Wednesday, February 28, 2007

Smoke and mirrors - a tax on your jet fuel?

A new petition has appeared on the Downing Street website this month urging the Prime Minister to introduce a tax on jet fuel. While no doubt well intentioned, could such a tax make matters worse, if it is not accompanied by comprehensive pollution regulation?

One possible, presumably intended consequence of the tax would be to deter people from flying. Unless the tax is set at a high enough level it is doubtful that it will reduce the amount we fly by any significant amount. How high is high enough? It would be a brave Government which imposed a fuel tax of as much as 100%. Yet fuel costs already rose by more than this in the past four years and flying is as popular as ever. Setting a politically acceptable tax is therefore unlikely to raise the cost of flying to the point where people choose not to fly. For many, as long as alternatives remain relatively costly and slower, flying will remain the popular choice, even with the additional financial burden of a fuel tax. The reality is that people benefit from the ability to fly too much to care about relatively small changes in price.

Worse, there are other, less visible side effects of a fuel tax. Imagine the tax is imposed and the cost of flying goes up a little, perhaps by as much as the difference between booking a few days later on a low-cost airline. You have already decided to fly because there aren't any good alternatives, but you intend to compensate by saving a little elsewhere. Herein lies the second problem.

Squeezing people's purses will drive them away from "green" goods, which are frequently more expensive. The local organic produce starts to lose out to the cheaper, polluting alternatives. That "green" energy provider that is a bit more expensive than the others starts to look less attractive. In this scenario, the fuel tax could have the perverse effect of increasing the pollution rate.

Finally, consider what the government is likely to do with the new tax. Governments like to generate growth. Growth correlates very closely with CO2 pollution. Without some care, the tax could well be spent on growth activities and with a concomitant increase in pollution.

So what is the solution to these unintended consequences? The answer lies in better regulation. The Government ultimately needs to limit the overall level of pollution, capturing all its sources. Without this, otherwise well-meaning pollution initiatives are in danger of back-firing in a cloud of smoke and CO2.