The Problem with Fuel Taxes and Road Pricing

8th Ave .....Midtown Manhattan
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Congestion and pollution are two “external costs to society” which are associated with driving. When you take your car out of the garage and take a trip down to the local supermarket or pick up the kids from school, you are imposing costs on other people: exhaust fumes which others must breathe and you take up space on the road contributing to traffic jams.

To correct for social costs, governments use taxes to make sure the individual pays for the costs they impose on society or to “internalise the external costs”. There are three taxes which are used to try and discourage driving:

  • VAT on Buying a Car
  • Road Tax
  • Fuel Tax

People hate taxes. People remark that death and taxes are the only two certain things in life and I think that fuel tax is one of the most hated (in the UK, fuel tax is 64p for every litre). The government argue that this fuel tax is to correct for “external costs” but I will argue that the fuel taxes is unfair and are targeting the wrong people.

The Costs of Driving

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Urban motorists impose greater external costs on society. City roads are full to their capacity and that means traffic jams everywhere. An extra car on the road is only going to make it worse. Congestion wastes everybody’s time. Secondly, population density is so much higher in cities meaning that the exhaust fumes produced will affect a lot more people. And not to mention noise pollution…

In contrast, rural roads are much quieter and less congested. Because there is so much spare capacity on the roads, an extra car on a rural road isn’t really going to add to congestion or effect anybody else. And although exhaust fumes are still emitted and noise pollution is still produced, it effects a lot less people: there are less people for it to affect.

So the external costs imposed by drivers in cities are greater than the external costs imposed by drivers in the country.

The effects of taxes

Beijing smog
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When you buy a car, you pay value added tax on the vehicle. To keep the car on the road, you must also pay road tax. Both of these taxes will discourage people to own a car because they increase the cost of owning one. But once you own a car and it’s licensed to drive on the road, these taxes will play no part in your decision about whether to use the car to drive to work or not: whether you use it or not you’ve already paid the tax. And whether you live in the city or the country you pay the same amount of VAT and road tax.

The other tax is fuel tax. This affects people’s decision on whether to drive to work or school. If it costs £2 to drive to work you might choose to do it every day but if it cost £8 you’d probably only drive if it was raining or for some reason the trains weren’t operating.

As I’ve mentioned, the external costs of urban driving are greater. So a fair tax which “internalises external costs” should penalise urban drivers more. But the taxes on urban driving are actually lower than taxes on rural driving. Places in the city are situated much closer to each another and so less fuel is needed to drive between them. As the amount of tax paid is directly linked to the amount of petrol used, this means urban motorists are paying less tax than rural motorists. This is unfair.

Is it essential to drive?

Il terzo occhio
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Another factor that economists must consider is “how necessary is it to drive?”

In the city, there are a huge range of alternatives to driving. In London, there is a flat rate 90p charge on all bus journeys, where ever in London you go. Buses are also very frequent: you shouldn’t have to wait any more than 10 minutes. I’ve found that I rarely have to wait more than a few minutes.

When I’m in the country, it often costs £3 for a single bus journey and the bus only comes once an hour or sometimes even every 2 hours. And there is about a 20 minute window for the time that the bus arrives.

In the city, everything is also much closer to each another. That makes cycling or walking a much more viable option.

So in the country there is often no choice except from to drive because everything is so far away from each another and there are no viable public transport options. In these areas, motorists must pay extortionate amount of taxes. Meanwhile urban city drivers, with the luxury of viable alternatives such as the bus, escape with lower amounts of tax. I think this is the fundamental unfairness of fuel tax.

Solving the problem

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The problem is that fuel tax penalises the wrong people. The solution is to tax urban drivers more to account for the greater amount of “external costs” they impose by driving.

In London we also have the congestion charge zone (£8 to enter Central London per day) and the low emission zone (£200 per day for heavy polluting vehicles to enter London). I think this somewhat solves the issue but it’s only restricted to London.

A few years ago the Labour government floated plans for a national road charging scheme.

Motorists will receive regular bills, possibly monthly, charged at variable rates by time and geography: rural country lanes would likely be charged at the bottom of the range, around 2p a mile, with inner city rush hour roads attracting the top £1.30 rate. The government hopes motorists will change their driving habits – by staggering journeys, sharing cars or switching to public transport – to the extent that there could be a 50% cut in congestion.

From a point of view of an economist, I feel that this is the perfect solution to the problem. It would reduce congestion which would lead to time savings for everybody and stop country motorists from being unfairly penalised.

In 2007, 1.7 million people signed a petition against the national road charging scheme. The idea seems to have fallen from the agenda. Because of the inherent unfairness in fuel taxation, I hope the government will reconsider a national road charging scheme.

2 thoughts on “The Problem with Fuel Taxes and Road Pricing

  1. Naturally I disagree 😉

    The previous road-charging scheme was utterly braindead because it was meant to replace some of the tax on fuel, thereby allowing people to use much less efficient vehicles – more 4x4s, you name it. To say nothing of the privacy ramifications of forcibly cramming a tracker into everyone’s vehicles, too.

    Additionally, any system reliant only on taxes is insufficiently positive. We can do better. Consider the whole problem. First, why do people congregate in cities? Can the government not think of some incentives to increase the amount of time people work from home wherever possible? Secondly, where are the Sinclair C5s of the world? Why is the government not reinvesting taxes into R&D on more efficient vehicles? Thid, why are stinking lorries clogging up the roads causing far more damage than cars, while people have to suffer travelling by train?

    If you want an ideal situation, move the vast majority of haulage onto the trains and the people out, giving them cheap (£500 or so) mini-eco-friendly cars with a much *reduced* bar to ownership instead.

  2. Hi Tim,

    You make some really good points.

    The first was that the national road-charging scheme would have shifted taxes from pollutants towards congestion. This means that the incentives against driving big 4×4 cars are reduced. I think that’s a really interesting point but could this not be solved through additional taxation at the point of purchase? Fuel consumption is not always something that people look at when buying cars and petrol prices are hard to predict so it is harder for consumers to take fuel costs into account.

    The privacy issues are the big thing for me. Some people have argued that we all essentially contain a tracking device in our mobile phones anyway and so it isn’t too much of a problem but I don’t think the my participation in one form of a tracking system validates the imposition of another one.

    I don’t think there needs to be a central database of where everybody has driven and where everybody is however. Cars could use GPS information and store information about where they’ve driven and when. At a later date (perhaps when the car is filled up or when road tax is renewed), the data about where the car was driven can be combined with charging data to work out how much tax is due. The government doesn’t need to keep a database of where everybody is and where they’ve driven.

    An alternative system would be to have an pre-pay system similar to an oyster card (Transport for London) built into the car. As you drive, GPS information works out where you are driving and combining it with some other kind of data which could be broadcast over the airwaves, it could deduct the amount of “credit” you have left. Of course the system needs to be tamper-proof but if I remember correctly, the amount of credit you have on your oyster card is stored on the actual card itself rather than in a central system.

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