England's "expensive gas" saves money
The UK gas tax escalator
In the 1980s, the British had some of the lowest gas prices in Europe. By the early 1990s, however, the Conservative government of Prime Minister John Major grew concerned that low gas prices would hurt their nation in the long run. They wanted to reduce their economic risks from oil dependency and to reduce their carbon emissions. Sound familiar?
To achieve these goals, they implemented the “Fuel Duty Escalator” policy.
This raised gas taxes three per cent faster than inflation. A couple years later, they increased the rate to five per cent above inflation, and still later to six per cent. Within a decade, gas taxes in the UK had more than doubled and UK gas prices had risen to near the high end for Europe. The official "Fuel Duty Escalator" policy ended more than a decade ago, but the government has increased gas taxes another 60 per cent since then. Today, UK gas taxes stand at $1.27 per litre. In BC, ours are three times less at just $0.44 per litre.
At first glance, it can seem that such high gas taxes are the government's attempt to grab money from drivers’ wallets. But it hasn’t worked out that way.
While the gas tax is three times higher per litre, the British only buy a third as much gas. As a result, the total gas tax collected per citizen by the governments in both Britain and in BC is roughly the same.
In 2000, a G8 report praised the UK’s Fuel Duty Escalator as a “best practice” for addressing climate change:
The fuel duty escalator - an annual above inflation increase in the duties on road fuels which the UK Government has been committed to since 1993 - is primarily aimed at reducing CO2 emissions from road transport and tackle climate change.
As such, the escalator has been the most important fiscal measure introduced by the UK Government to reduce greenhouse gas emissions.
It also contributes to other transport and environment objectives, such as reducing traffic growth and congestion, improving air quality, conserving finite natural resources, and internalising transport externalities.
A chart from that report shows the dramatic effect on gas prices:
Convergence and our BC Carbon Tax
Our BC Carbon Tax was designed by Premier Gordon Campbell to be a similar kind of fuel tax “escalator”. The big difference has been that our annual fuel tax increases have been many times smaller. Instead of three to six per cent above inflation, our increases have been roughly one per cent – which has been less than inflation. We increase our BC Carbon Tax by $5 per year which adds one penny more per year to gas prices. The next chart shows how little has happened compared to either the rest of Canada or Britain. The speed of our current escalator won’t close $300 carbon tax gap with the British, French or Germans in any of our lifetimes.
Christy Clark hits the stop button
Our current BC Government led by Premier Christy Clark seems very unlikely to increase the speed of our carbon tax escalator. In fact, her government is talking about halting future increases in the BC Carbon Tax and shutting down the escalator. They argue that other economies haven’t introduced official “carbon taxes” and so BC’s economy can’t afford to have our official carbon tax add a penny next year.
Of course, as this article has argued, we don’t have to use official carbon taxes to reap the benefits of carbon pricing. Anything that increases the price of gasoline will work.
Even rising oil prices increase the cost of using carbon fuels made from oil. Oil prices have been both spiking and collapsing in sporadic and unpredictable ways in recent years. Big price spikes have happened faster than our economy can adapt efficiently and so have done economic damage. Big plunges, like in 2008, can send the message that carbon fuels will be cheaper going forward. In fact, SUV sales picked up again as prices plunged.
This chaotic whipsawing of oil prices that is outside our control is yet another strong argument for higher gas taxes. For example, because the British, French and Germans have higher gas taxes they buy less oil. When oil prices spike, they pay less in total. In addition, their higher gas taxes mean the price of oil makes up a smaller percentage of their gas prices. So increases in oil prices have smaller percentage impacts on their transportation spending.
Economists say that the more predictable a price increase is and the farther in advance people know about it then the easier and less expensive it is to adapt to it. Relying on oil price chaos to serve as your de facto carbon tax escalator is a risky game. But that seems to be the “plan” going forward in BC.
Transit funding escalator?
Another possible tool for converging on UK carbon pricing could be a transit tax escalator. There seems to be growing support for using carbon taxes to fund more low-carbon transportation options. For example, recently Metro Vancouver mayors voted to add two cents per litre as a transit tax to help fund public transit. This is equivalent to a one time increase of $10 in unofficial carbon taxes on gasoline. If this became a two cent per year “escalator” it would quickly surpass the cumulative effect of our BC Carbon Tax. Still, even as a one time increase, it has apparently outraged many judging from the reactions I saw in various media.
Like the British in the 1990s, our oversized dependence on twitchy oil prices and our oversized carbon emissions leave our economy and our mobility at risk to unpredictable forces beyond our control. We can’t control oil prices. We can’t control how rapidly climate damages will unfold and thereby force CO2 cuts far larger than we are ready for now.
Unlike the British, we have yet to summon the courage or the political leadership to protect ourselves, at least, to the degree they have.
As the Brits would say, we have so far been penny wise and pound foolish.
Note: Often when Canada's oversized carbon transportation footprint is discussed some people make the comment that this is primarily because we are such a big nation and are more spread out. The argument is that Europe is more densely populated and therefore has a naturally lower transportation footprint. This isn't what the data shows, however. And that will be the subject of my next article. Stay tuned.