As the traffic crawled through the Mt Vic tunnel this morning, or when you turned on your radio and heard the latest reports on global warming, did you think about how you are helping to cause these problems? And if you did, did you then think you should help pay for a solution? I think you should, through a tax on petrol.
No doubt your first response to the idea of a tax will be “taxes are bad”, but why? As your actions are negatively affecting everyone in society you should pay compensation. With no tax, the price and quantity of petrol consumed represents the willingness of petrol companies to supply fuel and the willingness of consumers to buy. This market mechanism ignores social costs from the use of petrol, such as traffic congestion and pollution. Although New Zealand does have a petrol tax, it is not sufficient to cover the full social cost.
You might dispute the size of the social cost you have on society, but there are ways of measuring it. In terms of congestion, say that your arrival on the road at peak traffic time adds a modest second to the travel time of those around you. Using the average wage of a Wellington worker as a measure of a person’s value of time, a second is worth around 0.66 of a cent to an individual commuter. However, this cost applies to everyone following you in the traffic stream, about 1,000 people, implying a cost to society of $6.66 each time you hit the road. Add to this your car’s impact on the environment (about $1 per three litres of petrol consumed), road quality, the chance of causing an accident and noise pollution and the social cost of your driving habit seems high.
The primary cost of driving for an individual is the cost of fuel. So if the action of driving around is negatively affecting other people, the simplest way to make drivers pay for the damage they create is by increasing the cost of fuel. A higher cost of fuel makes drivers take into account the full cost of their driving on society, and creates a pool of money that can be used to improve public transport, build new and repair existing roads, or pay off the government’s liabilities under the Kyoto protocol.
You might complain that a tax doesn’t seem fair, as you can’t reduce fuel consumption or travel time since you have to go to work. However, there are two problems with this argument. Firstly, as there are alternatives to driving yourself to work every morning you can change your fuel consumption. If the cost of petrol became too over-bearing you might catch a bus or a train or even car-pool with people who work in the same area. In the short run (the time before everyone buys new fuel efficient cars) this behaviour will lead to a reduction in fuel consumption and congestion.
One further problem with calling a fuel tax unfair has to do with how we view what is unfair. A tax ideally increases the price of fuel to the true cost to society from its consumption. To me it seems perfectly fair to make someone pay the full cost of something they consume and get all the benefit from.
What sort of increase in petrol taxes would be required to ensure that people bear the full cost of their driving? Currently, taxes make up 49¢ of the price of each litre of petrol. However, 25¢ is used for road maintenance and some construction, implying that only 24¢ per litre is held to account for the other negative impacts of using your car. Of the remaining tax money, nearly a quarter goes to ACC to help cover the cost of accidents from driving, leaving just over 18¢ per litre to account for the environmental impact of driving and congestion. Assuming that the average trip uses six litres of fuel, the external cost of that trip per litre at peak traffic time will be $1.44, as compared to the 18¢ currently charged. By lifting petrol taxes by about $1 a litre, we will be forced to face the full cost that our driving habit has on society.
Many people oppose a tax on petrol because they do not believe that driving to work negatively affects anyone else, but it does. Paying for the damage we cause when driving is both fair and efficient. Think about it on the slow grind home tonight, I’m sure the idea will grow on you.
Please contact Matthew Nolan for further information.
This article published on Jul 09, 2007.