Cutting fuel taxes is not the long term answer

Despite the recent cut in duty applied for petrol, fuel prices have continued to rise to record levels at the pumps. This will increase the prevalence of  Transport Poverty, particularly in areas where people have to commute to jobs, and place further pressures upon people already suffering from a stagnant economy and rising unemployment. People who rely on public transport will also see the effects as bus and train companies pass the prices onto their passengers, and buses and trains become ever more crowded. Such high prices are becoming an election issue, and the issue of fuel duty is one that will not go away.

But the government should resist taking the easy option of substantially cutting fuel duty. The fact is, although taxation is a significant part of the cost of fuel, the price has been rising due to factors beyond its control. The recent 1p cut has already been wiped out by continued rises in prices.  One of the major facts we are going to have to deal with is that oil is a scarce resource running out. Whilst peak oil has been seen as a fringe interest in the past, it is going to be a central concept in the future. Depending on which side you believe, oil production may have already peaked, and the total viable reserves currently known could run out within a few decades.

Traditionally, classical economists have regarded peak oil as a problem to be solved by the market. As oil becomes scarcer, its price will rise and this will create an incentive for the development of alternatives and substitutes for oil, and for further exploration to find new reserves. However such a view represents something of a gamble, and ignores the damage to living standards the process of waiting for replacements to arrive will do. It is also not an approach that would make the transition a socially just one.

But it does demonstrate why government needs to resist cutting fuel duty. Even if the tax on petrol were to be totally removed, it would merely be a one-off boost that would provide a few years respite at most. It would also stall the very forces that free market enthusiasts claim will solve the issue. Furthermore, removing a pigovian tax for short term political gain would make tackling the wider environmental problems we face far more difficult.

But we cannot leave such an important issue to market forces alone. We need to begin planning for the post peak oil world, and starting to orientate our economy away from the assumption that people own cars and can drive. Planning has for too long centred on the notion that people will spend hours commuting to places of work, will want to drive to massive out of town shopping complexes, and are able to access services located miles away. Instead we need to recognise the importance of good public transport, traditional town centres, and bringing employment opportunities to where people live.