Memorandum from the Institute for European
Environmental Policy (IEEP)
1. The Institute for European Environmental
Policy (IEEP) is an independent, non-profit policy studies institute,
specialising in environmental policy in Europe. One of our areas
of expertise is the environmental dimension of European and UK
transport policy, which includes fiscal policy and alternative
2. The fact that road fuel consumption has
risen in spite of the fuel duty escalator has led some to claim
that it is not an effective policy instrument, but this is really
not the case. Fuel consumption can be expected to rise as disposable
incomes increase, but it would have risen more if fuel prices
had been lower.
3. Other things being equal, motorists are
known to consume somewhat less fuel as prices rise. This is the
elasticity of fuel demand with respect to price. It is generally
agreed that the short term elasticity is fairly small, but the
long term elasticity is larger. That is, motorists do not change
their behaviour very much in the short term, but are rather more
likely to respond in the longer term, particularly if they expect
that prices will remain high or get even higher.
4. A wide range of consumer responses to
high fuel prices is possible. In the short term they may drive
more economically, avoid making some trips by car, or switch to
another mode. In the longer term they might seek a more efficient
car, or adopt different working practices in order to cut the
distance which they need to drive. When moving house or changing
their place of work, they might also take motoring costs into
account in selecting a location.
5. In this sense, high fuel duties can be
regarded as synergistic with other stated transport policy objectives
such as promoting more efficient vehicles, increasing the use
of public transport, or reducing the need to travel. Conversely,
reducing fuel duties is likely to undermine these objectives.
6. Fuel duty is currently the principal
instrument available to help to internalise the external costs
of transport use, and hence to deliver environmental and related
objectives in transport policy. It is a very effective mechanism
to address CO2 emissions because these are a direct function of
the quantity of fuel consumed, but it is less efficient as a means
of tackling other problems such as congestion. Other instruments
such as congestion charging and distance-related taxes on heavy
goods vehicles are now under consideration in order to tackle
these specific problems, and if these were introduced, then a
reduction in fuel duty might be justified.
ULSP AND ULSD
7. In the Pre-Budget Report (PBR) 2000,
the government announced a proposed cut of 2p per litre for ultra-low
sulphur petrol (ULSP). ULSP is not, as yet, generally available
in the UK in spite of a 1p duty differential introduced last year,
as ULSP costs more to produce than standard unleaded petrol. The
additional reduction should however be sufficient to encourage
the general availability of ULSP from next year.
8. This cleaner fuel will bring about a
modest reduction in conventional pollutants (including NOx and
particulates) from petrol cars. Its impact on CO2 emissions is
slightly more controversial, however. The oil industry has argued
that the cost of a wholesale switch to ULSP would be excessive
and would exceed the environmental benefit, as the additional
demands in refining the fuel could lead to a net increase in CO2
emissions on a "well to wheel" basis.
9. These claims are disputed by some, and
may well turn out to be overly pessimistic, however. Against this,
an important long-term benefit of ULSP is that it will enable
motor manufacturers to use certain advanced engine technologies
which offer improvements in fuel efficiency. Thus, provided that
carmakers rise to the opportunity now provided to them, the net
effect of the ULSP duty changes on CO2 levels appears likely to
be positive in the medium term at least.
10. At the same time as the cut in duty
on ULSP, the Chancellor announced a further cut of 3p per litre
for ultra-low sulphur diesel (ULSD). This was presented as an
additional environmental measure, and a rational approach to fuel
taxation by moving the duty rates for ULSP and ULSD in harmony.
In reality, however, there is no clear reason for the latter to
be done, and there was no additional environmental benefit to
be gained from cutting the duty rate on ULSD because ULSD already
has a virtually 100 per cent market share of diesel in the UK.
Instead, the cost reduction will obviously encourage some increase
in diesel consumption, and hence in CO2 and other emissions.
11. This, then, was in effect a diesel duty
reduction rather thinly disguised as something else. There are
of course understandable reasons for the government to wish to
disguise a reduction in the rate of diesel duty, but it was regrettable
that the apparent linkage of changes regarding ULSP and ULSD created
some confusion over the new "green fuels" policy.
12. Assessment of the environmental impacts
of the changes announced in the Pre-Budget Statement was largely
confined to Table 6.2 of the PBR. This was accompanied by very
little discussion, or presentation of underlying assumptions or
methodologies used in reaching the estimates in Table 6.2. This
is in marked contrast to the economic aspects of the budget, which
are discussed at considerable length.
13. As a result of this lack of detail,
it generally remains very difficult to reach an independent assessment
of the accuracy or otherwise of the estimates produced.
14. One exception to this is the statement
which claims that reductions in NOx and particulates will result
from the reduced duty on ULSD. This is clearly incorrect for the
reasons set out in paragraph 10 above, as a slight increase in
emissions is likely to occur.
15. Given the continuing concern over transport
sector CO2 emissions and the apparent difficulty in maintaining
high levels of fuel duty, alternative measures merit consideration.
The Green Fuels Challenge represents a useful and timely opportunity
to increase the uptake of other transport fuels.
16. A number of alternative fuels have been
promoted over the years in various parts of the world, for a range
of reasons including improving emissions performance, reducing
oil dependency, etc. Some of these (notably electric vehicles)
have never really delivered their supposed potential, and few
have made serious headway on account of practical drawbacks or
cost disadvantages relative to petrol and diesel. Successive UK
governments have in the past shown little enthusiasm for alternative
fuels, and as a result, the UK has as yet relatively few alternatively
17. Probably the most readily available
alternatives to petrol and diesel are gaseous fuels - most notably
compressed natural gas (CNG) and liquefied petroleum gas (LPG).
These offer significant air quality benefits, and some reduction
in CO2, particularly relative to petrol engines, because natural
gas has a lower carbon to hydrogen ratio that petrol or diesel.
They are also much cheaper in terms of running costs, as the level
of duty payable is much lower than that on conventional road fuels.
A viable refuelling network will be essential to ensure broader
takeup of gaseous fuels. Several major oil companies have now
addressed themselves to this question, but got off to a rather
slow start in 1999-2000.
18. Hybrid vehicles combine an electric
motor and batteries with a small conventional engine. They are
technically complex and relatively expensive, but do offer benefits
in terms of emissions and fuel economy. Production models are
now available (Honda Insight and Toyota Prius), but have a rather
small market share.
19. For the longer term, fuel cells appear
to be the technology of choice to tackle vehicle emissions of
both conventional pollutants and CO2. After a long gestation period
they now appear to be approaching market-readiness for the light
vehicle sector, with several manufacturers vying to offer the
first production model, perhaps by 2004. They do not suffer from
many of the drawbacks of battery-powered electric vehicles, and
the only emission from the vehicle itself is water vapour.
20. As with many alternative fuels, however,
it is important to consider the full life-cycle emissions of the
fuel. While the end-use fuel is hydrogen, there are three main
routes whereby the hydrogen can be delivered to the fuel cell:
Hydrogen generated from natural gas
in a stationary plant, and pumped into a tank in the vehicle;
Methanol fuel, reformulated on board
the vehicle; and
Petrol (with very low sulphur content)
reformulated on board the vehicle.
21. A recent report from the Pembina Institute
in Canada found that, of these, only the first option reduces
greenhouse gas emissions substantially (by around two thirds).
The other two offer much smaller savings, which are really no
better than the improvement expected over the next 10 years in
conventional engines. Unfortunately there is a danger that the
latter options are likely to be favoured by some industrial interests.
22. It is therefore important to ensure
that the most environmentally-beneficial development path is the
one to be pursued, and the Green Fuels Challenge should be structured
in such a way as to ensure that an independent assessment of the
full life cycle impacts of the range of alternative fuel paths
is undertaken before we commit to any particular route, and that
a wide range of stakeholders is involved in this process.
23. The Powershift Programme is also investigating
options to provide greater incentives for the uptake of alternative
fuels, and a further increase in the funding of this work is desirable.