02 September 2021

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The Government is looking at how it will replace the revenue from Fuel Duty, and road pricing seems a likely solution. We look at how it might work.

With the advent of electric vehicles and the decarbonisation of road transport, the Government is looking at new ways to raise revenue from motoring. This new system is yet to be determined, but is likely to be based around some form of ‘road pricing’ whereby drivers, or the vehicle owners, are charged for where and when they drive.

Currently revenue from vehicles and road travel is raised through various means including duty on fuel (mainly petrol and diesel), and annual Vehicle Excise Duty, based on the CO2 emissions of the specific vehicle.

In 2019-2020 tax revenue from fuel duty raised £28.4 billion (excluding VAT), which accounts for around 2% of GDP, while VED was estimated to account for £6.5 billion in the same year.

The issue facing the Treasury is a future with revenues from these systems dwindling, as petrol and diesel vehicles are phased out over the next two decades and cars, vans and trucks have no CO2 emissions.

Numerous road pricing schemes have been looked at as replacements, which principally involve charging for miles driven rather than fuel used. Supporters also believe this type of system will compel drivers to think more about vehicle usage, reducing congestion in the face of increased car usage and a growing population.

On the face of it, road pricing might seem an equitable way to pay for driving. However, there are a number of major obstacles before it becomes reality.

How would road pricing work?

In 2005, then-Transport Secretary Alistair Darling proposed a national road pricing scheme, with every vehicle in the UK installed with a satellite receiver which would calculate charges from 2p per mile to £1.34, depending on which roads were used and at what time.

The idea was dropped after an online petition protesting against the scheme gained 1.8 million signatures, but the principle remains the same for many proposals.

According to work by the Transport Select Committee, a pay-per-mile system could be linked to a network of Automatic Number Plate Recognition cameras (as used already in road pricing schemes such as the London Congestion Charge), GPS and on-board units in vehicles, radio-frequency identification tags, and potentially smartphones, to build a cost for individual usage. The question is: how do you build this cost?

Mileage-based road pricing: how to make it fair

With Fuel Duty, there is an in-built mechanism which means that the driver pays tax based on the amount of miles they do. They can pay less tax by doing less miles, buying cheaper fuel or driving more efficiently.

For electric vehicles, it seems unlikely a similar system would be brought in. That’s because the Government would have to charge more tax on the electric drivers use for their vehicle than for, say, boiling a kettle when the power may have come from the same source.

Introducing higher taxes on EVs also risks derailing its ambitious strategy of decarbonisation, in which new petrol and diesel cars and vans will no longer be sold after 2030, while new hybrids will be permitted until 2035 with new petrol and diesel trucks banned from 2040 onwards.

So, a per-mile scheme seems to be the most equitable, but it has a number of caveats. One is location. A driver living in London may do far less miles than one living in a rural location. Yet the London-based driver might do their miles on heavily congested roads requiring far more management and upkeep, while the rural motorist is on quiet country lanes.

The logical progression then, is to charge more for busy roads used at peak times than empty ones. But there are concerns about how this will affect behaviour. Will it push drivers off main roads and on to others in search of cheaper motoring? What effect would this dispersion of vehicles have on local communities or smaller roads and their upkeep?

Another is vehicle type. A car is generally more efficient and uses less power, smaller (so takes up less room on a congested road), and create less wear and tear on roads than a commercial vehicle. Many advocates of road pricing, such as consultants Greener Transport Solutions, propose you pay less per mile for car than for a van, or truck, as a result, and there is not yet clarity on how this might affect running costs or usage profiles.

Who operates the scheme?

At present, the UK has a number of road pricing systems, from bridge and motorway tolls to cordon pricing such as congestion charges and low emissions zones. All are run by authorities who have their own payment structures.

For a nationwide programme, this patchwork approach would likely create huge complexity and confusion over costs and payment mechanisms, and so it appears there would need to be an overarching system, run centrally.

Critics argue that privacy now becomes an issue: drivers would effectively need to be tracked by the Government. Currently there are approximately 30 million vehicles in the UK. These may all have to be tracked in some form through technology and a central database held of all vehicles, owners and drivers.

How could a scheme operate?

For road pricing with electric vehicles to work, there needs to be an understanding of what is being charged for. Is it the movement of vehicle or the movement of the person in it?

If you charge for the vehicle, then who pays? A vast number of vehicles are not owned by the driver – company cars and commercial vehicles being two prime examples. So once the bill comes in, does the company pay for the miles driven, and will they then have to work out who was driving and charge that retrospectively to employees?

Then there is the issue of driving choice: consider you have a driver that uses busy roads in peak periods and refuses to find cheaper alternatives, or one that spends a lot of time on quiet, cheap roads taking much longer to get around. How does a business manage those costs and behaviours against productivity and cost-effectiveness?

In places in the world where road pricing initiative have worked, there has been a strong sense of the costs being used to help the person move around better, with significant subsequent investment in public transport. When road pricing was introduced in Stockholm, vehicle usage dropped by 25%. Even with a further £200 million spent on public transport, the International Council for Clean Transportation, said the system has been “extremely cost-effective”.

What are the next steps?

Media reports in the last year, such as this one in The Guardian, suggest the Chancellor is now looking closely at how road pricing schemes could work, and currently the Transport Select Committee is investigating the subject, and consulting with industry bodies and experts.

While no formal plans have been submitted, it seems highly likely that with the switch to electric, UK businesses and fleets will have to contend in the next decade with a major change in the way they pay for business motoring.

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