Saturday, November 04, 2006

Pigouvian Taxes - Flavour of the Month - Saviour of Humanity (i.e. The Second Coming)

British news has been full of the Stern Report all week. Stern is an previous chief of the World Bank, and all round respected fellow.

Based on the latest scientific evidence, his report says that if we pump out greenhouse gases at the same high rates over the next few years, by 2050 world income will reduce by 20%.

Tony Blair has said this is the most important report to fall onto his desk since he became Prime Minister (and let's face it, it's a distraction for all of us from Iraq!).

Britain will apparently bring in Green taxes to reduce pollution, but won't be a net increase in the tax burden to the public all in all.

This is actually a neat idea from an economist called Pigou. Pigou noticed that production often causes costs to the environment which the company themselves don't have to pay. Obviously the users of the environment generally have to pay the cost sooner or later in some form.

Pigou's idea was to tax the sale of products depending on how polluting they were, in effect the government would recoup the cost to the environment of the product. Consumer's would directly see the high cost of highly polluting products, which would give them an incentive to seek out less polluting products and firms to pollute less.

What's another big plus point, is the taxes gained from polluters, could be used to lower taxes which economists generally find distorting -- e.g. income tax, which makes employing people expensive to employ and helps cause unemployment.

Pigovian taxes make sense, but as was rightly pointed out in the British press, if Britain didn't produce any pollution any more over night, it'd take China 5 years to fill the pollution gap left by all of Britain.

My idea is how about putting Pigouvian taxes on imports. If the EU started taxing imports based on the projected costs to the EU from green house gases, there would be huge pressure on China, India and the US to knuckle down and deal with pollution more effectively. (Think how expensive palm oil imports from Indonesia would become!).

I don't like barriers to trade, but I reckon consumer power will be the difference. In effect the British public complain about the Chinese for being big polluters but are actually fueling profligate polluting rather than dampening it. If they could see the real price of the goods they buy from China, they'd have to put their money where their mouths are.

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