Select Committee on Trade and Industry First Special Report



This response follows the summary of conclusions and recommendations as set out in the in the Committee's Report.

Fuel Prices and Tax

(1) In the short term, the pre-tax price fluctuates as a result of changes in the price of crude oil, but over the last decade the steady increase in the real price of motor fuel at the pumps has been entirely and intentionally the result of Government taxation policies (paragraph 11).

The Government has had to make tough choices through its taxation policies. It has intentionally sought to deliver economic stability, cut the deficit, put public finances back on track, and has delivered extra jobs and more resource for public services like schools, hospitals and transport. The Government has charged duty on road fuels at rates that contribute revenue towards meeting various of these goals, and also take account of environmental considerations. The road fuel duty escalator, introduced by the previous Government in 1993, has been the single most important measure for reducing carbon dioxide emissions from road transport in the UK. Helping to ensure that the UK meets its legally binding target under the Kyoto Protocol to reduce a basket of emissions by 12.5 per cent below 1990 levels by 2008­2012 and to move towards its domestic goal of a 20 per cent cut in carbon dioxide emissions below 1990 levels by 2010, it gave a clear signal to motorists and manufacturers to design and drive more fuel-efficient vehicles, to avoid unnecessary journeys, and to consider alternatives to the car.

(2) It is undoubtedly the case that levels of fuel taxation are higher in the UK than in other countries, whether or not that is balanced by lower corporate tax rates, cheaper motoring infrastructure costs and lower social costs (paragraph 14).

In its statement of intent on the environment (1997), the Government indicated the need to transfer taxation away from 'goods' like labour on to 'bads' such as pollution. Therefore when making comparisons with other countries it is important to look at taxation in its widest sense, rather than focusing on just one element. The UK has one of the lowest total tax burdens in the EU, far lower than the EU average. The UK has among the lowest tax takes on personal income and consumer spending which includes spending on petrol.

(3) It is a widely shared perception that pump prices are quick to rise but slow to fall. Given that time lags have occurred in the past between movements on the world crude oil markets and prices on forecourts, we recommend that the Government keep a close watch on the relationship between the price of crude oil and that paid by customers at the pumps, and identify publicly any companies which fail to fulfil the undertaking given to Ministers that cuts in duty will be speedily passed on to customers (paragraphs 16 and 62).

The link between the oil component of petrol prices and crude prices is neither linear nor automatic. Other factors such as refinery product mix, stock levels and market liquidity in the wholesale market are also at play and have both an important and significant impact on product prices. The retail price of petrol also reflects the influence of a number of other commercial and variable factors, including taxation (excise duty plus VAT) and competitive pressures in the marketplace. Retail pump prices are for individual companies to set in a free and open market.

Price data collected by the DTI and by independent bodies shows that major petrol retailers passed on the duty cuts announced in the Budget on 7 March to motorists at the pump. The Office of Fair Trading continues to monitor prices to ensure that there is no anti-competitive behaviour within the UK petrol and diesel markets.

Government Objectives

(4) It is still unclear how the Government is measuring its success at meeting its objectives; the Environmental Audit Committee's recent Report criticises the Government on precisely these grounds. If it has no valid means of measurement, the Government should hardly be surprised if people conclude that revenue is a rather more important element than the environment in fuel taxation. The consensus of opinion among the five big oil producing and refining companies is that demand for motor fuel is relatively inelastic. If one intention behind high fuel taxation is to reduce the amount of petrol sold, the evidence available to us is ambiguous as to whether it is working (paragraphs 18 and 52).

The Government's belief that the road fuel duty escalator has had a bearing on carbon dioxide emissions flows in part from modelling work that links changes in price to road fuel use, and car use to fuel costs per kilometre. It agrees with the views quoted by the Committee that demand for motor fuel is relatively price inelastic. But, as implied by its comment on the Committee's more general conclusion on fuel prices and tax, this does not mean that increases in price are without their impact on demand. This is especially so over periods of time sufficient to allow manufacturers and motorists to design and drive more fuel efficient vehicles, and motorists to change their habits, to avoid unnecessary journeys, and to adopt alternatives to the car.

There have been a large number of studies that have sought to estimate relevant elasticities. The elasticity of demand for fuel derived in the DTI's Energy model suggests that a sustained 1 per cent change in price will lead over a number of years to a far from insignificant 0.23 per cent reduction in the volume of fuel use. DTLR studies have led to the inclusion of the same value in their National Road Traffic Forecasting Model for the long run elasticity of car use with respect to fuel costs per kilometre. Though elasticities in different studies can vary because of differences in the way in which models are specified and call on different data, the price elasticity of demand for fuel derived in the DTI model coincides with the statistical mode of fuel price demand elasticities reported in the literature.

The Government also continually monitors the effects of all tax measures. DTLR and DEFRA have consistently sought to evaluate the escalator's contribution to transport and environmental objectives, most recently for the development of the Integrated Transport White Paper and the UK's Climate Change Programme. Actual road fuel consumption fell by 0.2 per cent between 1999 and 2000 against a backdrop of increasing traffic and national income, implying a combination of more efficient engines and more economical driving. Based on recorded fuel use, DTI's provisional estimates for 2000 suggest that carbon dioxide emissions from road transport have fallen from 31.7 million tonnes of carbon in 1997 to 30.7 million tonnes in 2000. This is also consistent with people driving more economically which may well be the result of higher fuel prices, behaviour consistent with that suggested by estimated elasticities.

Bulk Buying

(5) Whilst we appreciate that bulk buyers may agree in advance the price of fuel they will purchase and prices may subsequently fall, it seems bizarre that such wholesale arrangements should ultimately penalise bulk buyers. We recommend that, following the Office of Fair Trading's inquiry into wholesale petrol, they should continue to monitor the situation, to examine the source of discrepancies between pump prices and bulk prices for diesel, and identify remedies (paragraph 46).

The Office of Fair Trading will continue to monitor wholesale petrol and diesel markets. It will not hesitate to act if there is substantial evidence of predatory pricing.

The Point at Which Duty is Levied

(6) There are a number of concerns over the point at which duty is levied. Not only does the current point of duty appear to have effects on the competitiveness of oil companies, but the low levels of fuel held by retailers were a factor in accelerating the September fuel crisis. We are not convinced that the Government has given sufficient consideration to changing the current arrangements. What is efficient for the Government is not necessarily in the best interests of industry or consumers. We recommend that the Chancellor commit the Government to an open review of current arrangements for the point at which duty is levied on fuel (paragraph 54).

The current duty point arrangements were set in place in 1985 following extensive consultation across government and with the oil industry. As part of the usual pre-Budget process, HM Customs and Excise will be giving advice to the Chancellor on a range of duty-related issues. Customs would be glad to receive the views of interested parties concerning the duty point in time to advise the Chancellor before the Pre-Budget Report 2001.


(7) The situation on the island of Ireland is different in scale and ease of access to that between Britain and the continent of Europe. Widely differing tax rates have caused, and are causing, serious disruption (paragraph 39).

The Government sets duty rates according to what is best for the United Kingdom as a whole, although it acknowledges that the situation in Northern Ireland is different because of the ease of access to Ireland. Revenue loss in the hydrocarbon oils sector has been a concern in Northern Ireland in recent years. In response HM Customs and Excise have increased their resources dedicated to tackling oils fraud in Northern Ireland by a factor of four since September 2000. Provisional figures indicate that Customs have more than doubled the volume of illicit fuel that they seized in 2000/2001 compared to the previous year. In 2000 Customs broke up 13 major fuel laundering plants with the capacity to produce in excess of 40 million litres of illegal fuel.

Overall Impact on Trade and Industry

(8) Companies that are heavily reliant on road transport, particularly small companies, will inevitably be hit hardest by high fuel taxation levels. In some sectors, and in rural areas, rises in fuel taxation can be the straw which breaks the camel's back. However, we have received no conclusive evidence to show that the current level of motor fuel taxation has rendered UK business as a whole less competitive. High fuel taxation levels have no doubt adversely affected some businesses, but any analysis of the overall impact on business must also take into account the external environment. We remain to be convinced that any decline in UK competitiveness in recent times can be attributed to any significant degree to high fuel taxation levels (paragraphs 23 and 61).

It is reassuring that other evidence provided to the Committee, and the Committee's conclusion about the overall impact of motor fuel taxation on trade and industry, is consistent with the evidence submitted in the Memorandum from the Department of Trade and Industry and HM Treasury. Though there are bound to be exceptions, mainly in sectors that depend on the roads for the transport of relatively bulky and lower value products, and among firms that are distant from their markets, expenditure on road fuels as a proportion of the value of industrial output is generally low with an overall average of no more than 1.3 per cent in 2000. This makes it unlikely that road fuel tax, and in particular any changes in road fuel tax, could have a significant bearing on relative cost competitiveness especially if, as the Committee observes in its conclusion, account is taken of the external environment.

Hauliers: Cabotage

(9) We recommend that immediate action is taken to ascertain whether continental hauliers are indeed breaking EU rules on cabotage. If this is found to be the case, UK enforcement must be stepped up and appropriate action taken. There is, however, no evidence that non-UK hauliers are responsible for more than a small volume of freight carriage within the UK, nor that the recent fall in haulage rates within the UK is directly attributable to the threat of lower rates offered by non-UK hauliers (paragraph 33).

EU legislation is not specific about what time period constitutes a breach of the cabotage regulation. However, a survey carried out for the Department of the Environment, Transport and the Regions last year showed that 98 per cent of foreign vehicles stay in the UK for no more than ten days. UK enforcement authorities are working closely with their colleagues in other Member States to deal with cases where UK operators relocate their business to another Member State but continue to operate primarily in the UK.

Hauliers: International Journeys

(10) The figures available to us suggest that UK-based hauliers are losing their competitive edge against other European hauliers in respect of international journeys as a result of high fuel taxation. The introduction of a 'vignette' for non-UK hauliers may help redress the balance. We recommend that the Government seek to maintain a full picture of international vehicle traffic to establish the trend (paragraph 35).

DTLR is to review its road freight surveys as part of the National Statistics Quarterly Review programme. The Committee's recommendation will be addressed in that context. Existing surveys include the International Road Haulage Survey, which collects information about the international activity of UK registered heavy goods vehicles, and the Ro-Ro Enquiry, which collects information from roll-on roll-off ferry operators and from Eurotunnel. The Department also has a survey of domestic road freight activity, and further information is available from Eurostat, to which the Department's surveys contribute. The Quality Review will address how full a picture of international vehicle traffic is provided by these sources, and whether any further survey information should be collected. This will, however, have to be looked at in the round, also bearing in mind cost, feasibility and the burden on operators of providing extra information.   

Hauliers: Unqualified Drivers

(11) Employment by hauliers of unqualified drivers from Eastern Europe is one which affects competitiveness, although wholly unconnected to motor fuel taxation levels. In the interests of equity, the Vehicle Inspectorate should actively seek out and prosecute any cases where hauliers can be shown to have broken the law (paragraph 37).

The Government agrees that, in the interests of fair competition, effective enforcement action is necessary against operators illegally employing non-EU drivers. It supports the adoption by the Council of Ministers of a draft Directive requiring non-EU drivers of vehicles engaged in the international carriage of goods to carry an attestation confirming their entitlement to drive the vehicle.

Hauliers: Insolvency & Bankruptcy

(12) In spite of extensive anecdotal reporting of haulage companies going under, there is a dearth of official statistical evidence to prove conclusively that this has occurred, or if it has occurred that it is due to high levels of motor fuel taxation. Government has a responsibility to clear up this confusion (paragraph 42).

Official statistics do allow comparison of compulsory company insolvencies and individual bankruptcy orders in road transport and in total through the period when the road fuel tax escalator was in operation. Separate data for road hauliers among road transport businesses is not available, but hauliers are understood to represent a high proportion of all businesses in the sector. Any conclusions that can be drawn about road transport in total are therefore likely to apply to road haulage.

As charts appended to this Memorandum show, individual bankruptcy orders and company compulsory insolvencies in road transport have tracked total bankruptcies and insolvencies very closely during the 1990s, at least once the impact of the 1991 recession had worked through. If anything, there has been a slight downward trend in company compulsory insolvencies in road transport relative to the all industry total, not the reverse, as one might expect if increasing road fuel taxes had been a significant influence on company failure in this sector.

Since the proportion of the stock of road transport companies that fail has been pretty constant at around 3 per cent in recent years, the slight downward trend may reflect a gradual fall in the proportion of road transport companies in the total stock. Supported by statistical evidence about the proportion of road transport in total output, this in turn seems likely to reflect a gradual structural shift in economy towards sectors that depend less than others on road transport. This may be because of an overall shift towards lighter and higher value added manufactured goods such as electronics, and towards services with a relatively low road transport element such as many financial and leisure services in which output has also grown relatively quickly in recent years.


(13) Farming has been in crisis for some time. Any additional costs, whether from fuel prices or from elsewhere, inevitably have a disproportionate impact. It is difficult to draw a clear distinction between the problems facing the industry as a whole and the impact fuel prices are having on farmers' ability to compete in the European marketplace. The high proportionate increase in the price of red diesel arose not a result of motor fuel taxation rates, but increases in the price of crude oil (paragraph 47).

The Government shares the perception that the high proportionate increase in the price of red diesel last year arose not as a result of motor fuel taxation rates, but because of increases in the price of crude oil. Additional information provided to the Committee suggested that the cost of road fuels represented just over 4 per cent of the total value of agricultural output last year. Especially bearing in mind that fuel price increases resulting from higher world oil prices affect farmers everywhere, it seems likely that other problems facing the industry with a bearing on costs will have been a more generally important influence on competition within the European market place.


(14) Transport costs are obviously an important element of overall costs for retailers. However, we have received no evidence to suggest that UK retailers are rendered less competitive because of the levels of UK motor fuel taxation (paragraph 48).

The Government notes the Committee's conclusion. Though there may be various overseas elements in their costs, retailers competing with one another within the UK face the same business environment, in which motor fuel taxation is only one among many elements. Those competing in overseas markets face a more complex set of costs depending, for instance, on the source of the various goods and services they consume, procure and sell, none of which need necessarily come from the UK.

Bus and Coach

(15) Although high fuel taxation impacts on the bus and coach fares paid by consumers, and may make passenger and road transport less competitive with other means of transport, fuel taxation levels do not appear to have adversely effected the international competitiveness of the UK bus and coach industry (paragraph 50).

The Government notes the evidence given to the Committee about the impact of fuel prices on bus and coach operators. Many such operators will benefit by the 3p per litre reduction in duty on ultra low sulphur diesel implemented following this year's Budget. Those currently eligible for fuel duty rebate - that is, operators of local bus services - will specifically benefit from the decision to keep the rebate rate unchanged despite the reduction in duty. This decision is worth £28 million a year to bus operators and will increase the rate of rebate to 80 per cent for use of ultra low sulphur diesel.

The Government is currently considering a recommendation from the Commission for Integrated Transport that fuel duty rebate should be extended to long-distance coach services in return for operators offering half-fare concessions for pensioners and disabled people. It also notes the Committee's conclusion that fuel taxation levels do not appear to have adversely effected the international competitiveness of the UK bus and coach industry.

Petrol Retail Industry

(16) Petrol retailers are having difficulties of various sorts, with very low margins, competition from supermarkets, and disagreements with the big oil companies. In Northern Ireland, their plight is exacerbated by cross-border purchases. Independent petrol retailers are facing problems over the pricing of their purchases from oil companies. The fuel crisis made life uncomfortable and more problematic. But taxation itself is not the real problem, so long as demand for fuel remains relatively inelastic (paragraph 55).

Since 1990, UK competition authorities have held a number of inquiries into the UK petrol market. All found the market to be competitive. The Office of Fair Trading continues to monitor the market to ensure that possible anti-competitive behaviour does not arise. Officials from the Department of Trade and Industry hold regular meetings with representatives of independent petrol retailers and distributors to discuss retailer wholesaler relations and other issues.

The Government is aware of the smuggling problem in Northern Ireland but will not allow its policies or the livelihoods of legitimate traders to be undermined by the activities of criminals.

HM Customs and Excise have developed a strategy to tackle oils fraud. In Northern Ireland this strategy has been in operation since 25 September 2000. Supported by significantly increased resources, it has resulted in greatly enhanced enforcement activity. Customs are working in conjunction with other agencies to maximise their impact. Their aim is not only to seize more smuggled petrol and diesel, but to ensure that they actually impact on the illicit market.

Arrangements for Possible Interruption of Supply

(17) We hope that the chaos precipitated by the last fuel crisis will not be repeated. We trust that the Government have now sufficiently robust procedures in place to deal with any future interruption of supply (paragraph 60).

The Government agrees that it is essential to ensure that disruption on this scale cannot be repeated. This is why the Prime Minister set up the Fuel Supplies Task Force which published a Memorandum of Understanding on 29 September between the Government, the oil companies, trade unions, hauliers and the police. Its purpose is to ensure that fuel supply is maintained in the event of any future disruption by committing all signatories to take the necessary contingency action to ensure the supply of fuel in the event of future protests. It commits the parties to:

- joint early-warning systems and co-ordinated contingency plans;

- joint crisis management systems covering stock levels and location, fuel movement and delivery, and to tackling the potential for intimidation of tanker drivers.

The Government is firmly of the view that these measures need to remain in place to maintain essential services in the event of any further disruption to fuel supplies.

Insolvencies and Bankruptcies in Road Transport compared with All Industries.

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