Lot of attention, understandably, on the PM announcement this week on freezing fuel duty. Inevitably controversial. But it does raise the question of whether road transport is under or over taxed from a carbon pricing point of view (thread)
We @EnergySysCat are looking closely at carbon pricing. It is pretty clear that if you want to create energy markets that encourage low carbon innovation and identify cost-effective decarbonisation across different vectors, consistent carbon pricing would be a big help.
It is central to a whole systems approach.
As a personal aside, I used to think that if you just got carbon pricing right and got out of the way, that was basically job done. In those days, I listened too much to @Simon_Less policyexchange.org.uk/low-carbon-and…. I now think innovation policy and spending is much more important.
But that does not mean carbon pricing is no longer essential for creating the right market ecosystem, as @Dieter_Helm stressed in his Cost of Energy Review.
And, despite Treasury's various efforts to equalise carbon prices in recent years, we still have a wide variety of effective carbon prices across the economy, as this excellent infographic by @EnergySysCat's @danialsturge makes clear.... 
You can find the infographic here: es.catapult.org.uk/wp-content/upl…
Our work found that the effective range of taxation for road transport was £29-£190/tonne of carbon saved. Why the huge range?
Basically, it depends on whether you think fuel duty and VED are taxing congestion or carbon. If you think it is just carbon, the effective tax rate is £190/tonne (above BEIS central social cost of carbon of £80/tonne)...
... if you think fuel duty is largely about congestion, it is £29/tonne (undertaxed).
Economists would probably argue fuel duty is not a very good way of taxing congestion (road pricing/congestion charging would be much better), so some might argue a better approach would be to tax fuel at equivalent of £80/tonne or more and introduce road pricing separately.
So which is it, carbon or congestion? If you go back to the original Budget speeches, it is not clear. Norman Lamont in 1993, when introducing the fuel duty escalator AND hiking fuel duty by 10% (a different time, I think we can all agree), said:
"The overall impact will be to shift the tax burden from car buyers to car users; and to help both the environment and the industry." johnmajor.co.uk/page4282.html
Ken Clarke, when he took over as CHX and INCREASED the escalator to 5% said: "It is not good policy in these environmentally conscious days to keep road fuel costs so much cheaper than they used to be....
... In March, my predecessor announced that fuel duties would increase on average by at least 3 per cent. in real terms in future Budgets in order to restrain carbon dioxide emissions....
... I have now decided to strengthen the March commitment by increasing road fuel duties on average by at least 5 per cent. in real terms in future Budgets. This will complete Britain's strategy for meeting our Rio commitment....
... Others in this country, some others in this House and in Europe continue to canvas unrealistic blueprints for a new European Union-wide carbon tax, which would impose massive new burdens on British industry...
... Any critic of the Government's tax plans who claims also to support the international agreement to curb carbon dioxide emissions will be sailing dangerously near to hypocrisy."
WOW. The speech is extraordinary, not least for increasing VAT on energy bills from 5% to 20% (I think this had to be rapidly reversed after inevitable outcry). Different times. johnmajor.co.uk/page4283.html
So it appears that the environment and carbon dioxide were the original intention behind the fuel duty escalator, which suggests the current price is close to £190/tonne than £29.
We are doing much more work on this @EnergySysCat . This week we released a series of case studies examining the international experience of carbon pricing. es.catapult.org.uk/publications/r…
In short: having a target behind your carbon price is important (see Climate Change Act); you need some way of providing investor confidence; and carbon pricing on its own is not enough to achieve the innovation you need.
Next stage is to look at options for reform. Can you find a policy approach that works economically, encourages innovation and can walk the political tightrope? Simples. Get in touch with me or @Georgeday27 or @danialsturge if you would like to get involved.
