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Vincent Cable: Brown must not relent on energy taxation

The alternative to rationing is a strong price signal – we had better get used to it

This year has seen failing banks, a 10p tax revolt, a bursting house price bubble, anger over high food, gas and electricity prices and, now, an oil shock. After over a decade of growth and rising expectations, a sharp squeeze on living standards is making people very cross. The Government's offers of palliatives have, so far, merely added contempt for its weakness to disillusion over its performance. Its PR skills rival those of Marie Antoinette during the Paris food riots – witness the suggestion that today's worries over oil product prices might be eased by more nuclear power in 20 years time. It must not now make a bad situation worse by panicking over energy taxation.

The oil price shock is global; but the distributional effects are felt nationally. Unlike the US, Germany, China and India, Britain is largely self-sufficient in oil. We are not making large transfers to overseas oil producers. That is why Gordon Brown's appeals to Opec are so ludicrous. The national argument is about how to share out the "economic rent" from North Sea oil and how to ease the pain from a shift in relative prices.

Government tax revenues from North Sea oil could rise this year from £10bn (based on oil prices of $84 a barrel) to £16bn (at $128): a windfall from extra tax on oil company profits and petroleum revenue tax.

Some people seem to believe oil revenues exist in a financial silo and that any windfall can just be "given back to the motorist". It isn't that simple, however. The overall government budget is deteriorating badly. The current economic slowdown is affecting income and corporation tax. The seizing up of the housing market has badly hit stamp duty. The Institute of Directors predicts a £20bn tax shortfall this year over and above the planned £43bn government borrowing and the unplanned £2.3m concession to 10p taxpayers. Delaying the planned 2p rise in fuel duty for another six months would cost a further £550m: money the Government does not have and would have to borrow.

Then there is the environmental dimension. Lord Turner, chair of the Government's climate change committee, has reminded it (and us) higher energy prices are a "legitimate" way to cut greenhouse gas emissions. In fact, fuel tax in real terms has fallen (by about a sixth) since the 2000 fuel protests. The overall affordability of motoring – and road freight – relative to public transport has consistently improved, despite fuel taxes. It is alarming to see how quickly and easily environmental concerns are being swept aside. Yet, if oil use is to be curtailed the alternative to crude and authoritarian rationing is a strong price signal. We had better get used to it.

There are, of course, special problems in rural areas which lack transport alternatives. Differential duties favouring remote areas are one option. Last week, I visited Shetland, where fuel prices are the highest in Britain. People are worried and annoyed (particularly with the fuel distributors who seem to be exploiting a local monopoly). But, then, I noticed lines of cars at major junctions in the countryside. Motorists drive in from farms and remote hamlets, then share car journeys into the major town. Necessity is the mother of public-spirited invention. How then, should the Government respond to the clamour for tax cuts on motoring? Demands for unfunded duty cuts are simply demagogic. An alternative is to vary duties with the oil price (up and down) to create more price stability. Unfortunately, with crude prices fluctuating by $10 a barrel in a week, a variable tax could be an administrative nightmare.

Then there is taxation of vehicles rather than fuel. The Government proposes applying environmentally graduated excise duty retrospectively on older vehicles, having earlier promised not to. Sneaky changes like this bring environmental taxes into disrepute. It would be better to have much bigger tax incentives for new vehicles, rewarding fuel efficient cars and penalising gas guzzlers. Road hauliers have a reasonable grievance but not the one they are currently protesting about. They are right to be annoyed that continental lorries fill up before entry and do not pay higher fuel duty on British roads. The Government failed to deliver a promised road user pricing scheme.

These issues require a careful, planned response. The Government must not panic. It should wait. This is not Armageddon. Markets will work, given time, as global oil demand moderates and supply responds. In the short run the oil price could rise further or fall back sharply. None of us can predict oil prices and those who claim to are either fools or charlatans. What the Government must not do is further compromise its deteriorating fiscal position or abandon environmental imperatives.

The writer is deputy leader of the Liberal Democrats and their Treasury spokesman