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
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:
1,200 to 1,800 cc£105; and
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.