Tuesday, 27 March 2018

How should the UK Government reform the HGV levy?

In January 2018, the UK Government consulted on how it could reform it's heavy goods vehicle vignette scheme, also known as the HGV Levy.  The HGV Levy charges all trucks 12 tonnes and above for using any public roads in the UK, based on either one day, one week, one month or a year of use of the network (see this PDF for the rates).

For UK registered trucks it is relatively simple, as the Levy is only available as an annual charge collected in parallel with Vehicle Excise Duty (VED) - the annual vehicle registration tax.

The HGV Levy was introduced as a relatively simple way of raising revenue from foreign trucks using UK roads (as VED on the trucks liable for the HGV Levy was reduced on almost all those vehicles, meaning most paid nothing more).  

The HGV Levy was introduced on 1 April 2014 and in its first year earned £46.5m (US$65m) in revenue from foreign trucks (it also earned £146m from UK registered vehicles, although this largely corresponds to revenue lost from reductions in VED).

As a vignette, the HGV Levy is basically a prepaid fee for using UK roads based on time, as is similar to such schemes operating in several European countries.  The well-known Eurovignette is levied by Luxembourg, the Netherlands, Denmark and Sweden for using their roads.  Latvia, Lithuania, Romania and Bulgaria all also have heavy vehicle vignette charging systems.

What's wrong with the HGV Levy?

It's better than not having it at all, but it has the same fundamental limitation of a charge, for an activity that generates externalities which isn't based on usage, but on charging a right of use.  It effectively means that vehicles using roads the most are cross-subsidised by those using roads the least.

The HGV Levy will generate more revenue if the number of HGVs registered in the UK increases, but not if the current fleet is used more intensively.  Similarly, if more foreign HGVs enter the UK, there will be more revenue, but not if those that already visit the UK travel more often.   Obviously, the vignette may be said to incentivise operators to maximise utilisation (because they pay the same whether a truck is idle or not).

However, to properly understand whether or not the HGV Levy should be reformed, or not, there needs to be some clear policy purposes to it.  For all of the information in the consultation documentation, there isn't a clear stated policy purpose for the Levy itself, just some related policy goals of the UK government around the road freight sector. 

Those policy goals are:
  • Encouraging individual HGV operators to plan more efficient route operation and use the most modern equipment.
  • Helping to drive more efficient use of our roads.
  • Reducing emissions which contribute to poor air quality and climate change.
These are all very well, but before any of that, I'd suggest the core objective of any such charge should be:
  • In association with VED, seek to recover the fixed and marginal infrastructure costs of road use from vehicles that are charged.
As it stands, it doesn't do that particularly efficiently.  For a start, it charges vehicles more according to the number of axles they have.  Although this might be seen as a proxy for increasing wear and tear (based on Equivalent Standard Axle (ESA) Loading), it also penalises operators for having lower ESA loadings for the same tonnage.   However, in a vignette, it doesn't make a lot of difference.

How could the HGV Levy better meet the UK Government's policy goals?

The last of the goals could be better met by having emissions ratings included in the existing charging scheme.  EEVs and the highest Euro rating vehicles could pay less, as with the German system.  That would also, indirectly, encourage use of the most modern equipment (although it's far from clear exactly what public policy objective that achieves in and of itself).   That would be relatively simple, but the other goals (more efficient route operation and driving more efficient use of the roads) are difficult to achieve with a charging scheme that only distinguishes by vehicle classification and dates of permitted access to the network.

Distance, mass, location based charging is the logical next step

For any scheme to incentivise better use of the road network there needs to be a geographic element.  This is near impossible to do with a prepaid vignette.  There could be separate vignette products for use of the strategic road network (Motorways and major highways) compared to the local road network, but it is unclear what that would achieve? Virtually no trucks can usefully operate in the UK without access to the local road network, so that would be universal.  Charging separately for motorways would disincentives use of that network, which is hardly going to optimise road use.

Far more effective would be to charge for actual road use.  That means charging for distance consumed, based on vehicle class and with a location element, so that route choices can be influenced.

For example, it would be logical to incentivise greater use of motorways and major highways over local roads, because such roads tend to be built to standards that mean that the marginal wear and tear generated by a heavy vehicle axle passing over the road surface is lower.  Furthermore, such roads tend to be safer on a vehicle km basis and avoid built up areas.  As a further step, rates could vary between individual strategic and local roads at a later date, with lower rates for A compared to B roads and unclassified roads, to discourage use of residential streets to avoid congestion.

Environmental objectives could also be better met through a distance based charged, because it better links payment with road use, so that those that drive the most pay the most.  As in many European countries, rates could vary according to Euro engine rating, with higher charges for the lowest rating. See the charge rate structure for the German LKW-Maut system below:

German LKW-Maut vehicle classification
A vehicle has a emissions classification as above, which places it into a category.  This category determines whether a pollution charge is levied on top of the infrastructure charge.  The highest quality emissions category pays nothing for pollution, but the lowest quality pay €0.083/km (US$0.167/mile).  Infrastructure categories reflect numbers of axles, which is a simple proxy for vehicle mass.  It can argued that this is not strictly efficient, in that the more axles there are for a vehicle of similar mass, the lower the marginal wear and tear that vehicle imposes on the network.  However, given Germany only charges for use of the motorways and expressways, it is likely that the difference this makes to road maintenance costs in Germany is low.

LKW Maut per kilometre charge rates

So having emissions based charging will both reduce emissions and encourage use of newer vehicles.  Allowing distance and location based charging will enable more efficient route choices to be made.  The bigger question then becomes: How could the UK transition to mass/distance/location based heavy vehicle charging?

A possible path

Other European countries have moved from vignette based charges to distance charging, and the UK could combine this with a reduction in Vehicle Excise Duty to match the rates for light vehicles, so that charges shift from ownership to usage.  However, the UK will probably also need to offer some refunds for fuel duty as well, given how significant fuel tax is as a revenue source (and how unsustainable it is over the long term).  There are revenue benefits in replacing a proportion of fuel duty, because a shift to distance charging will protect it from fuel efficiency and changes in engine technology (albeit limited for many HGVs in the short term).   Any revenue collected from a new distance based charge from heavy vehicles would have to be hypothecated, and it would make sense for this to be a source of funding for both local roads and strategic roads for maintenance funding, alongside Vehicle Excise Duty from all vehicles.

Rate setting for the heavy vehicle charge should also be undertaken independently, by an independent regulator seeking to raise revenue to meet the needs of the road networks across the country, using a cost allocation approach that means heavy vehicles pay only their share of long run maintenance and capital costs of the network.  This also means reforming the whole funding and governance system for roads.  Highways England is a good start, but a similar reform should apply to local roads and the road authorities of the devolved administrations should follow as well.

The way to deliver a heavy vehicle charge would be to adopt an open market approach, certifying service providers to a standard of performance to measure road use and bill for it.  There would have to be procurement of a service around compliance and enforcement, to ensure vehicles paid the charge.  Refunds of fuel duty as part of the system may help increase compliance, but there will need to be considerable efforts made to promote compliance.

Any change should start with HGVs 12 tonnes and above first and transition down to 3.5 tonnes and above over several years.  What this should do is provide a platform for further change in the longer term as fuel tax becomes increasingly unsustainable, and mean that heavy vehicles are charged efficiently and effectively for wear and tear they impose on the road network, with rates able to be adjusted at a geographical and time of day level, to help encourage road use outside congested periods.

I doubt the current UK government will go down this path, but I can certainly see a future one doing so.

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