Select Committee on Environmental Audit Minutes of Evidence


Memorandum from the Automobile Association (AA)

  As a policy tool to help the UK meet its international climate change obligations, the fuel tax escalator has been expensive to all motoring households; a disproportionate and excessive cost on less well-off car-owning families, and a huge political failure which has harmed the overall promotion of genuine environmental advances.

  It is an indictment of the flawed fuel tax escalator policy that successive governments did not develop cost benefit models similar to the AA's, and never challenged the AA's own model which showed clearly that the fuel tax escalator was an expensive and cost ineffective measure to reduce CO2 emissions.

  The tax concession given in the 1999 Budget for ultra low sulphur diesel has been a spectacular success. The concession the Chancellor has promised for ultra low sulphur petrol will mean nearly all petrol vehicles will produce materially lower toxic emissions by April this year. This demonstrates that the motoring tax system can be used highly effectively for environment advances, as seen from the introduction of unleaded fuel onwards.

  The push of technologies and the pull of financial incentives and regulation are now playing a significant part in helping to achieve the Government's environmental policy objectives. Policy must blend revenue neutral tax changes and technology and regulations so they work in harmony.

  The Chancellor's strategy to change the basis of the road fund licence and company car taxation is ambitious and reforming, and will support the toxic and greenhouse emission strategies. It reinforces the key EU/ACEA agreement as ever more fuel efficient vehicles are brought forward.

  These welcome motoring taxation reforms enable positive signals to be sent to consumers maximising the chance of favourable reaction because the measures are tax neutral, are easy to package and to present to motorists, and motorists will see them as logical and sensible.

  The Chancellor has taken key reforming steps to modernise motoring taxation and the AA has urged him to embark on further reforms in his next budget and undertake to:

    —  formally "de-escalate" motoring taxation to reduce reliance on fuel tax for general government spending, from the current £1 in £7. A long term commitment not to increase general fuel taxes in line with inflation in future budgets would be a well recognised way of achieving this;

    —  announce a general review of road taxation with a key goal of re-establishing trust and making clear what social, environmental and infrastructure funding, and general taxation principles are guiding motoring taxation policy. In particular the proportions of road tax and fuel duty that fund roads should be separated and made transparant from those levied for general expenditure;

    —  monitor fuel prices to ensure that consumers receive the tax reduction from ultra low sulphur fuels in full.

INTRODUCTION

  The Chancellor in his Pre-Budget Statement confirmed the end of the fuel tax escalator, gave a commitment to reduce the duty on "greener" petrol and diesel, and undertook to freeze fuel duty increases in his 2001 Budget. He also set out details of reform to the road fund licence for cars and lorries, and gave further reductions in the road fund licence for smaller engined cars. These announcements were welcomed by the AA as positive steps but more needs to be done if our archaic motoring taxation system is to be reformed and trust re-established.

  The Committee has focused on three specific questions. The AA's response is drawn from the extensive research we have commissioned over the past five years. Attached to this submission are the following AA reports:[1]

    —  "Tracking CO2 emissions from UK homes and cars". December 1997.

    —  "Fair payment from road users: A review of the evidence on social and environmental costs" by Professor David M Newbery. February 1998.

    —  "The effect of fuel prices on motorists" by Professor Stephen Glaister and Dan Graham. September 2000.

  (i)  What is the case for using fuel duty, amongst other measures, to help us meet UK air quality targets through reducing demand for transport?

  The UK has two air quality targets: The National Air Quality Strategy, and the UK Climate Change Programme.

  The National Air Quality Strategy (NAQS)

  This defines air quality standards for eight major pollutants, and sets objectives for reductions in the concentrations of these pollutants. The elasticities of petrol use with respect to price are so small that, even with a 6 per cent fuel tax escalator, they are overtaken by growth in incomes within the year.

  Fuel duty change to all intents and purposes has no impact on NAQs. In contrast technological development, particularly engines and fuels, have ensured that for most pollutants, and in most areas of the country, the standards will be achieved. A new car made today produces less than 5 per cent of the toxic pollution of one made 25 years ago. The AA Toxic Tailpipe Indices for toxic pollutants show that since 1992 pollutants from the tailpipes of the nation's cars have fallen.


The AA 1999 Toxic Emissions Indices Reduction in Emissions (%) from Cars Since 1992

NOx
39%
Benzine
52%
PM10s
43%
CO
39%
VOCs
47%


  Further reduction in pollution from the next generation of new cars will result from the implementation of Euro III and Euro IV which will come into force in 2001 and 2005 respectively. These are shown in the following table.


The Relative Fall in Toxic Emissions Since 1992 as a Result of the Euro Standards (medium-sized car, urban test cycle)

Fuel  
CO
HC
Nox
PM10

Petrolpre-Euro I
100
100
100
5
PetrolEuro-I
15
9
19
2
PetrolEuro-II
10
4
9
2
PetrolEuro-III
7
3
6
2
PetrolEuro-IV
4
2
3
2
Dieselpre-Euro I
7
10
43
100
DieselEuro-I
4
4
29
55
DieselEuro-II
3
3
21
31
DieselEuro-III
2
2
13
20
DieselEuro-IV
2
1
7
10


  In short, the AA has supported and promoted the introduction of Euro-IV technologies because, although these bring increased costs to motorists (eg cost of catalytic converters), those costs are justified by the benefits based on a national approach. The AA has also promoted and supported enforcement against wilful polluters.

  There will be "hotspots", where air quality objectives will not be met. These will be mainly in some inner city areas with high concentrations of ageing buses and lorries running on old and polluting diesel technologies, and other local sources of pollutants. Specific action is needed to get these old technology vehicles replaced with newer cleaner technologies.

  The tax system can be used highly effectively for environmental advance as seen from the introduction of unleaded fuel onwards. The Government's proposals for reform of lorry road tax to improve environmental performance, and to provide a ring-fenced fund of £100 million to incentivise and give allowances for old technology lorry scrappage are welcome steps.

  The tax concessions given in the 1999 Budget encouraged take-up of ultra low sulphur diesel. This has been a spectacular success. Virtually all diesel sold in the UK is this cleaner ultra-low sulphur variety, and the UK is one of the few countries in Europe to be benefiting from its use.

  The AA believes the Chancellor's commitment to reduce fuel tax on ultra low sulphur petrol by 2p a litre in April (in addition to the 1p a litre given from October 2000) will stimulate a successful switch to production and distribution of this fuel. For example, Esso's Fawley refinery commenced production of ultra low sulphur petrol last October in a response to the 1p tax reduction.

  The AA submission to the Chancellor in October 2000 called for further tax concessions to encourage the take-up of ultra low sulphur petrol. The AA subsequently welcomed this decision which means nearly all petrol vehicles will have materially lower toxic emissions by April 2001

  Not only will the widespread use of ultra low sulphur fuels reduce the emissions of NOx, CO and VOCs from tailpipes, it is also an enabling fuel to allow the introduction of new petrol engine technologies, such as gasoline direct injection, which offer significant improvements in fuel efficiency and hence a reduction in greenhouse gas emissions from cars. The longevity of catalytic converters is also expected to increase.

  The push of technology and pull of regulation and financial incentive will support both the Government's National Air Quality Strategy and its Climate Change Programme so playing a significant part in achieving environmental policy objectives. The AA rejects approaches to environmental policy that do not work with the grain of people's everyday lives and win reasonable people's acceptance. Revenue neutral tax changes, technology and regulation can be made to work in harmony.

The UK Climate Change Programme

  Petrol and diesel in the UK is the most heavily taxed, and the most expensive in the developed world. This results from the policy of successive Chancellor's of the Exchequer to increase fuel duty by up to 6 per cent annually above the level of inflation. The table highlights the effect of this policy on the UK price of motoring fuels.


Petrol Prices and Taxes EU Member States—9 October 2000

Pump price
per
litre
Taxes and duties
Per
litre% of
pump price
Pre-tax price per litre

Belgium
£0.63
£0.41
56%
£0.22
Denmark
£0.66
£0.44
67%
£0.22
Germany
£0.62
£0.42
68%
£0.20
Greece
£0.48
£0.25
52%
£0.23
Spain
£0.50
£0.29
58%
£0.21
France
£0.65
£0.45
68%
£0.21
Ireland
£0.56
£0.32
58%
£0.23
Italy
£0.66
£0.42
64%
£0.24
Luxembourg
£0.50
£0.28
55%
£0.22
Netherlands
£0.70
£0.46
66%
£0.24
Austria
£0.57
£0.34
60%
£0.23
Portugal
£0.53
£0.25
47%
£0.28
Finland
£0.68
£0.46
67%
£0.22
Sweden
£0.67
£0.45
67%
£0.22
UK
£0.80
£0.61
76%
£0.19
EU average
£0.67
£0.46
69%
£0.21


  Successive chancellors, regardless of political party, have tried in public to justify the fuel tax escalator on environmental grounds—that increasing the price of fuel was necessary to help the UK meet its international obligations to reduce greenhouse gas emissions. However, the order of priorities was best explained in the Chancellor's 1999 Pre-Budget Statement when he scrapped the fuel tax escalator stating:

    "The fuel escalator was inherited from the previous Government. Since 1997 the escalator has been needed to reduce the £28 billion deficit we inherited as we put in place our new measures to protect the environment. Those who have opposed the escalator—including some who originally imposed it—have to explain how, without it, they would have cut the deficit, made money available for public services and in the last two years been meeting our environmental commitments."

  Eminent economists have argued that the fuel tax escalator was a blunt instrument, and a most expensive one for families. The impact of the escalator in terms of reduced emissions of CO2 from cars has been minimal. Nor were claims of fast growing emissions from cars truthful. CO2 emissions from cars were stable throughout the 1990s despite traffic growth because of technological improvements.

  The agreement between the European Commission and the car manufacturers will significantly reduce CO2 emissions from cars in the future, despite traffic growth. As with toxic pollution it will be technology and not taxation that has, and will continue, to deliver the policy objective of improved fuel consumption and even more efficient vehicle use.

  The economic basis for increasing fuel taxes as an environmental policy objective has been challenged by Professor David Newbery, Director of the Department of Applied Economics at Cambridge University. In his AA commissioned report `Fair payment from road users: a review of the evidence of social and environmental costs'. He said:

    "... if environmental and social taxes (or `green' taxes) are to be both politically attractive and economically effective, they must be clearly distinguished from other taxes or charges, set at levels determined by acceptable methods of computing the cost of the damage done, and applied uniformly to all sources of the same damage. That is `green' taxes should be distinct, non-discriminatory, and defensibly quantified."

  Professor Newbery defines these three terms as:

    Distinct—the basis for setting other road taxes needs to be clear, and the logical approach is to distinguish road-user charges from other road taxes.

    Non-discriminatory—similar taxes should also be applied to other similar sources of environmental and social damage.

    Defensibly quantified—the revenue raised should be allocated cost effectively to reduce the damage caused.

  Professor Newbery argued succinctly that the fuel tax escalator failed all three of these tests.

  The AA is committed to genuine debate and analysis of policies. Raising the price of fuel must have some effect on demand, however small. In the report "The effect of fuel prices on motorists" commissioned by the AA and the UK Petroleum Industries Association (UKPIA), Professor Stephen Glaister of Imperial College found that even a 6 per cent tax escalator would struggle to hold demand steady in the face of normal growth in incomes, let alone improvements in fuel efficiency. He found that it was low-income car reliant families that were disproportionately hit very hard by the policy. He said:

    "Unfortunately the usual practice in the United Kingdom has been to set fuel tax rates in isolation, without reference to possible complementary tax or expenditure changes. So it is useful to analyse the effects of fuel tax increases in isolation. We have shown that there are many relatively high-income households who would not be much affected by the fuel tax escalator. Conversely there will be some poorer households who would be badly affected in relation to their incomes. They may not be numerous but they are not unimportant in terms of overall policy."

  The fuel tax escalator was successful in raising general revenue until the public became aware of the rate of tax on fuel and overwhelmingly judged it unreasonable. As a policy tool to help the UK meet its international climate change obligations, it has been expensive to all motoring households, a disproportionate and excessive cost on less well-off car owning families, and a huge political failure which has harmed the overall promotion of genuine environmental advance.

  On the other hand, the Chancellor's strategy to change the basis of the road fund licence and company car taxation to encourage the take-up of cleaner and more fuel efficient cars, and the incentives for the rapid take-up of ultra low sulphur petrol, is ambitious and reforming. The Chancellor is to be congratulated for taking these reforms forward. These fiscal changes will support the Government's air quality strategies, and reinforce and complement the EU/ACEA agreement as even more fuel efficient vehicles are brought forward. The power of these measures is that they influence the choice of car at the point of purchase and every mile driven thereafter.

  The Chancellor has also announced a £10 discount on the new graduated VED for cars using cleaner fuels and technology, such as cars running on road fuel gas, bi-fuel and dual fuelcars, and cars using hybrid technology. However, while this is a welcome signal to consumers a £10 annual saving on VED in comparison with, for example, a £5,000 additional purchase cost for a hybrid car is unlikely to stimulate interest in new technology cars. A review to find ways of giving consumers positive financial incentives to purchase new technology cars should be undertaken.

  In its October submission the AA urged the chancellor to review fuel taxation policy in order to establish its purpose and guide conflicting social, safety, environmental, infrastructure funding, and general tax raising objectives. In particular, the AA advocates the separation of charges to use roads from taxes for general expenditure.

  The AA urges the Chancellor to reduce gradually tax rates on motoring to progressively reverse the trend of the last 20 years. There is a strong political and social case to bring general tax rates down to levels applied in other sectors of the economy allowing funds to be freed up for investment at economically rational levels.

  The AA believes it most unwise and acceptable to be so reliant on the road user for funding £1 in £7 of everything the Government spends.

  (ii)  What is the relationship between fuel duty and fuel prices, and the value of long term signals to consumers?

  Duty and VAT currently represents 75 per cent of the retail price of petrol and diesel. This is the highest tax level in Europe, making motor fuels in the UK the most expensive in Europe. There is deep resentment among motorists about the level of tax and the price of the fuel they must buy.

  AA surveys over three years have found increasing awareness of the level of tax paid. In 1997 just 5 per cent of motorists could say (within 5 per cent) how much the price of a litre of fuel was tax. In September 2000, awareness had increased to 62 per cent.

  The current level of awareness, and hostility, owes much to the fuel protests when the tax paid by motorists became the real issue. The fact that the Chancellor scrapped the fuel tax escalator, has committed to reduce the duty on ultra-low sulphur fuels, and then to freeze the duty until at least 2002, illustrates that the current high levels of duty are not politically sustainable.

  The AA acknowledges that there is value in giving long term signals to consumers to persuade them to support environmental, and road safety, objectives. The Chancellor's reforms of the road fund licence and company car taxation will send out these signals and the AA has no doubt that consumers will react favourably. They will do so because the measures are tax neutral, they are easy to package and to present to motorists, and motorists will see them as logical and sensible.

  On the other hand, the fuel tax escalator was surrounded by a "green fog" that in reality had little environmental focus and was levied to raise revenue.

  The system of charging motorists to own and use cars needs a review. New charges on motorists are planned—congestion charging and workplace parking charges. These new charges will be on top of the most highly taxed and highly priced petrol and diesel in Europe. In the absence of new ways of taxing and charging motorists, these new charges may become a "poll tax on wheels".

  Only through a fundamental review of all the taxes and charges paid to own and use cars can trust be restored in what today is viewed as a thoroughly discredited motoring taxation system.

  (iii)  The Government's appraisal of the impact of fuel duty policy changes

  The DETR report "Climate Change: Draft UK Programme" states in respect of the fuel tax escalator:

    "Taken in isolation increases in (fuel) duties between 1996 and 1999 are estimated to have produced annual carbon savings of between 1 and 2.5 million tons of carbon by 2010."

  In the same report it is stated:

    "The voluntary agreements (between the car manufacturers and the European Commission) along with the changes to Vehicle Excise Duty and company car taxation will result in savings of around 4 million tons of carbon by 2010."

  The fuel tax escalator has been the most expensive and least cost effective measure to reduce CO2 emissions. Work commissioned by the AA in 1997 (UK Centre for Economic and Environmental Development) suggested a cost to consumers of £2,000 for each tonne of carbon saved. This compared most unfavourably with alternative measures such as energy efficiency in the home which paid for themselves over a short period of time with a net benefit to both families and the economy. Details are set out in the AA report "Tracking CO2 emissions from UK homes and cars".

  It is an indictment of the flawed fuel tax escalator policy that successive governments did not develop this type of cost benefit model, and never challenged the AA's own model of costs.

  The Chancellor's tax reductions for ultra low sulphur petrol will achieve both immediate reductions in key pollutants, and will facilitate the earlier introduction of advanced technology cars that will reduce overall fuel consumption. The AA's sister motoring organisation in Germany (ADAC) has produced models of the effects of the introduction ultra-low sulphur petrol, and these confirm the DETR's own projections.

  One area where a firm decision is needed is in respect of Liquid Petroleum Gas (LPG). Momentum is beginning to grow around LPG but the viability of the fuel is dependent both on the Government's funding of the Energy Savings Trust scheme to convert vehicles, and the sustainability of the fuel taxation advantages. A recent AA review concludes that the Treasury must make clear whether or not it will continue to favour LPG as Euro IV technology becomes mandatory and the environmental advantages of LPG become less clear-cut. Without such assurances, uncertainty will undermine confidence in the investment in fleets, facilities and vehicles.

  The AA would favour a clear statement in the 2001 budget that the current LPG concessions will remain for a minimum of seven years in order to give certainty to individuals and businesses about the future. A clear decision is needed.

Conclusion

  Since 1992 the fuel tax escalator was sustained on dubious environmental claims, and continued by successive chancellors in the guise of an environmental tax, but with revenue as the key objective. The fact the Chancellor has scrapped the escalator, reduced fuel tax, and committed to a freeze on duty increases at least until 2002 is a welcome recognition that the fuel tax escalator is dead.

  On the other hand the Chancellor has been bold in taking forward reforms that will use motoring taxation to incentivise the widespread take-up of cleaner fuels and more fuel-efficient cars in the future. The AA applauds the Chancellor for taking these key reforming steps, but has also urged him to embark on further reforms in his next budget. He should:

    —  undertake to "de-escalate" motoring taxation to reduce reliance on fuel tax for government spending, from the current £1 in £7. A commitment not to increase fuel taxes in line with inflation in future budgets would be a well recognised way of achieving this;

    —  announce a general review of road taxation—to separate and make transparent the proportions of road tax and fuel duty that fund transport services, from those taxes levied for general expenditure;

    —  monitor fuel prices to ensure that consumers receive the tax reduction for ultra low fuels in full.

  Modernisation of the current discredited system would allow new ways of charging motorists to use roads, and allow corresponding reductions in motoring taxation. The average family would pay no more under the new system, but would benefit from flexibility and choice in transport services, as well as having the best transport services in Europe.

January 2001


1   All reports published and available from, AA Group, Norfolk House, Basingstoke, Hampshire RG24 9NY. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 5 March 2001