Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by The Institute for Public Policy Research

The following briefing is a summary of discussions held at IPPR in the run up to the Pre-Budget Report with a number of transport experts, environmental NGOs and economists.


  Between 1993 and 1999 Conservative and Labour governments increased road fuel duty over and above inflation as part of a package of policies to reduce greenhouse gas emissions from transport. In March 1999, these increases were stopped as the price of oil was in itself pushing up the price of petrol and diesel. IPPR and many other organisations advocated and support the use of taxation to ensure there is a continuing increase in the price of fuel over the long term for environmental reasons. It is important that this principle is not lost in the Government's response to the "fuel crisis".

  However, the price of oil has recently increased very rapidly and some sections of society are finding this hard to adapt to. One of the consequences of high oil prices is a tax "windfall" made up of Petroleum Revenue Tax and VAT revenues over and above Treasury expectations. This windfall allows the Chancellor to compensate those groups hardest hit from high oil prices. The package below sets out ways to do this without undermining the Government's environmental objectives.

  We recommend that the Chancellor spend £1.5 billion in a package to respond to the high oil price. One billion pounds would be spent on direct compensation for motorists and hauliers. The other £500 million would go to help reduce the UK's dependence on cars and fossil fuels by supporting the alternative transport options of public transport and cleaner fuels.


  About £1 billion should be spent on measures specifically designed to compensate motorists and hauliers for the unusually high oil prices faced during this year. The measures should be designed to specifically help those motorists facing genuine hardship rather than those whose high petrol consumption stems from a lifestyle choice. Lower mileage and lower income motorists, not least in rural areas, should be protected. We reject a cut in fuel duty as it would reward those who drive the furthest, using the most fuel, in the least efficient vehicles.

  We propose a £50 cut in VED for cars up to 1,800 cc, about two thirds of cars, at a cost to the Treasury of about £800 million a year. For most motorists this would be worth more than a 3p per litre cut in fuel duty, which would save a typical motorist about £35 a year. For example, the saving on fuel costs for a 1.8 litre Ford Focus doing 10,000 miles, the most popular car on sale this year, would be about £36.50. Average annual car mileage is about 9,300 miles and 10,300 in rural areas of Britain, according to the 1997-99 National Travel Survey. Average annual car mileage for low-income rural motorists, those in the bottom 40 per cent of the income distribution is about 8,000. A typical low-income rural motorist would save less than £30 from a 3p cut in fuel duty. Relative to a 3p cut in fuel duty, the winners from a £50 cut in VED would be the owners of small and medium size cars who drive less than about 15,000 miles a year (depending on fuel efficiency). The losers would be those who drive gas-guzzlers or more than about 15,000 miles a year (about 15 per cent of cars).

  The proposed cut in VED would build on existing reforms, increasing the number of bands for existing cars from two to three:

    Up to 1,200 cc—£50;

    1,200 to 1,800 cc—£105; and

    Over 1,800 cc—£155.

  From next year there will be a graduated system for new cars with four bands based on carbon dioxide emissions. Those with higher emissions will pay more.


  The haulage industry is facing some competitive pressure due to high fuel prices, but it has exaggerated its claims. The Environment, Transport and Regional Affairs Select Committee rejected the case for an "essential user" rebate on diesel duty after a great deal of industry evidence was placed before them. A recent survey by the energy Efficiency Best Practice Programme found that only 20 per cent of haulage fleet managers were aware of their total fuel consumption. Those companies receiving EEBPP advice on fuel efficiency had cut their fuel bills by 25 per cent in five years.

  There is a stronger case for a level playing field on fixed costs across the European haulage industry. We recommend reforming the road and vehicle tax regime for hauliers to bring it into line with the rest of the EU. The first stage would be an immediate cut in VED for lorries of £500 on average across the fleet. The HGV tax system is extremely complex and the tax cut could be graded to favour the cleanest and least road damaging vehicles. This would be an immediate cost to the Treasury of around £200 million.

  The second stage of the reform would be the introduction of the "Eurovignette" system in 2002 to level playing field with other EU countries and ensure overseas hauliers paid for the use of UK roads.


  A further £500 million should be spent on boosting the greener transport alternatives such as public transport, clean fuels and vehicles. This would increase the choice of transport methods and help reduce car dependency.

  Increasing fuel duty rebate on ultra-low sulphur diesel for buses from 75 per cent to 100 per cent would cost about £105 million, helping to keep fares down and preventing loss of services owing to higher fuel costs as a result of oil price increases. Until 1993, when Kenneth Clarke introduced the fuel duty escalator, bus operators received a 100 per cent rebate of fuel duty. In return for restoring a 100 per cent rebate, bus operators could be required by regulation to offer a minimum half bus fare discount for 16-18 year olds in full-time education in association with the introduction of the government's proposed youth card. The cost of transport is recognised as the biggest financial barrier to staying on at school and college.

  Extending 100 per cent fuel duty rebate on ultra-low sulphur diesel to scheduled coach journeys, which currently provide a socially important service but receive no public subsidy whatever, would cost about £20 million a year. In return, coach operators could be required by regulation to offer a minimum half fare concession to pensioners and disabled people parallel to the new statutory minimum half fare concession for local bus services.

  Increasing fuel duty rebate to 100 per cent for ULSD would wipe out any tax differential encouraging business to use cleaner fuels such as CNG or LPG. If this is seen to have an effect on the take up of cleaner fuels then a tax credit could be offered to restore the differential.

  Tax free travel vouchers to encourage green commuting operate in the USA and similar proposals are under consideration by the government. In Britain, the vouchers could be used to pay for public transport fares, including taxis in rural areas. The cost to the Treasury of allowing employers to give up to £600 worth of vouchers a year to each employee is estimated to build up to about £200 million a year over time. A £600 maximum would in particular encourage local rather than long-distance commuting, and is particularly of benefit to bus users. For example, it would cover the cost of an annual all-zones bus pass in London.

  Many people in rural areas cannot access local services through public transport. As well as extra support for rural buses, which the Government is already implementing, a Rural Services Fund could be set up to support local shops, petrol stations and other rural services in isolated communities. We recommend that £100 million be dedicated to this fund and spent through grants, rate relief and other methods to increase the accessibility of essential services for rural dwellers.

  The Energy Saving Trust has a small scheme for grants to convert cars and lorries to cleaner fuels, notably Liquid Petroleum Gas (LPG) and Compressed Natural Gas (CNG). There is scope to extend this scheme to more vehicles and extra grants. We recommend that £50 million be allocated to such conversions.

  LPG and CNG are both commercially viable fuels whose use can be rapidly increased in the short term. In the longer term, electric hybrid vehicles and, ultimately, hydrogen powered fuel cell vehicles are the low or zero emission options of the future. The Carbon Trust, being set up with money hypothecated from the Climate Change Levy, will be funding research and development into low carbon technologies. Its remit on alternative transport fuels like hydrogen could be extended and backed up by providing an extra £25 million from road fuel duty.

October 2000

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