Bill Emmott - International Author & Adviser


Green Energy Tax
Corriere della Sera - June 22nd 2008

If globalisation means that we share problems with more and more other countries as well as create opportunities for trade and investment, then proof of that idea has never been plainer. All around the world, the pain of an oil price of $130-140 a barrel is being felt by oil-consuming countries, a price that has more than doubled in just 18 months. On one side of the globe, China this week tried to deal with it by raising retail fuel prices and cutting subsidies, in order to dampen down demand and reduce the losses being made by oil refiners in that country. On the other side, Giulio Tremonti was proposing to cut the profits being made by energy firms by raising their taxes, and to use the proceeds to provide discounts to some of the poorest Italian families. Which of these very different policy measures will work?

          First of all, the answer must depend on your expectations about the future level of oil prices. Analysts have been queuing up to predict higher and higher prices--$150, $200, $250. Politicians have been queuing up to blame speculators. My view is that the politicians are right, but that they donít understand what a speculator actually is. Any price that doubles inside just 18 months is not just the result of supply and demand: there has been no new blow to supply in the past year, and demand growth in China, India and elsewhere has been steady, not dramatic. This is a bubble. But the bubble is being inflated by normal oil users and investors, not some demonic group of speculators: by banks, refiners, oil firms, pension funds and others all making bets on a long-term rise in the price.

          This week, several pieces of news have emerged that offer hope that the bubble is likely to burst quite soon. One was Saudi Arabiaís announcement of an increase in oil output this year, and of oil-production capacity next year. Another was the granting by Iraq of oil contracts to Western oil firms at last, to repair and develop that countryís oil field. A third was the declaration by Brazilís central bank governor that inflation is now the biggest threat to all emerging markets, and that all (including China) must take measures to slow their economic growth and control inflation, which if followed would certainly change the marketís expectations about demand growth for oil. The fourth, and most important, was Chinaís decision to raise retail fuel prices by 17-18%, which is bound to have an impact on Chinese driversí demand for it and which also suggests .

          These are hopes, of course, not facts. Until the bubble bursts, we cannot be sure of the future direction of oil prices. Governments cannot wait in hope: they have to deal with the realities that confront them. Examining Mr Tremontiís proposal in that light, it looks likely that half of it will work, but half will not work.

          The half that makes practical sense is his idea of aiming his discounts at the poor. Cutting fuel taxes, which was proposed by Hillary Clinton during the Democratic primary campaign in America, makes little sense as a way to help the poor, first because it gives money to everyone, rich or poor, and is thus wasteful; second, because it provides an incentive to drive more and to use more fuel, which would increase demand and so might push up prices once again. If it is possible truly to identify the Italians most in need of discounts, and to avoid fraud in the process of allocating them, then this idea has the chance to provide the maximum benefit at the minimum cost, which is a good test of any piece of public spending or taxation.

          The half that looks much less practical is the proposal to finance this measure by imposing higher taxes on energy firms. Any firms that can do so will just pass on those higher taxes by raising their prices, or else minimise the impact of the tax by making sure more of their profits arise abroad, out of Mr Tremontiís reach. In practical terms, this idea looks to me like an illusion, a way to make an increase in public spending look defensible and affordable, at a time when concern about Italyís budget deficit is rising again.


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