Wednesday, 30 October 2019

Grattan Institute is wrong about replacing fuel duty - the problem isn't just electric vehicles

I wrote before about a good report from the Grattan Institute, in Australia, promoting the idea of congestion pricing.

The report diverts into considering the case for replacing fuel duty in Australia with road user charging on page 32. 

It claims the case is flimsy for three reasons:

  1. Fuel excise revenue is not plummeting, but just isn't growing as a proportion of GDP (this is true).  Drops in revenue in real terms in recent years are because of a freeze on indexing over twelve years, which is a separate matter (but does suggest the politics of raising fuel duty are not that simple).  
  2. It doesn't matter if fuel excise duty plummets because it is not hypothecated for spending on roads and consists of only 5% of Commonwealth tax revenue, and the Commonwealth only pays on average 21% of spending on roads.
  3. Australia has few electric vehicles (0.2% of the fleet) and is only going to be around 4% by 2030.

Now all three points have some validity on the face of it.  Yes, inflation indexation will largely protect revenue from fuel duty for some years.  Yes, the fact fuel duty isn't hypothecated means that road spending isn't dependent on it, and the proportion of electric vehicles is very low.

Yet, this fails to note three other points.

Electric vehicles are only part of the picture. Hybrid vehicles consume on average half as much as standard petrol or diesel engines per km travelled, and sales of hybrid vehicles are around eight times higher than pure electrics, and this figure is only likely to grow.  Furthermore, the trend of fuel efficiency with petrol and diesel engines continues as well, which means that new vehicles, regardless of motive power, use less fuel and so reduce the yield per kilometre travelled from fuel duty.  So while inflation indexing may retaining the value of fuel duty per litre sold, there will be fewer litres of fuel sold per vehicle.  This trend is seen in countries with higher sales of such vehicles such as New Zealand and the United States.  Even if Australia only has 4% of the fleet as pure electric by 2030, it might be more like 40% hybrid, with the remaining vehicles mostly much more fuel efficient than the current fleet. 

Equity is a growing issue.  Even if revenue could be protected solely by indexation of fuel duty to inflation, or increases beyond inflation (and some who advocate for electric vehicles would believe this would increase takeup of such vehicles), it raises a more profound question of equity.  Those acquiring electric or hybrid vehicles in most cases are buying new vehicles, so those who pay the least fuel duty (or none at all), are those who can afford a new vehicle.  Millions of Australians never buy a brand new car, let alone an electric or hybrid vehicle, so the collection of fuel duty over time will fall more and more on those least able to buy new vehicles.  Policy makers may be fine with this, but only if fuel duty is seen to be a tax on emissions, but it is a tax that the wealthiest are best able to avoid by spending A$124,000 on a Tesla  or A$50,000 on a Nissan Leaf.  If fuel duty is to be seen as a charge for using the roads, and contributing to paying for the costs of maintaining and upgrading the road network, then it becomes a much bigger issue, as it is unfair for some to pay and others not.

More closely linking what road users pay to what is spent on the network is a good policy objective. This goal has previously been mentioned in respect to reform of charges of heavy vehicles, and from an economic efficiency point of view, moving roads closer to a utility model whereby (beyond toll roads), road users pay various charges to use the network, based on the costs of maintaining and developing that network.  Hypothecating fuel duty for light vehicles (and heavy vehicles) would do this, and enable longer-term decision making to be made on road maintenance and renewals, allowing long term planning and better management of the costs of maintenance and construction over time.  Making fuel duty more transparent, so road users know what they pay and know it is spent on the network would make it much easier to evolve towards direct road user charging to replace it (and consider reducing the high registration fees in Australia, so that road use, rather than vehicle ownership, is more heavily charged). 

In the long term, road user charging can support congestion pricing.  Over time, if more and more vehicles are paying based on vehicle characteristics and distance, then charging by location and time of day could also be included.  However, it is not a reason to introduce road user charging for electric vehicles or hybrid vehicles in the next decade, nor should the interest in congestion pricing await such technology.

So I reiterate, Australia should investigate light vehicle charging, and along with Heavy Vehicle Road Reform, how reform of the funding, governance and rate setting of light vehicles can deliver a more accountable, transparent and better value for money system of road management for Australia.   It would be timely to reopen consideration of light vehicle charging once the proposed Large Scale On-Road Trial of Heavy Vehicle Charging is launched in 2020

Fuel duty will need to be replaced in Australia because it will be grossly unfair for the wealthiest Australians to pay a fraction of the cost to use the roads than those who can't afford vehicles with newer forms of motive power.  The research on future scenarios and options to address them should start, and within a few years all new electric vehicles registered in Australia, at least, should be required to pay a road user charge, and for work to be started to transition hybrid vehicles onto such a road user charge in due course.

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