Tuesday, 10 June 2008

The Oil War

Very often, environmental policy is seen as being in direct conflict with economic growth. For instance, consider the EU-wide policy of placing high taxes on transport fuel. This issue has come to a head recently, as protesters gear up for a major battle with the EU governments. It is clear, however, that the current troubles have their origin not in the taxes placed on fuels, but in the fact that oil is running out, and global demand has finally caught up with supply.

It would be very easy at this point to come to the conclusion that the taxes on fuel are inflationary, leading to higher costs of goods throughout the economy, and therefore lower real economic growth. What this argument fails to take into consideration is adaptation. Because the EU (unlike the US) has pursued a strategy of placing taxes on fuel, we now use less oil and are therefore in a better position to weather the coming storm than the US, which has had no incentive to increase efficiency.

Thus, in the broad sense, the taxes on fuel have forced the EU consumers and companies to prepare to some extent for a future in which oil is no longer cheap. The US however, has had no such policies. Today there is still virtually no tax on oil in the US, and so, despite transport fuel still being around half the price there that it is in Britain, the US economy is ill-prepared to cope with the change. In some parts of the US, people are now spending more than 13 percent of their income on transport fuel (source: International Herald Tribune, 10 June 2008).

This situation, which is hardly mirrored in any section of European society, has arisen because in the absence of fuel taxes, there has been no incentive to develop public transport, and no incentive to car owners to consider fuel efficiency. As a result, people in rural areas often have long commutes to work, and their cars are often so-called "trucks", rarely doing much better than 20 miles to the gallon. In this situation, they have been left exposed to the price of fuel, because the changes that need to be made are long-term, and can only be made with capital investment. Someone who has just had 7% of their total income removed is unlikely to be able to buy a new car.

But there is a wider lesson in all this. Our economic prosperity is currently based on excessive consumption of non-renewable resources. If we do not use this prosperity to pay for the necessary changes to economic structures today, we will find ourselves poorer and less able to adapt in the future.

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