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First principles assessment
Why introduce fuel taxes
Fuel taxes exist in three forms, as an indirect tax purely to raise revenue,
as a charge for the use of roads, and as a pollution tax (DfT, 2002). The
use of indirect taxation to raise revenue has been in existence for many
years; the level can be interpreted as a historical accident or a reflection
of the relative political marketability of each tax (DfT, 2002). Some economists
recommend an increase in fuel tax matched by a decrease in direct taxes
seen as harmful to the economy, e.g. income and investment taxes. That is
to say an increase in fuel tax is part of a revenue-neutral tax shift (Litman,
2002).
| Fuel tax as a charge for road space. When fuel tax is used to charge
for road use, and hence to influence the amount of driving (to reduce
congestion, pollution, severance and other negative consequences of
car use), an excess over and above the economy wide rate of indirect
taxation is levied (DfT, 2002). The excess is an amount, which will
take the total fuel tax to a level that will influence fuel consumption
– i.e. personal decisions about whether to drive or not, and/or
driving style. The excess can be increased annually by a specified
amount, or reviewed periodically. |
| Fuel tax as a pollution tax. Fuel tax can also be viewed as a pollution
tax, based on the polluter pays principle (i.e. a Pigou tax). “If
this tax has been set optimally, the tax payment per unit of fuel
is equal to the social cost of the externalities generated by its
consumption” (DfT, 2002). When the tax level is set in this
way, it is not designed to influence consumption levels. However,
if the current rate of tax means that the market prices are below
marginal social cost, then raising the levy to equal marginal social
cost may influence consumption levels in the first instance. |
Fuel tax as a rationing device. Fuel tax can also be used as a rationing
device. To meet commitments to the Rio Summit and other such treaties
to limit fuel consumption, supply is treated as completely inelastic
(DfT, 2002). Thus, an increase in consumption one industry sector
must be matched by a reduction in another. In this case, the excess
over and above the basic indirect tax would be increased more in sectors
where a reduction in consumption is desired.
|
Demand impacts
Litman (2002) reports a number of price elasticities for fuel consumption.
All the elasticities indicate that substantial increases in price are
needed to achieve noticeable reductions in fuel consumption in the short
term. Nevertheless, the effect appears to be cumulative over time. The
following price elasticities are reported:
|
Estimate by
|
Short term
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Medium term
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Long term
|
|
Goodwin (1992)
|
–0.27% over two to three years
|
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-0.7% over five to ten
|
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Dahl (1991)
|
|
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-1.0%
|
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Hagler Bailly (1999)
|
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-0.6%
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DeCicco and Gordon (1993)
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-0.3 to –0.5% in the US
|
|
Taking Goodwin’s estimates, a 10% price increase would reduce fuel
consumption by 2.7% over two to three years, and 7% over five to ten years
(Litman, 2002).
Reductions in fuel consumption can be achieved by reducing the number
of journeys made or driving more fuel efficient vehicles.
“The elasticity of vehicle travel with respect to fuel price is
typically found to be -0.20 to –0.3 (Harvey, 1994; Schimek, 1997;
Johansson and Schipper, 1997), with values of about –0.1 in the
short run, and up to –0.50 over the very long run” (Litman,
2002).
Joseph (2000) in DETR (2001) observes that traffic levels in the UK “have
been relatively low, despite levels of economic growth that have previously
stimulated significant traffic growth. Rail travel is at record levels
and even cycle and motorcycle traffic is rising. Joseph considers the
key difference between economic growth generating high car traffic growth
in the past and not doing so now is high fuel prices.”
| Response |
Reduction in road traffic
|
Expected in situations |
| 
|
|
There may be a small effect where changing
departure time avoids congestion and thus reduces fuel consumption. |
| 
|
|
Increased fuel prices may encourage drivers
to take the most direct route (assuming it is not overly congested),
although it is unlikely that they will be significantly deviating
from this anyway. |
| 
|
|
Destinations closer to home, work or
other places that individuals cannot avoid travelling to will become
more attractive. |
| 
|
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The effect will depend on the size of
the price increase, but those on low incomes will be affected first,
and make the greatest reductions. |
| 
|
|
The effect will depend on the size of
the price increase, but those on low incomes will be affected first,
and make the greatest reductions. Public transport will become more
attractive when the fuel cost for a journey becomes more than the
public transport fare. |
| 
|
|
Again the effect will depend on the size
of price increases, but those barely able to afford a car will be
affected more. Over all drivers the more likely response would be
to switch to a more fuel efficient vehicle. |
| 
|
|
Where the journey to work becomes prohibitively
expensive, and cannot be undertaken by an alternative, cheaper mode,
some individuals may relocate. In extreme cases, individuals may
relocate both home and job, to be nearer to other family members
for example. Again, those on low incomes will be affected first. |
 |
=
Weakest possible response, |
 |
=
strongest possible positive response |
 |
= Weakest
possible negative response, |
 |
= strongest
possible negative response |
 |
= No response
|
Short and long run demand responses
These estimates are based on fuel tax levels that at least keep pace with
inflation.
|
Response
|
-
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1st year
|
2-4 years
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5 years
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10+ years
|
|
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-
|
|
|
|
|
|
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-
|
|
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|
|
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Change job location
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-
|
|
|
|
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-
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Shop elsewhere
|
|
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|
|
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Compress working week
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-
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Trip chain
|
|
|
|
|
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-
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Work from home
|
|
|
|
|
|
-
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Shop from home
|
-
|
|
|
|
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Ride share
|
|
|
|
|
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-
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Public transport
|
|
|
|
|
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-
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Walk/cycle
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|
|
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*
|
-
|
-
|
|
|
|
|
|
-
|
-
|
|
|
|
|
=
Weakest possible response, |
|
=
strongest possible positive response |
|
= Weakest
possible negative response, |
|
= strongest
possible negative response |
|
= No response
|
*It is more likely that people will transfer to more fuel efficient vehicles.
Supply impacts
There are no supply impacts.
Financing requirements
There are no financial requirements assuming mechanisms for collecting
tax are already in place. Conversely, fuel tax is a major source of income.
Expected impact on key policy objectives
|
Objective
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Scale of contribution
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Comment
|
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By reducing congestion, efficiency will be increased.
|
|
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By reducing congestion, severance, pollution, accidents and other
negative impacts will be reduced, thus, improving liveability.
|
|
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By decreasing car use, negative environmental impacts will be reduced.
|
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As fuel tax is indiscriminate and affects those on low incomes
most, it may have negative effects in terms of equity and inclusion.
Those for whom car use is essential due to the nature of the journey
or lack of alternative will also be unduly penalised. Where tax
levels differentiate between types of fuel, cheaper options may
be available if those concerned can afford to change the vehicle
they drive.
|
|
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Reductions in car use will improve safety.
|
|
|
 /
|
If increased expenditure on fuel reduces spending in other sectors
of the economy, economic growth may be stifled. Although, where
individuals change their travel behaviour to avoid increased costs,
there will be no negative effect on economic growth. Indeed, where
the changes in behaviour result in reduced congestion, growth may
occur.
|
|
|
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Increased revenue from taxes will benefit finances.
|
|
= Weakest
possible positive contribution, |
|
= strongest
possible positive contribution |
|
= Weakest
possible negative contribution |
|
= strongest
possible negative contribution |
|
=
No contribution |
Expected impact on problems
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Contribution to alleviation of key problems
|
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Problem
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Scale of contribution
|
Comment
|
|
Congestion-related delay
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Reductions in car use will reduce congestion-related delay
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Congestion-related unreliability
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Reductions in car use will reduce congestion-related delay
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Community severance
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Reductions in car use will reduce severance
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Visual intrusion
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Reductions in car use will reduce visual intrusion
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Lack of amenity
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Increased demand for local goods and services may result in increase
amenity.
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Global warming
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Reductions in car use will reduce pollution contributing to global
warming.
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Local air pollution
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Reductions in car use will reduce local air pollution
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Noise
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Reductions in car use will reduce noise
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Reduction of green space
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/-
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Reduced demand for car use will reduce demand for increased road
infrastructure and may therefore prevent reductions in green space.
However, increased demand for public transport and associated
infrastructure may negate this effect.
|
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Damage to environmentally sensitive sites
|
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Reduced demand for car use will reduce demand for increased road
infrastructure and may therefore prevent damage to environmentally
sensitive sites. However, increased demand for public transport
and associated infrastructure may negate this effect.
|
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Poor accessibility for those without a car and those with mobility
impairments
|
/
|
Those with mobility impairments who rely on a car to get around
will be penalised unless exemptions or rebates are offered. Those
without a car may benefit if increased demand for alternatives
improves provision.
|
|
Disproportionate disadvantaging of particular social or geographic
groups
|
/
|
Those for whom car use is essential, e.g. some rural residents,
or shift workers for whom there is no adequate alternative, will
be penalised unduly. The effect will be greatest on those with
low incomes. Those without a car may benefit if increased demand
for alternatives improves provision.
|
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Number, severity and risk of accidents
|
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Reductions in car use will reduce the number, risk and severity
of accidents.
|
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Suppression of the potential for economic activity in the area
|
/
|
Reduced congestion will improve the attractiveness of an area.
Although, increased spending on fuel that reduces spending in
other sectors of the economy may stifle economic growth.
|
|
= Weakest
possible positive contribution, |
|
= strongest
possible positive contribution |
|
= Weakest
possible negative contribution |
|
= strongest
possible negative contribution |
|
=
No contribution |
Expected winners and losers
|
Group
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Winners / losers
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Comment
|
|
Large scale freight and commercial traffic
|
|
If these users are subject to tax increases (i.e. no exemptions
or rebates) they will lose if alternatives are not available.
However, if congestion is reduced enough to make substantial cost
savings, the impact on these groups may be neutral.
|
|
Small businesses
|
|
If these users are subject to tax increases (i.e. no exemptions
or rebates) they will lose if alternatives are not available.
However, if congestion is reduced enough to make substantial cost
savings, the impact on these groups may be neutral.
|
|
High income car-users
|
|
The impact on high income car users may not be significant and
not sufficient to prevent car use, but it is nonetheless a negative
impact unless reductions in congestion are sufficient to negate
the fuel tax cost.
|
|
People with a low income
|
/
|
Those dependent on a car will lose, but those who use alternatives
may benefit from improved provision if increases in demand are
sufficient to cause improvements.
|
|
People with poor access to public transport
|
|
Where increased demand results in improved provision, these people
will benefit. Otherwise the effect will be neutral or negative
if public transport is more congested.
|
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All existing public transport users
|
/
|
If operators are subject to fuel tax increases, price rises may
be passed onto customers who will loose. Where rebates are offered,
this negative impact will be minimal. Although, where increased
demand results in improved provision, these people will benefit.
Otherwise the effect will be neutral or negative if public transport
is more congested.
|
|
People living adjacent to the area targeted
|
-
|
Fuel tax is not area based.
|
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People making high value, important journeys
|
|
These journeys may still be made as solo drivers, but reduced
congestion will result in valuable time savings.
|
|
The average car user
|
|
The average car driver will be penalised unless they are able
to use an alternative.
|
|
=
weakest possible benefit, |
|
=
strongest benefit |
|
= weakest
possible disbenefet, |
|
= strongest
possible disbenefit |
|
= neither
wins nor loses |
Barriers to implementation
There are few barriers to the implementation of fuel tax beyond public
opinion. However, as the assessment tables above indicate, there is
potential for unwanted negative impacts.
|
Barrier
|
Scale
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Comment
|
|
Legal
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There are no obvious legal barriers
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Finance
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There are no financial barriers
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Political
|
|
Public opposition to fuel tax increases is likely to be significant,
especially if the alternatives are not perceived as adequate.
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Feasibility
|
|
There are no feasibility barriers
|
|
=
minimal barrier, |
|
=
most significant barrier |
Text edited at the Institute for Transport Studies,
University of Leeds, Leeds LS2 9JT
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