The tax should equal the cost of the pollution and only that cost

There are excellent reasons for varied policies to deal with pollution and the damage it causes. Like, for example, the damage caused by pollution being an excellent justification of plans to deal with it. However, that does not mean that all plans to deal with pollution are justified by reference to the damage it causes. Which is the problem with the real world application of the entirely true and proper general contention. My own suspicion would be that Sadiq Khan has just fallen foul of this with his idea of a pollution control zone in London:

Sadiq Khan has unveiled details of his plan to introduce an “ultra-low emission zone” covering a huge swath of London in the next few years.

The scheme, which will see the most polluting vehicles charged for entering the centre of the capital from April next year, will be extended to the North Circular and South Circular roads in 2021.

The basic economics here is just fine – the theory of it all that is. The general rule is that consenting adults get to do as consenting adults. The limitation of this is when there is harm done to some third party. So, sure, people get to drive their cars. But when their doing so leads to damage to people not in the car being driven there’s a case for something or other to be done:

Car and van drivers across a huge swathe of London will face daily charges of £12.50 under ultra-low emission zone expansion plans revealed today.

Mayor Sadiq Khan confirmed that ULEZ – being introduced in Central London next year – will stretch to cover an area surrounded by the North and South Circular roads from October 2021.

The thing we do is impose a Pigou Tax upon the activities causing the third party damage. This is the justification for the Congestion Zone itself for example, something strongly backed by the Adam Smith Institute over the years. The basic economics of that comes from Sir Alan Walters, who was, you might recall, St Maggie’s favourite economist. Pigou, the founder of the very idea of the tax, was the bloke who introduced Keynes to economics. There’s significant heavyweight agreement about the economics of this sort of solution.

The zone will operate on top of the congestion charge, and will be in effect throughout the year, 24 hours a day.

It is estimated that 100,000 cars, 35,000 vans and 3,000 lorries will be affected by the expanded zone and new standards every day.

However, it’s necessary to understand the economics here. As with the Carbon Tax, another implementation of the same basic idea, we are not raising funds to clear up the problem. Nor are we insisting that there should be no such pollution. We are, instead, stating that we want to have the right amount of such pollution.

The “right amount” being determined by our desire to maximise human utility. This means that where that private action by the consenting adult(s) has more value, creates more utility, than the third party damage then we want the activity to continue, because that makes us in aggregate richer. More value is being created by it happening than destroyed. Equally, where the damage is more than the value we don’t want it to happen.

So, we first find out what is the damage from the activity. This is where Stern’s $80 per tonne CO2-e for the carbon tax comes from. This is the cost of the emission of another tonne. We then slap a tax of that cost upon the activity.

Note again, this isn’t about compensation, nor stopping it. It’s about having the right amount of it. We have now changed the price system. Everyone doing that thing is facing the full cost of their doing it. They’ll only do it if doing so produces more value than the cost they face. Because that’s how humans work in the face of prices. They will also stop doing it where the value to them is lower than the price they face, it now including the costs to others.

Really, do note something important here. We are not talking about compensating those who suffer the pollution. Sure, the revenue has to go somewhere so why not lower other taxes but compensation isn’t the point at all. We want to change prices so that all costs are included in them.

So, what’s the cost of the pollution, slap on a tax of that amount and bugger off home again, that’s the solution:

Mr Khan gave the go-ahead for the expanded zone despite winning only 56 per cent support in a city-wide consultation, and imposed the same basic rate, despite suggestions that a lower levy would apply in the suburbs.

And this is where we meet the politics of such charges. For politics doesn’t really allow for good economics, sadly. It’s pretty obvious that the costs out in the suburbs will be lower than in the centre. But the price or tax isn’t being varied. We’ve also, so far at least, absolutely no evidence at all that this is the correct cost. For example, we’ve recently been told that a diesel in London costs £8,000 in pollution over its life. Which is a great deal less than a £4,500 or so a year tax for being on the road, isn’t it?

That is, while Pigou Taxes are somewhere between fine and perfect in theory political reality rather makes them fail. Simply because no one does, as with Sadiq Khan here, implement them with the required subtleties.

Oh, and there’s also that other little problem. Given the tax paid on fuel already, who is to say that anyone is underpaying for the pollution they cause in the first place?

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  1. Since the concentration of all atmospheric pollutants (except ammonia which is an agricultural by-product) has dropped to 40% of the 1970 level (or lower) and all continue on a downward trend, I would guess that everything that needs doing is being done already. The more so since the effect of any pollutant reduces to zero before the concentration reduces to zero.

  2. The problem, as always, with Pigou taxes, is that politicians, Don’t-Kill-The-Job rule-writers, and Green gadflies are allowed to define the existence of the problem, the “social cost” of the problem, and the tax to reduce the problem; and once entrenched, to raise the tax beyond all relation to the problem, as Seattle’s head tax against Amazon (which did not cause “homelessness”) was to go directly to subsidies to the “homeless” (which did, though regulating ultra-small “dormitories” out of existence was also a cause). Mayor Khan is not in his office to clean the air but to raise more money for his re-election army.

    Meanwhile dilute liberals like Tim get to sit at the table with the grown-ups and pat themselves on the back that they have gotten lefties to use economics (which means, have gotten lefties to use numerals), fighting on a battleground defined by our adversaries.

  3. Yes, Tim, but anyone who lives in London knows you’re Adam Smith recommended LCZ Pigou Tax was a complete load of bollox. The traffic problems caused by London traffic mean that no-one drives in Central London if they can’t possibly avoid it. Hence almost all the traffic in Central London is catering to the needs of the businesses & residents of Central London & the vast majority of the tax paying gets passed onto them through the prices of the goods & services they buy. Essentially, it’s as if you’re sticking a Pigou Tax on air. You’re not going to get any reduction in breathing.
    I was driving into Central London, daily, when the western extension came in. Servicing one of those needs. The only difference I noticed in traffic, before & after, was the average value of the cars rose a bit. At a guess people who’d used cars as part of their job being priced out. And the capacity removed by the wealthy realising it was possible to use their Chelsea tractors & Porches more frequently.
    Not quite your intention, I’d imagine

  4. Also the problem this scheme is supposed to be solving simply isn’t there. I’ve lived in Central London for a large portion of my life. The latest bit off of Queensway. It’d be hard to get more central nor solid with traffic. The air’s cleaner than it’s ever been. It’s certainly nothing like the London air produced the smogs I survived as a kid. You could cut that up & stack it in blocks.
    I suspect the whole things made up as a revenue raising wheeze. Aided by ever more air sampling with ever more sensitive kit. Of course London’s smelly. It’s a city FFS! What do you expect it to smell like. The Downs? It’d be a lot less smelly if there were less curry houses & kebab shops. If they washed the streets once in a while, like they do in every other major city. Or even swept up the litter. Mostly it’s filthy. How much of the particulates they’re so concerned about is just a small amount being constantly recycled as the traffic churns it up?

  5. They always wheel out pictures of kids playing in Central London. But the only reason the kids are there is because their parents are subsidised to live there. If they lived somewhere more suitable, their lungs would improve by a corresponding amount. And we wouldn’t have to subsidise all the extra services for those kids – teachers who can’t afford to live in London either. Grrr!

  6. It is a great curiosity in our advanced societies that nothing ever gets any better no matter how much is done to alleviate it, only worse, and therefore requiring ever more ‘something’ to be done, usually meaning we must deprive ourselves of the things that most benefit and please us.

    There is something familiar about this, religious zealotry. It involves self-denial to mortify the flesh and preserve our immortal soul for its life in some future Paradise, and in keeping with its religious essence requires a flow of money from sinner to zealot… to fund the worthy cause and relieve the zealot of doing any work whilst he/she goes about their Father’s business.

    Despite all: poverty is worse; air quality worse; diet worse, health worse, boozing worse, and so on.

    Rationally then we should stop doing whatever it is we have been doing since at best it has not improved things and at worst has made everything much more dire: to carry on with more of the same would not be sane.

    We could perhaps have one of those periodic purges which encourages the zealots to lie low, at least for a while.

    • Something got better once: America’s dependence on Arabian crude oil. But there remains a requirement for “ever more ‘something’ to be done,” in this case, the Byzantine bureaucracy that assigns a serial number to every gallon of gasoline proving it has been properly diluted by ethanol. (Corn farmers in early-voting Iowa retain a stranglehold over Presidential politics and demand a phony market for their product.) The stated problem has solved itself but the most that even a reform President can achieve is a tweak to the rules proving you have done your duty if the dilute gasoline is shipped abroad.