1. Quiz 1: Road Transport Case Study Evidence A – Fuel taxation, international experience 1. Why should ‘reducing traffic’ be an aim of government, separate from the aim of ‘reducing pollution’? There is no reason why it should, except for the fact that traffic causes congestion, which imposes an external cost on other motorists. 2. What is the argument behind the assertion that not taxing jet fuel amounts to a ‘hidden subsidy’? Taxes distort markets the least if they are evenly applied across the widest possible range of goods. In particular, if the government wishes to reduce CO2 emissions, then the optimal tax approach is to charge a consistent carbon tax across all sectors of the economy.

2. Evidence A 2 of 4 3. How could you justify the lower rates of fuel duty applied to ‘agricultural and construction site vehicles’? The external costs of congestion are, in the UK, much greater than the external costs of that proportion of CO2 emissions which are created by traffic. Off-road vehicles cause no congestion, and so properly pay less fuel duty. 4. The IFS estimates short-term PED for petrol at - 0.25; and – 0.6 in the long-term. What implications does this have for raising revenue from fuel taxes? Even in the long-term, fuel duty increases will generate significant amounts of additional revenue for the government.

3. Evidence A 3 of 4 5. If the short-term PED for fuel really is – 0.25, what should have been the resultant fall in sales as prices rose from 100 pence per litre to 130 pence per litre? PED = % change in demand / % change in price - 0.25 = % change in demand / 30% So % change in demand = - 7.5% 6. What explanations might there be if, during a recession, no reduction in fuel sales took place? Partly, this will reflect inflation: the real price of fuel will have increased by less. And the actual figure of PED for fuel might be even less elastic than – 0.25.

4. Evidence A 4 of 4 7. Should we deduce from the fact that drivers will fill up in the cheapest places that all countries should charge the same fuel duty? No: Britain’s island status limits the possibility of UK drivers going overseas to fill up cheaply elsewhere. However, there is a case for fuel duty in Northern Ireland being nearer the rate applied in the Irish Republic, since many motorists cross the land border to fill up more cheaply in the Republic.

5. Evidence H Uptown Oil 34. What is the difference between biodiesel and fossil diesel? Chemically, they are similar and can be mixed together in the same tank – indeed ordinary diesel has by law to have a minimum of 2.5% biodiesel content. Their difference lies in their source. Fossil diesel comes from non-renewable deposits of crude oil, whereas biodiesel, like all biofuels, comes from oil- bearing plants such as rapeseed oil, soy and palm oil.

6. Evidence H 2 of 3 35. Is biodiesel more environmentally friendly than fossil diesel? Only if the oil-bearing plant does not replace existing vegetation cover. Biodiesel and fossil diesel both emit the same amount of CO2. Biodiesel only has an advantage if additional CO2 was taken out of the atmosphere in the first place. 36. Is recycled biodiesel more environmentally friendly than ordinary biodiesel? The impact on CO2 emissions is the same. But it is an efficient way of reducing overall waste.

7. Evidence H 3 of 3 37. Could the use of recycled cooking oil make a substantial contribution to reducing CO2 emissions? No: the potential amount of fuel is far too small. However, even minor contributions (if there really is a contribution) are welcome. 38. Given that most biofuel plantations simply replace other crops, should they still attract a discounted rate of fuel duty? No: if the impact on both CO2 emissions and the wider environment is the same, then there is no reason why it should attract a lower rate of duty.

8. Evidence I CO2 produced per unit of energy Note: we cannot take these figures at face value. The first five (grey-shaded) bars record the CO2 needed to convert the oil-bearing plant into fuel. The actual CO2 emissions of the fuel are not recorded (in contrast to the fossil fuels), as they are assumed to be balanced by CO2 taken out of the air (i.e. by photosynthesis) when the plants were grown. The figures are based on the January 2008 DfT analysis, which was overturned six months later by the Gallagher Review. Its conclusion was that most oil-bearing plants replace other crops, so there is no additional ‘carbon capture’ when they are grown.

9. Evidence I 2 of 2 Cont’d] It is therefore likely that biofuels have no advantage over fossil fuels in terms of CO2 emissions – which explains why the tax concessions of biofuels are being withdrawn. 39. Uptown oil describes itself as a “commercial environmentalist”. How, then, should we view its research? With some caution. A for-profit company selling recycled cooking oil will naturally put its environmental benefits in the best possible light.