Stephen King: How the congestion charge lost its principles

Reading last week's edition of the Ham&High, my local newspaper, I came across Ken Livingstone's occasional column. The Mayor of London's theme was "It's right to target the gas-guzzlers".

That may be true, but imagine you're the unfortunate owner of a Vauxhall Zafira 2.0 16v Turbo, a relatively small people carrier with only a modestly adventurous performance described by its maker as a "Clever Family Car" and, last year, the winner of the Prima Baby and Pregnancy Reader Award for best value. From 27 October this year, you will have to pay £25 per day should you drive your Zafira in central London, whether or not you live in or outside the congestion zone. Your car's CO2 emissions are marginally above the 225g/km zone G threshold and this takes you into very expensive territory indeed.

If you consider the treatment of this upmarket version of the Zafira an anomaly, you might want to consider some of the other implications stemming from Mr Livingstone's congestion charge reforms. Should you be the driver of a BMW 6 Series convertible with a 3-litre engine, you will have to pay only £8 per day if you choose to drive into the zone and will get a 90 per cent discount should you happen to live in the zone. The same applies to a BMW X5 3.0 diesel (a dreaded Chelsea tractor) and two Porsche models. Bizarrely, if you're the owner of the manual version of a Renault Espace, you'll be outside the zone G danger zone but if you've been foolish enough to buy the automatic version, you'll be facing a £25 bill per day.

In his February 2008 statement regarding the new congestion proposals, Mr Livingstone said "examples of cars that.... will be liable to the higher charge are the Porsche 911, most BMW 7 series, Range Rover, Land Rover Discovery, Toyota Land Cruiser, Volkswagen Touareg and the Mercedes M Class". Yes, they're all fairly evil. No mention, though, of the winner of the Prima Baby and Pregnancy Award. In the Ham&High, Mr Livingstone said band G vehicles "may be justifiable on a Scottish hill farm but it is completely unnecessary to take them into central London". Try driving your Vauxhall Zafira in the Highlands, no matter how clever it's supposed to be.

Until now, I've been a bit of a fan of the congestion charge. It's not something you'd necessarily want to admit to in polite company but, as an economist, there's something inherently appealing about a tax that tries to make people pay for the social costs of their pollution.

Yet the constant tinkering with the congestion charge alters people's economic incentives in unpredictable ways. Moreover, a tax that's frequently revised in seemingly arbitrary fashion will come to be seen as grossly unfair. If the congestion charge eventually falls into this category, then green taxation in general will become politically much less acceptable. (Indeed, Ruth Kelly, the Secretary of State for Transport, seems already to have recognised this problem given her admission last week that national road pricing was still a very long way off.)

Mr Livingstone says "you wouldn't find many people who would defend the right of people to dump their rubbish in the middle of the street". True, but his proposed reforms provide a licence to dump pollution "rubbish" in exactly the way he criticises, so long as the polluting cars aren't too big. He's making band A and B car owners exempt. They can pollute as much as they want.

When the congestion charge first came in, there were one or two exceptions (electric cars, hybrids) but almost all cars were subject to the charge. Those who lived in the congestion zone were subject to a 90 per cent exemption, so they could carry on driving their cars without any real regard to their contribution to pollution. Overall, though, the principle was simple: impose a charge and, hence, reduce congestion. If congestion didn't come down, the charge could simply be raised a notch or two.

Then Mr Livingstone decided to widen the congestion zone to include some of the swankier parts of London. Residents of Knightsbridge, Kensington and Chelsea were suddenly able to drive their cars virtually for free through the now larger zone. If, as Mr Livingstone argues, the polluter pays, this was a very strange message indeed.

Ken's latest proposals, though, seem to be distinctly baffling. Consider, for example, the likely experiences of three hypothetical car drivers should Mr Livingstone's plans come into effect. One drives a Range Rover, one of Mr Livingstone's despised Chelsea tractors, and lives in Kensington. Another, having previously sold her band B emissions car, drives a G Wiz, one of those tiny electric cars which have become rather popular in recent years. She lives in Kentish Town. The third, a man with a large family, lives in Lambeth. A couple of years ago, he bought a Renault Espace people carrier with an automatic gearbox.

For the Range Rover driver, the daily congestion charge has gone from £5 to £8, then to free and, later this year, to £25. The G Wiz driver was prepared to sacrifice space, comfort and safety in exchange for free entry into the congestion zone but now discovers that, later this year, the sacrifice wasn't worth making, so she'll upgrade to a polluting vehicle.

Finally, the driver of the Ren-ault, having made the effort to buy a car that actually served a useful purpose transporting both his own kids and their friends around in only the one car, will have to pay, later this year, a charge of £25 per day, reflecting the arbitrary nature of the CO2 emissions threshold. He may be forced to sell his car, presumably at a sizeable additional loss if others are having to do the same.

I don't see why the driver of a Renault Espace should be treated with the same degree of condemnation as the driver of a Lamborghini, yet this is what Mr Livingstone's proposals – and his comments – imply.

The problem arises from the shift in the congestion charge from its original aim of reducing the numbers of cars on the streets of London to its new aim of targeting cars with high CO2 emissions. The shift, though, leads to all sorts of unwelcome distortions. The incentive to "go electric" is reduced because those petrol cars with low emissions will now be allowed into London for free. Drivers with smaller cars who will now be able to drive through London whenever they want (and those who will now buy a smaller car to take advantage of the new exemption) undermine the "polluter pays" principle (although Mr Livingstone may re-impose a charge on these drivers later on, conveniently after the Mayoral elections). The driver of the Renault will suddenly sense there's a tax on children, so will doubtless feel hugely aggrieved. In the process of hitting the driver of the Range Rover, many others will be unfairly thumped as well.

It is, then, the arbitrary nature and the devious presentation of the frequent changes in the congestion charge system that I object to. As an economist, I'm happy to support any sensible policy that brings the social costs (and benefits) into our private decisions. But I'm not happy to support a tax system which changes on a seemingly random basis and whose latest variation has been timed to coincide with a Mayoral election (suddenly, people can pollute for free). The congestion charge was originally based on sound economic principles. Sadly, those who run the scheme may have left their own principles behind, in the process undermining support for morally appropriate forms of social taxation in all walks of life.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com