Fuel tax is good for the reasons why taxes in general are bad – 02/28/2023 – Bernardo Guimarães

In March there will be strawberry shortages. We will not be able to buy the same amount that we bought in September.

We’ll do it smoothly, as always. It’s like this every year, because of climate variations.

Interestingly, we have never come across campaigns to raise awareness about strawberry shortages in March.

The problem resolves itself because strawberries are much more expensive in March.

From the consumer’s point of view, we buy less strawberries now because strawberries are more expensive. But strawberries are more expensive because there are fewer strawberries.

Price is not to blame for our low consumption. The price is the messenger.

Fluctuations in the costs of producing (or importing) each good are reflected in prices. Is it more expensive to sell fresh strawberries in March? We have less for sale, at higher prices. Changes in demand also affect prices, at least until supply adjusts.

Without fuss, the price system makes us consider the costs of production in our consumption decisions; and makes producers consider our demands in production decisions.

But the price system doesn’t capture everything.

The Earth has a scarce capacity to assimilate pollution without it harming our life on the planet. Children learn about it at school. There are numerous awareness campaigns.

However, this scarcity problem persists. Everything can change, but for change to happen it seems that raising awareness and educating is not enough.

The crucial difference between the pollution case and the strawberry case is that the costs of producing (or importing) strawberries for consumption in March fall on those who produce and sell them, but the pollution resulting from burning fuels falls on everyone. Thus, an important part of the costs of burning fuel are not borne by those who consume or produce.

The cost of pollution is not captured by the pricing system.

The solution was formalized by Arthur Pigou some 100 years ago. We must include costs that do not fall directly on the producer or consumer in the prices. This is called tax.

Taxes discourage the activities on which they are levied. Cosmetic taxes make it more expensive and therefore less attractive to buy perfume. Taxes on labor income encourage informality. In general, this is a problem.

However, in the case of fossil fuels, we do want to discourage their use.

The logic that makes this a good tax is the same as that that makes liberal economists dislike taxes in general. Taxes typically increase the discrepancy between the price and the cost of producing. This tax does the opposite, as it includes a social cost in the price and thus makes the price message more correct.

Yes, this tax makes products that use fuel the most expensive. But that’s exactly what we want. If the price system reflects these environmental costs, companies and people will gradually migrate to less polluting alternatives. Human ingenuity will be stimulated to develop these alternatives.

Yes, the richest, in general, will continue to leave with the car – but they will pay more taxes.

Ending the exemption would be a great measure even if we weren’t so worried about the public deficit – in which case, we could reduce other taxes. Gradually, we should tax fossil fuels more.

If the environmental cost of polluting were fully incorporated into prices through taxation, whoever paid those taxes would be compensating society for that cost. We would no longer rely on awareness campaigns. Goodbye guilt. Welcome to the fundraiser.

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