A Practical Example

Virtually al governments charge fuel taxes. Many have increasingly been using this as a sort of eco-tax. I believe, however, that this tax’s potential has been underused. It is a stick, but there is no carrot attached. And, as everyone knows, you catch more flies with honey than with vinegar.

Take road transport for example and this is how the scheme would work. This proposal tries to change this.

Let us imagine that studies have shown that every adult in the country travels, on average, 30000 Km in a year. With this information in hand the government would move to defining how much fuel an average citizen would require for these 30000 Km. Since the objective is not to stay the same but to decrease emissions, the government would calculate the fuel consumption using a relatively efficient car. Not the most efficient in the market, but something better than average. One suggestion could be to use the average consumption of B-type cars for example, but the appropriate criteria would always be a technical and political decision. In Europe, we could look to the 120 mg emission standard and work from there to define the average yearly consumption required.

For simplicity’s sake let’s say that would mean a consumption of 5 litres per 100 Km.

We could then say that on average, ceteris paribus, each person would require 1500 litres of fuel per year.

With this done, the government would define a percentage discount of the tax paid on fuel. Again, for simplicity’s sake, we could assume a discount of 10% of total tax.

All adult citizens would be able to buy fuel at this reduced rate up to the limit established, which I suggest should be close to, but below average consumption. This should minimise public resistance but still create a positive environmental effect. In the example above, people would have an allowance of 1500 litres of fuel that they would be able to buy at a 10% discount of taxes. Past this level they would still be able to buy fuel (the objective is not to ration energy after all), but they would need to buy it at a surcharge, for example 50%.

The system would then allow citizens to sell their allowances on to others, with the price fluctuating freely on the market; or to the State at a Guaranteed Buyback Price. As such, the market would establish an allowance price fluctuating between this buyback price and the surcharge value (which increases with the market price of fuel).

At the end of each year, the State would automatically buyback any unused allowances anyway, and would credit the bank accounts of their holders. It would be important to do so instead of allowing citizens to accumulate allowances as this would risk eliminating decreases in emissions one year by higher emissions in subsequent years.

In order to facilitate the functioning of the market, it would be interesting to allow for exchange brokers, a bit like those that exists for currencies. The easiest would be to allow fuel stations to perform this task. Whether to allow anyone else who wished to be registered as a broker to also do so would be a purely political decision. Allowing it would create another area for the financial market, but it would also risk speculation, which in turn might damage public perception of the system.

As with currencies, these ‘allowance exchange offices’ would be able to have a spread between buy and sell prices as way of compensation for their part in facilitating the market.