12)
Turbine scheme provokes wuthering gale of protest Independent, Mark Branagan (6/4/12)
Prince Charles endorses wind power in new film at Sundance Festival The Telegraph, Roya Nikkhah (29/4/12)
Study claims tourists ‘not put off’ by wind farms in Scotland BBC News (24/4/12)
Tide turns in favour of wave power instead of wind farms Scotsman, David Maddox (23/4/12)
Rush towards wind-generated electricity will not reduce fuel poverty Power Engineering (21/4/12)
Shell says no to North Sea wind power Guardian, Terry Macalister (26/4/12)
David Cameron, the Speech He Needs to Make Huffington Post, Juliet Davenport (25/4/12)
Campaigners want David Cameron to come clean over wind farm policy Western Daily Press (27/4/12)
Being Green Doesn’t Mean Higher Electricity Costs Says Green Energy UK DWPub (27/4/12)
Documents
Cost Benefit Methodology for Optimal Design of Offshore Transmission Systems Centre for Sustainable Electricity and Distributed Generation, Predrag Djapic and Goran Strbac (July 2008)
A Cost Benefit Analysis of Wind Power University College Dublin, Eleanor Denny (19/1/07)
Ecological and economic cost-benefit analysis of offshore wind energy Renewable Energy 34, Brian Snyder, Mark J. Kaiser (2009)
Questions
- Why is difficult to predict the future (financial) cost per kilowatt-hour of electricity generation by the various methods?
- Why is it difficult to estimate the demand for electricity in 10 years’ time?
- Identify the external benefits and costs of electricity generation from (a) onshore wind turbines; (b) offshore wind turbines.
- Is ‘willingness to pay’ a good method of establishing the value of external benefits and costs?
- What are the steps in a cost–benefit analysis?
- What types of problems are there in measuring external benefits and costs?
‘Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.’
