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?