Today the Treasury published its analysis of the dynamic effects of fuel duty reductions. The headline message of its analysis is that ‘these reductions in duty will increase GDP by between 0.3 and 0.5 per cent in the long-term’. Apart from a single short paragraph (section 3.25), the report does not mention pollution. It does not mention CO2 emissions at all. It also doesn’t mention how much extra fuel will be consumed as a result of the fuel duty reductions. But it does give just enough information for a rough estimate of the extra climate impacts from the fuel duty reductions to be made. Using the Treasury’s own assumptions, it appears that the extra climate impacts will be about £300 million per year.
Here’s how I made that estimate:
The fuel duty reductions mean that instead of 68 pence per litre, the duty will be 55 pence per litre in 2014-15 (chart 2.1). This drop of 13 pence per litre is about 10% of the price at the pump.
The Treasury’s price elasticity of demand for fuel is estimated to be -0.35 rising to -0.43 after 20 years(section 3.22). This elasticity reflects the change in fuel demand after all the second round macroeconomic indirect effects have been captured.
So a 10% reduction in price will lead to a 3.5 to 4.3% increase in consumption. I used the smaller 3.5% figure to be conservative.
Current consumption of fuel for road transport is about 35 million tonnes per year. A 3.5% increase is an extra 1.2 million tonnes of fuel use per year.
Each tonne of petrol or diesel emits about 3 tonnes of CO2 when it is burnt. So the extra fuel use will generate about 3.6 million tonnes of extra CO2 per year.
The climate impact from one extra tonne of CO2 emissions is called the social cost of CO2 (SCCO2). The SCCO2 is very uncertain, but the mean estimate from the PAGE09 model is about £80 per tonne in today’s prices, giving the £300 million per year of extra impacts from the fuel duty reductions .
Of course, this is all rough and ready. But its the best that can be done using the information that the Treasury has chosen to publish. I’m sure the Treasury must have better estimates. Perhaps it should publish them.