Tuesday, 26 May 2015

Long term trend towards less oil use - what does this mean for fuel tax?

An excellent article in Slate describes the long term trend in the use of transport fuels in the United States:

According to the EIA, the U.S. transport system required about 6 percent fewer BTUs of energy to function in 2014 than it did in 2007. And it used nearly 10 percent less oil than it did that year. In fact, oil consumption was lower in 2014 than it was in 2000. And as a proportion of transportation fuel, petroleum hasn’t been this low since 1954, when coal was still a significant transportation fuel. Petroleum’s market share has fallen from 96.5 percent in 2004 to 91.5 percent in 2014.

US transport sector energy consumption by fuel (Source: Slate)
So in proportionate AND absolute terms, there is less oil being used for transport in the US.  This is not because there is less tonnage being shipped (quite the opposite) or fewer people travelling, no it is because of fuel efficiency and the emergence of alternative fuels and motive power for road vehicles. Given that in 1954 the reason petroleum was a lower proportion was because railroads still used coal for steam locomotives (they virtually all use diesel now), the transformation today is considerable.  

4.7% of consumption is now alternative fuels including ethanol and biodiesel, 3.5% is now natural gas.  In 7.5 years the average fuel consumption of cars sold in the US has improved by 25%.

Although oil prices have dropped, there is little indication that this trend is about to be reversed, which poses an obvious question.  What is the future of fuel tax (or "gas tax" in the US)?

In the United States and a few other countries, fuel taxation is a direct source of revenue that is dedicated to government spending on roads and public transport subsidies.  However, in many other countries it is simply another form of taxation, although it tends to be acknowledged as a way of charging bluntly for the negative externalities generated by burning petroleum products.

Of course, lower consumption does mean some obvious benefits, from lower noxious emissions and contributions to CO2 emissions.  These benefits can be monetised, and there is an argument for maintaining this momentum, but it is unlikely that fuel taxes are the key driver for this, not least because they are so low in the United States compared to other markets (in some cases less than a tenth of the taxes in Europe).  

The growth of alternative fuels and greater fuel efficiency creates the obvious issue that revenue per vehicle mile is dropping, so what should be the response to this?  There are three broad paths that jurisdictions can go down:

1. Do nothing: This is, in effect, the default position of the US Federal Government, but also all those jurisdictions that do not increase such taxes.  The implication of this is that either funding for roads gets subsidised from non-usage based taxes (which is what the US Federal Government does), or funding gets cut, or those dependent on funding find alternatives (which in a federal-state relationship can mean greater use of tolls).  As easy as this option is, it lacks any strategic focus and is essentially an adhoc approach to charging road vehicles and raising revenue for highway infrastructure.  The mere fact that this has been the primary approach of most US state governments, as well as Federal, is a damning indictment on the political process to think strategically about the highway sector.  In Europe, given such revenues are rarely even partially dedicated to transport spending, it may be easier, although this simply means as a source of revenue, fuel taxes diminish over time.  It doesn't necessarily mean transport funding has to, but it does beg the long term question about reform of taxation.

2. Increase fuel taxes:  By increase, I mean go beyond inflation (which a few jurisdictions already so, such as New Zealand), and increase to take into account the real loss of revenue due to efficiency. This may have some initial appeal, as it is likely to encourage a more rapid shift to alternative fuels and more fuel efficient vehicles.  Yet the distributional impact of this is going to be more mixed.  It will impact those who are least able to afford new vehicles the most, and also those with fewer alternatives in terms of mode or trip consolidation (e.g. rural motorists).  On the other hand, it also means those driving alternatively fueled vehicles or highly fuel efficient vehicles are paying much less to use the roads, so the vague relationship between what is paid and the costs imposed upon the highway system (or capital consumed in using roads) reduces even further.

Of course, in many jurisdictions fuel tax isn't even nominally intended to be a way of recovering the infrastructure, let alone external costs, of highway use, although the economic case for doing so is clear.  When there are clear policy goals to avoid subsidising overuse of highway networks (because of congestion, pollution and lack of public funding for maintenance, renewals and network enhancements), it seems obvious that moving towards a user pays approach makes sense.  Fuel taxes may be a first, blunt, but low administrative cost way of doing this.  Yet, if the relationship between fuel consumption and road use widens more and more across the vehicle fleet, it simply means that some road users are paying much more than others, going above and beyond the pollution costs that may be fair to recover from those users.   Even if there were a hypothetical solar powered car, it consumes road space and road capital tied up in the infrastructure.  It should pay for using that infrastructure, even if the case to charge it for negative externalities is zero.

So, whilst increasing fuel taxes may be a short term palliative, it feeds the cycle of ever decreasing consumption of petroleum and inequities between those who pay more through such taxes, and those who avoid such taxes because they can afford to buy more fuel efficient vehicles.

3. Implement road usage charging:  In my view, the only solid case for fuel tax is as a carbon tax.  If it were set at an appropriate price to reflect this, it would easily be the most defensible way of recovering that cost.  It is, not, a good way of recovering the imputed costs of noxious pollution, because it isn't a tax on particulates or NOx or other emissions (as diesel vehicles emit more of these by-products that petrol vehicles, but emit less CO2 and use less fuel). Beyond that, it has long been established that the relationship between fuel consumption and infrastucture costs is very weak. One reason being that the greater stresses imposed on road infrastructure due to heavier vehicles is not reflected in proportionately higher fuel consumption to recover such costs.  Furthermore, it is clear that there is no relationship at all between the long run amortised capital costs of roads and the consumption of fuel of vehicles as they use them.

However, it is not the argument that charging vehicles through fuel taxes is inefficient and badly targeted that is driving investigation of options for distance based road usage charging in the USA, but rather concern about the sustainability and equity of continuing to do so.  Oregon is already well on the way to implementing such a system for the most fuel efficient cars, as an option. and other states are investigating how to move in that direction.  What it raises are a whole host of questions, not least how to transition from the current taxation of fuel to charging by road usage, and also whether there is a role for continuing to tax fuel (if only because of the environmental externalities).


Many of the problems of highway management and infrastructure in the US today are due to a lack of funding, but also poor pricing and recovery of the costs of maintaining such infrastructure.  Looking at charging directly for use, rather than through the proxy of fuel taxes would help answer one element of this, and opens up wider questions of thinking of the links between using roads, paying for roads, spending money on roads and their management.  It isn't just an issue for the US, but in all jurisdictions where fuel taxes are a significant contribution to public funds.

Doing nothing may remain the easy option, particularly if the politics of raising fuel taxes are difficult, (and the politics of considering direct charging even more so), but what it ought to do is open up a dialogue and discussion about what roads are for, who should pay for them, how funding for them should be allocated, and where policy on highways should be heading.  I advocate an approach that more closely linked road users to decisions on funding, and how and by how much they are charged, because doing so has delivered greater benefits in other economic sectors.   It requires some strategic thinking that goes beyond how vehicles are taxed.

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