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Taxing traffic

22 July 2014

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Paul Burke is a Professor in the Arndt-Corden Department of Economics, Crawford School of Public Policy. His research interests include energy economics, environmental economics, and Asia-Pacific economies. His courses include IDEC8029 Issues in Applied Microeconomics.

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Placing prices on emissions and congestion in the Asia Pacific would reduce pollution and traffic jams and improve living standards, a new study has found.

In the week Australia axed its own carbon-pricing scheme, the study by Crawford School’s Dr Paul Burke looked at the effects of both the Australian carbon tax and Singapore’s congestion tax. The study will appear in Asia and the Pacific Policy Studies.

The study reviews the potential for revenue from ‘green pricing’ to be used to improve budget balances, for development priorities, or to allow other taxes to be cut.

Green pricing schemes can involve price-based approaches such as taxes and charges or quantity-based approaches such as emissions trading schemes.

Burke said that Australia’s carbon pricing scheme, while short-lived, contributed to a historic reduction in emissions from covered sectors.

“Governments have to raise revenue somehow. It makes a lot of sense to raise some of this revenue by taxing bads such as congestion and pollution. Doing so can kill two birds with one stone,” said Burke.

Singapore’s congestion pricing was the first such scheme in the world and has helped the country avoid the crippling traffic jams experienced in some other Asian cities.

“Traffic congestion and pollution are both economic phenomena. Economics also has a clear suggestion for how to address these problems: use fiscal instruments to get prices right. It’s an old idea, but has been vastly under-utilised,” said Burke.

While some countries, including China, are moving toward use of greener pricing, the traffic is not one-way.

“Australia’s recent repeal of our carbon price shows that there can be serious political impediments to environmental tax reform. There is often a tendency to see old taxes as good taxes, despite the fact that many old taxes are not economically efficient,” said Burke.

One of the other case studies the researcher looked at was Indonesia’s fuel subsidy scheme. Burke said subsidising fossil fuel use runs contrary to green pricing and ends up hurting the country’s economic bottom line.

“Reorienting fiscal strategies toward taxing rather than subsidising fossil fuel use would be economically sensible, and would allow countries to follow much greener development trajectories,” said Burke.

Are you interested in the ideas in this story? Dr Paul Burke teaches Environmental Economics (IDEC8053) and Microeconomic Analysis and Policy (IDEC8016).

You can read the full early view paper in the Asia and the Pacific Policy Studies journal.

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