Sunday, November 30, 2008

A great time to end fuel subsidies

Many countries control the price of motor fuels.

This got their budgets into deep trouble in the first half of 2008. The high price of oil caused massive budget blowouts. Malaysia, Indonesia, China and India among various others faced the politically painful necessity of raising gasoline and diesel prices or face deep budget cuts.

Yes, the parking lot is Giant too!
Cheap fuel, cheap cars and cheap parking have helped create a
remarkably car-dependent landscape in Malaysia's urban areas.

But what should these countries do now that the price of oil is way down near US$50 per barrel? Unfortunately some are cutting fuel prices again. The Indonesian Government will cut the price of gasoline from Rp6000 to Rp5500 per litre on Monday. India probably will in late December. Malaysia has already cut the price four times since its big June price rise.

Isn't this a bit short-sighted? We all know how hard it will be to raise prices again if (or when) oil prices rise again.

Would it not be smarter to take this golden opportunity to end these unwise price controls? Now seems like a relatively painless moment to shift to letting gas prices rise and fall with the global price of oil. Then next time the price rises and people start to scream, DO spend money to help the poor who will be hurting, but please DON'T control fuel prices again.

I do realise that this would not eliminate political pain if oil prices go up. The politics of fuel prices are nasty. But they are especially nasty if the prices are a government decision and not a market phenomenon.

So is this change happening yet? There are strong signs that it might be!

Malaysia seems set to shift to a 'managed float' system for fuel prices. Confusingly, it has also promised a RM0.30 subsidy but there is talk that this may be made to only kick in 'when necessary' (when oil prices are high). An announcement next week may clear up the confusion. I have argued before that fuel subsidies are a bad idea but a subsidy with floating prices is maybe not quite as pernicious as a fixed price I guess.

China was also reported last week to be considering some kind of managed float for fuel prices. But only so long as oil prices stay below some threshold, such as US$130 per barrel.

[Update: I now notice that Indonesia is thinking of doing the same.
"In the future, we expect (subsidized fuels) to follow (the market prices) automatically up to certain ceilings (prices)," the ministry's head of fiscal policy, Anggito Abimanyu, told reporters.]

[2nd update: Armin Wagner of GTZ recently wrote a short discussion paper on exactly this issue: "EXPLOIT FALLING MARKETS: a contribution to the debate on fuel pricing mechanisms". It was written as part of GTZ's International Fuel Prices Survey process. It is available for download via HERE. Thanks Armin!]

Saturday, November 1, 2008

From fuel taxes to 'pay as you drive'

The US has started trials for distance-based charging mechanisms aimed at ultimately replacing the gasoline tax.

Motorists in several US cities are being recruited to try out a new mileage-based road user charge system. The Public Policy Center of the University of Iowa is leading the trial. This is very good news (although I realise this trial is only the first step in a very long process with no gurantee of political success).

Smart folks like Bern Grush and Robin Chase have been calling for usage-based pricing for a long time and pointing out that motor fuel taxes are gradually failing us. The Netherlands, Singapore and the UK apparently have plans for distance-based charging too. Germany and Switzerland already charge heavy vehicles based on distance and weight.

There are spin-off opportunities here. I hope they don't get missed!

It would be natural for people to be suspicious about having 'extras' that piggy-back on a new user charging system. But I think it would be a great pity if the mechanisms chosen for mileage-based user charging cannot exploit other important spin-offs as well, while still protecting privacy.

Exploiting all of the spin-offs could amplify the benefits and make "Pay as you drive" (PAYD) charging more cost-effective.

Any distance-based charging mechanism should be flexible enough to ALSO:
  • allow for performance-based parking pricing and handle per-minute parking pricing (see Grush)

  • help with PAYD Insurance applications

  • allow registration fees or 'road taxes' to be turned into PAYD fees

  • charge differentially for driving at different times and different places (and hence provide for congestion pricing)

  • provide for reliable measurement of total vehicle mileage, so that distance-driven can become a reliable part of vehicle depreciation calculations and reduce odometer fraud in the used vehicle market

  • even allow time-of-purchase taxes to be 'variabilised' if necessary (as I argued in a paper - see here for publisher site and here for pdf preprint - this would allow such fees to send their usual signal to vehicle buyers but would prevent them adding to fixed costs by turning them into a variable cost).

If I am not mistaken, there are technologies already out there (ask Bern Grush and Robin Chase) that could do these things AND still ensure privacy. The Iowa system may also have these features, but I am not sure. Can anyone confirm?

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