The respect agenda, and the price of fuel

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The suggestion of the UK Economic Minister that the Assembly should use part of its devolved funding to address a problem in a non-devolved area of policy (fuel duty) was not the first example of a (deliberate?) failure to understand the devolution settlement, but it is no less outrageous for that.  It was rightly given short shrift by a spokesperson for Elin Jones.

Even if the devolved government had the power to adjust fuel prices in rural areas and/ or give grants to help people pay for fuel, it has not been funded for such actions.  And, in any event, I’m still far from convinced that it’s the right answer; it seems to be treating the symptom rather than the underlying problem.  Time will tell whether the limited experiment being conducted by the UK Government will work or not.  It isn’t a fuel stabiliser, of course – it’s simply a cut in duty in certain areas.

The problem of rising and variable fuel prices remains a difficult one.  It makes budgeting difficult for both consumers and businesses, so I can well understand why parties are keen to propose solutions to it.  That doesn’t mean that the solutions being proposed are workable, though.

Inevitably, the failure of the Tories to implement their election promise on a fuel stabiliser has led to criticism, and criticism for breaking a promise is entirely deserved, even if I have serious doubts about the wisdom or practicality of the promise in the first place. 

Actually, it seems that Cameron may not have fully understood his own party’s policy on the issue, and ended up presenting it in a wholly unintended way, raising unrealistic expectations in the process.  One of the original proposers of the policy has set out here his own dismay about the presentation – it was never intended either as a means to assist household budgets, nor even as a means of eliminating all fuel price variability.

It was intended, rather, as part of a green approach to taxation, and it is from that point of view that its original Conservative proposers would wish it to be judged.  In short, it was as much to do with keeping the prices up in order to incentivise greener transport options as it was to do with keeping the price down in the face of speculative pressures.

There seem to be few in the green lobby who would agree with the approach, though.  The Green Alliance’s tax expert came out very clearly against the idea this week.  As the report notes “The clear upward long-term trend in crude oil prices would mean that any fuel price stabiliser would simply allow oil producers and petrol retailers to hike prices at the pump and increase their profits, in the knowledge that the taxpayer would be left to fund the difference”. 

It’s a view which echoes my own concern that calling for the stabilisation of prices by adjusting tax on a commodity which is itself subject to an inexorable long term increase in prices amounts, in reality, to little more than a call for a tax cut.  There’s nothing wrong with calling for a tax cut, of course – as long as those making the call are prepared to say which other taxes should go up, or which expenditure should be cut.

International experience seems to be limited, to say the least.  Some countries (e.g. the US) allow local legislatures to set at least part of the rate of fuel tax, and devolving this element of taxation would enable Wales to set a different rate, of course.  That might help our more rural communities, faced with higher pump prices and fewer alternatives to cars; but it would still leave a hole in the government’s finances which would need to be plugged somehow.

I’m only aware of one attempt to use variable fuel tax as a mechanism.  Between 2000 and 2002, the French tried to use fuel tax in this way – the ‘TIPP flottante’.  It was abandoned partly as a result of a change of government, but mostly for precisely the reason that I doubt its efficacy – it became clear that, against a background of rising fuel prices, the total tax take from fuel duty was on a one-way trajectory, to the financial detriment of the treasury.  There have been regular calls for the system to be reintroduced, but it seems unlikely to happen any time soon.

The ‘TIPP flottante’ was one of a number of possible mechanisms considered by a team at Turin University who reported “Our simulations suggest that “flexible” taxation mechanisms could not be a proper policy for stabilizing price levels in fuel markets”.  (Full report available here).

It was their view that more constructive action would involve looking at the market structure of the industry, and I’d agree with that. 

It also strikes me, as I’ve mentioned before, that controlling the speculators and gamblers who are partly responsible for the huge variations in prices might not be a bad idea either.  It certainly has to be better than allowing them to set the level of taxes being collected by governments, which is a potential, if inadvertent, side effect of varying fuel duty with the price of oil.  They’re the last people that I’d put in charge of government fiscal policy!

Most important of all, however, is that we need a plan to escape from our dependency on oil, and move to renewables as rapidly as possible.