Increase in fuel taxes and banning motor vehicles 1
Over the last decade, public awareness of air pollution as significantly increased. Members of the British public wholesomely agree on the need to be proactive. The issue gained urgency when the courts ordered the British Government to take deliberate steps to reduce nitrogen dioxide emissions. However, from an economic point of Over the last decade, public awareness on air pollution as significantly increased. Members of the British public wholesomely agree on the need to be proactive. The issue gained urgency when the courts ordered the British Government to take deliberate steps to reduce nitrogen dioxide emissions.
With more scientific data available, studies can now directly link lung and heart conditions to air pollution.
A third of CO2 emissions in the UK are from automobiles. In this regard, in 2019 the British Government banned the sale of all petrol and diesel in 2035. It is anticipated that this ban will lead to the UK achieving a target of zero carbon emissions by 2050.
However, from an economic point of view, this move will have far-reaching measures for the economy.
The UK government has also hit automobile fuel with huge taxes. Nearly 60% of the final cost of fuel reverts to the government in form of taxes. Fuel duty accounts for 58p per liter, value-added taxes account for up to 25p per liter. In previous years (1993-1998) fuel duty was set at 3% above inflation. The UK government collects £28 billion in taxes each year which is merely 2% of the annual budget.
Circular flow of income.
To better understand the impact of banning the sale of motor vehicles and high fuel taxes, we shall consider the circular flow of income
In this model, the economy has two significant decision-makers. The households and firms. The firms will produce goods and services that will be consumed by households in exchange for wages. The households exchange wages for goods and services. Additionally, for the firms to produce goods and services, they will need labor, land, and capital. These are the factors of production. The factors of production are owned by households. The households and the firms will interact at the market.
Relating to the automobile industry, both households and firms need automobiles. Firms need the ship raw materials labor and the finished goods to the market. For the households, vehicles are majorly a luxury
Inelasticity of fuel prices
The automobile industry experiences inelastic demand. The theory of inelastic demand happens when a change in price causes a smaller percentage change in demand. This is because there are few substitutes for automobiles. Secondly, motor vehicle users are used to the high fuel costs they soon get used to a price increase.at the moment, motorists in the UK are unresponsive to price elasticity However the increase in fuel taxes has far much-reaching effects on the economy.
Less congestion.
If fuel was to be cheap, everyone would own a car, and movement would be impossible due to traffic jams. When the cost of fuel is high, for households to save money, public transportation which is cheaper due to collective pooling becomes the only option. In 2019, the average British commuter lost 115 hours due to traffic jams. At a cost of £ 894, this amount is a colossal figure to the economy.
Encouraging other forms of transport
when the fuel costs are increased, the households will consider other means of transport. For instance, rail and cycling. These are not only cheaper alternatives, but they have zero emissions. Rail transport is increasingly gaining popularity in the UK. There is some 15,000 km ferrying some 1.7 billion train journeys. Less use of vehicles in cities will result in more safety for pedestrians and fewer accidents too. With fewer accidents, insurance payments would reduce and this would lead to lower premiums. Lower premiums would mean more savings to the households.
An increase in the cost of production for the firms.
Any increase in the cost of production is passed on to the households who are final consumers. When fuel costs rise and the firms don’t pass the increase to consumers, their profits would diminish. This is because an increase in fuel prices increases the cost of transport which increases the overheads. Distribution costs of raw materials and finished goods increase too. If the price increase is small, the firms can choose to forgo some profit, but over the years as fuel costs rise, the final price paid by consumes has increased too
Slow demand
when the price of fuel rises, the price of consumer goods rises and this slows down demand. This is because firms will not increase wages commensurately. Households will have much less to spend. They will spend only on essentials. This will depress investments. A slow in demand has the most far-reaching effects. This is because a firm may shelve future expansions plans; suspend any more recruitment against the backdrop of slow demand.
Increased Government spending
higher taxes will result in the exchequer collecting more taxes due to inelastic demand in the automobile industry. This means that the government has more money to spend on social welfare programs. The firms will get government contracts and more jobs will be created on one side of the economy. An increase in government revenues means the government will spend more on social welfare programs.
Effect on labor
Fuel prices rarely trouble the labor Market. This can be attributed to the fact that the market can anticipate fuel increases each other year. For businesses that have salesmen, they have had to switch to fuel-efficient vehicles like hybrid systems that use less fuel.
Aviation industry
Aviation as an industry is the most affected by an increase in fuel taxes. Among the largest overheads in the aviation industry is fuel. The volatility of crude oil prices in the international market doesn’t help much. When fuel costs are high, they will significantly affect the bottom line of an airline which will affect expansion plans, procurement plans, and eventually the bottom line negatively. An increase in fuel taxes for the airline industry will make cause high ticket prices. For airlines that do not enjoy government subsidies, the option will be to file bankruptcy.
Effects of banning petrol and diesel vehicles
New opportunities
The UK has taken the first bold step in banning fossil fuel engines. With other nations globally soon to follow suit, the majority of the countries have set dates for the ban of new petrol and diesel engines. The ban is not expected to affect the economy negatively. It is expected this ban will create new opportunities. With the introduction of hydrogen and electric vehicles, fuel stations will shift to charging stations.
Investment
Secondly, the electric grid will require massive investments from both the government and the private sector to fully serve the increase in capacity. The investment will create jobs for the human labor needed to set up the infrastructure. There will also be the need to increase the production of more electricity to power the economy. Bigger power stations will be built and this will mean more jobs. Electric vehicles require charging their batteries periodically. To increase the range, more research and development is required on more efficient fuel cells. Research and development is an expensive affair and requires massive investments. Currently, their British carmakers are spending up to £70 billion in R&D to produce more efficient cars.
Healthy population
One of the biggest advantages of banning petrol and diesel vehicles will be a healthier population. Each year the NHS spends £11 billion on respiratory diseases. With the population having access to cleaner air, this figure will go down and the money can be used to treat other diseases. Additionally, a healthier population means that the time spent in the hospital will be reduced increasing proactivity
Continuance of employment
When fossil fuel vehicles will be faced out, production factories will be slowly increasing the capacity to produce electric and hydrogen cars. Factories don’t anticipate any job losses. However, at some point parity between the cost of maintaining an electric vehicle and a petrol or diesel vehicle will prevail. At some point owning a car that is mot electronic will be expensive.
Loss of government taxes
The biggest loser will be the government. As of 2035, the government will not collect fuel taxes. The exchequer will devise new taxation measures to purge the deficit or find a way to tax the electronic fuel used by the vehicles, this move will have far-reaching measures to the economy. Additionally, the UK is becoming a huge junkyard of electronic waste. At some point, the government will have to give waste collectors subsidies to clear the huge large chunks of electronic waste.
In conclusion, the banning of vehicles that use either diesel or petrol in 2035 will not have far much-reaching effects on the economy. Apart from a decline in fuel taxes, the net effect is cleaner air to the British population and massive investment opportunities that will contribute positively to the British GDP.