One of the reasons climate change is described as the world’s biggest market failure is because the cost of the emissions do not always fall on those creating them, but instead on future generations or people in developing countries. That is beginning to change as these impacts start to be felt in the rich world too, but these uncosted externalities have undermined the effectiveness of a market system.
Calling climate change a market failure doesn’t have to be a criticism of markets, it’s just what happens when the key feedback loops for a functioning market are absent. That’s why many economists have backed a carbon tax, to internalise the cost of fossil fuels, thus removing the externality and allowing the power of the market to drive change and reduce emissions.
That’s also why it is good news to hear that Chancellor Rishi Sunak is considering an end to the tax break on red diesel and the decade-long fuel duty freeze. These market-distorting policies have passed on the cost of vehicle pollution, blunting the incentive for companies to innovate and produce less polluting alternatives.
The cost of this pollution has effectively been externalised into the atmosphere, contributing to climate change, and also into the lungs of the British public adding further costs to services and the NHS. A study by Oxford University showed the health cost of pollution from cars and vans in the UK to be £6 billion a year. A Greener Journey’s report from 2018 found that as a direct result of the fuel freeze, traffic has grown by 4%, worsening both congestion and pollution.
The freeze itself has also cost the Treasury £9 billion a year according to the Institute for Fiscal Studies, vital funds which could be used to invest in cleaner public transport systems and supporting other public services as part of the Government’s levelling up agenda.
Critics will say that ending the freeze is counter to this, however the evidence suggests otherwise. Transport researcher Giulio Mattioli has pointed out that people in the poorest quintile drive less than half as much as those in the richest. There is a misguided perception that everyone drives. Nearly a quarter (24%) of households in England don’t even own a car and for the poorest quintile this figure jumps to nearly half (46%).
That means those on the lowest incomes don’t see much benefit from the fuel duty freeze. If anything, it’s a subsidy for better-off motorists, with negative health consequences for the poor. After all, air pollution disproportionately impacts poorer communities whose residents can’t afford to live in leafy suburbs on the edge of the green belt. Tellingly, the thinktank Onward, which identified ‘Workington Man’ as the crucial northern Red Wall voter for the Conservatives to target, has called for the fuel duty escalator to be reintroduced in its recent report on the UK’s net-zero plans.
Even the famous school run is conducted less in cars than some people would have you think. In 2014 as many primary school children walked to school (46%) as were driven (46%). For secondary school, the number being driven halved to 23%, behind those that used the bus (29%) and those that walked (38%). With car ownership in decline it’s likely these car use figures have dropped further since then.
The original justification for the fuel duty freeze has long gone. A decade ago fuel prices were much higher through a combination of tax rises and fuel costs. That’s no longer the case, in fact Saudi oil production is pushing down prices to record lows. Since the fuel duty freeze, concerns about climate change and pollution have jumped. A study by Cardiff University last week showed that when asked the most important issue facing the UK in the next 20 years, respondents put a combination of climate change (23%) and pollution (6%) above Brexit (25%) or the economy (10%).
To really help level up the UK, the Government should use the income from fuel duty to invest in public transport and other services that will more directly benefit the poorest communities.
Ending the fuel duty freeze is sensible, evidence-based policy that will help improve markets, drive innovation, improve air quality and help decarbonise our transport sector which is now the UK’s biggest source of carbon emissions.
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