Intelligent fuel taxation?

As jurisdictions in North America and elsewhere look at what to do about the future of fuel taxation, one suggestion has been put forward by independent transport policy advisor, Phil Carey, who used to be had of the Road Pricing Framework Division (when it existed) at the UK Department for Transport and previously led the transport policy review for the Prime Minister’s Forward Strategy Unit.

It was circulated by the RAC Foundation (not prepared for it), and is another cut on the options available to the UK government for reforming vehicle taxation. 

The report is here, below is a summary of the key points.  Essentially, it is a way of applying the technologies available for road pricing, but in a way that uses fuel duty to affect behavioural change.  The philosophy behind it is described in the executive summary:

rather than trying to levy an extra charge on reluctant drivers, the flexibility of fuel duty means the government could instead go down the easier route of offering a rebate: less fuel duty to pay if the vehicle has been driven on less congested roads. This aligns well with the current focus on  behavioural economics, i.e. rewarding people for desired behaviours. If the numbers are to stack up for the Treasury, fuel duty would clearly have to rise to better reflect the costs of driving in congested conditions. However, almost all drivers would then get some rebate – modest in cities, potentially substantial in rural areas. The net effect is a more finely-tuned ‘intelligent fuel duty’ (IFD), collecting a fairer charge based on how motorists actually drive, and acting in a much more economically efficient way.

Proposal

Fuel duty should be increased so that in real terms it charges at a level equivalent to a congestion charge, but all vehicles can choose to be equipped with devices that enable them to claim a rebate for not driving at peak times on congested roads.   Those that do not get equipped, would pay the full price.

Fuel duty is, in effect, pre-payment to use roads, so the rebate system would be rewarding the use of roads at times when the full duty should not apply.  

"A simple, well-publicised banded structure assigns different levels of rebate per km driven on different types of road at different times; there is no discount for driving on urban roads at peak periods."

It becomes a reverse congestion charge, so that motorist would know they would get a greater rebate driving in the off peak.  The technology used is not detailed, but could involve a smart phone linked to the vehicle, or a bespoke GPS device.  What would matter is that it was able to identify driving outside the charged times and roads, as long as it could do that, then the discount would apply.  

Hypothetical fuel duty rebate rates

The report contained the table above, and several others as samples of how it could work.  As you can see, at peak times, motorways and urban roads may be deemed to be "congested" and see no rebate, but rural routes would have a reduced one.  Whereas mid and low charge periods would have various levels of rebate built in.   Of course, this is just a concept, and alternatives may suggest a minor rebate for motorways over urban roads, to encourage traffic to use roads at peak times that are better suited for it.

Principles

The key points of the proposal surround the weaknesses of fuel taxation, and the difficulties of introducing any new forms of road pricing, largely due to the political toxicity of the issue.  His key points are:

- It is unfair to keep increasing fuel tax in a way that bluntly adds to charges for all motorists, regardless of where and when they drive. "At a typical average fuel duty plus VAT cost of 5 p/km, rural driving on quiet roads ends up paying far more than all the costs it conceivably imposes. In fact analysis shows that at least 70% of all driving brings in more revenue in fuel duty than all the identifiable costs it imposes in congestion, pollution (including carbon) and accidents".  Indeed, some would debate that the costs are that high, but the key point is fair.  Increasing fuel taxes continues to overcharge the many, and undercharge the few, if one goal is to reduce congestion;

- He notes the advantages of the "Road Ahead Group" Brian Wadsworth proposal to reform Vehicle Excise Duty, but that it leaves fuel duty alone.  A point that I share.  Noting "At present we are caught by the  Treasury’s understandable desire to protect the current attractions of fuel duty and to target carbon reduction, and the political wish to avoid anything that smacks of extra charges for using roads. The result is paralysis in the face of the congestion challenge."

Problems

• The proposal rewards off-peak driving or driving on uncongested roads.  There would be some controversy about motorists who have filled their tanks, pre-paid at the full rate, but drive only occasionally, as they would only be "rewarded" if they drove to use up the fuel in their tanks.  In effect, it penalises occasional motorists because it may be some weeks or months before they get the rebate.  Given there is likely to be a cost to be equipped to facilitate the rebate, it imposes an additional cost on those users (although this could be overcome by some sort of subsidy).
• The long term strategy for such a rebate is unclear.  The long term issue of fuel efficiency isn't addressed, as those with the most fuel efficient vehicles still pay less, and those unable to afford such vehicles pay the most.  It certainly doesn't address the sustainability of revenues from fuel taxes.  Over time, rebates would need to be adjusted, and hybrid/alternatively fueled vehicles would face quite different incentives.
• There is a considerable amount of central government mandated technology and planning required, as roads would need to be designated as congested at set times on a case by case basis for this to be most effective.  This could be delegated to local authorities, but does contain risks of information being wrong if it is centrally managed.  
• Users would complain if things went wrong, so you would face considerable expense from "customers" seeking money back.
• Foreign vehicles would be a complication, as there are issues under EU law about not making this available to such vehicles on an equivalent basis (although there is no big reason to say no to offering it to foreign vehicles).

Then there is commercial vehicles, which are excluded from the proposal in theory, but in practice would face a real difficulty because fuel duty reform of this kind would necessarily have to include diesel.   So it would be wrong to not raise diesel the same as petrol (especially given the environmental impacts), but that would mean including all vehicles in the rebate scheme.  Not a bad thing in itself, but it is hard to see how the line can be drawn based on fuel.

Conclusion

I like the concept in principle, as it is one way of trying to address the toxic politics of road pricing, but delivering significant potential benefits in terms of behaviour change.

However, the prospects of increasing fuel tax to the level needed to create serious behavioural change are daunting, and I doubt it could be announced in advance and be politically acceptable.  We are talking here about a doubling of fuel duty, in effect, and telling all motorists to relax, they only need a government mandated device to get a rebate from it.  I do not think this is substantially less toxic than suggesting the alternative of offering people the option of paying less fuel tax by paying per mile.   

What is behind it is intelligent and economically sound, but the need to address the sustainability of fuel tax means that it would be better to consider how to approach some replacement of that tax, rather than find ways to increase it and then offer a rebate.

The congestion relief benefits from this proposal are potentially high, as they are for simply moving to road pricing, but it is because of the increase in fuel duty that this happens.

Furthermore, it has the more fundamental problem of needing to be centrally managed.  One of the object lessons of major IT projects in the UK is that they are to be avoided, for the risks involved in terms of cost, scope creep and poor quality procurement are considerable, and are not born by those making the decisions.  Far better in my view to look to devolve responsibility for these issues from central government to a set of highway companies who can best make these tradeoffs.  For this concept to work easily, it would see city centres or major corridors deemed "rebate free" at certain times, and the debates would come as to what those times are and what corridors it means.  This opens up a Pandora's Box of arguments that are impossible to resolve centrally, and which local authorities will be incentivised to adjust for their own ends.  I would be sure many would simply say their entire cities get the rebate, then the issue of hypothecation (which this proposal seeks to avoid) rears its head.  What incentives are there for local authorities to get that right, when there are political and business access issues that will, initially, be very loudly resistant to the concept.

If it did not target with that degree of precision, it would give rise to all sorts of accusations of being too blunt.

In that light, I prefer an approach that doesn't fiddle with fuel tax, but offers motorists options to pay per mile, and get a proportionate refund in fuel duty.

It does not address congestion, but starts to offer an incentive to move away from fuel duty to paying directly for road use, which in itself will influence demand. Over time, it would have to include some compulsion (i.e. all new vehicles automatically paying according to distance), and then it starts to be able to include some modest variations in charges based on time of day.  It has the advantage of a relatively low profile introduction, so has a greater chance of being accepted, and being able to protect against the erosion of fuel tax revenue.  It doesn't deal with congestion, but Brian Wadsworth's proposal (PDF) could, in parallel with this, contribute towards an incentive to avoid peak driving.

I can envisage a system whereby motorists opt in to paying by distance on all roads (perhaps cheaper on motorways than other roads, to reflect relative infrastructure costs), and get a proportionate refund in fuel duty, but also can earn a rebate on vehicle excise duty based on when and where they drive.  Both would be optional, but such a proposition could be made compelling for many motorists (although the Wadsworth proposal would need tweaking to incorporate HGVs in a way that is fair and does not breach EU law).

The key is for it all to be voluntary to be acceptable to enough people, and for trust to be built up that the new voluntary options actually involve getting some value from a system that most perceive simply rips them off.