Can road user charging be used to tax carbon dioxide emission directly, if it replaces fuel taxes?

The rise of alternatively fuelled vehicles, such as electric vehicles, plug-in hybrid electric vehicles and perhaps hydrogen fuel cell technology has promoted exploration and implementation of road user charging (RUC) in jurisdictions across the world as a replacement of fuel tax for revenue from motor vehicles.

What this means is that motorists will more directly pay for their road use, they will see the cost of that use, and may change behaviour as a result. It is also a shift from taxing fuel to taxing distance. The taxation of fuel is largely invisible to motorists, as it is built into the cost at the pump, and although in most jurisdictions it changes from time to time, its effect is that motorists prepay for road use when they refuel.  Of course taxing fuel makes the fuel more expensive, and so adds to incentives to consider the cost of fuel when purchasing and using vehicles, and some environmentalists are concerned that by making petroleum and diesel cheaper it will reduce incentives to buy alternatively fuelled vehicles.

Replacing fuel tax with RUC and introducing a carbon tax

Associated with that is debate about how best to internalise the costs of emissions that contribute to climate change. Some jurisdictions have adopted an emissions trading scheme (e.g., New Zealand), which effectively means that businesses have to purchase the right to emit in order to produce their goods or services, which includes passing on those costs to their customers. Depending how widespread it is implemented, this is an economically efficient and rational approach towards internalising such costs, as the price gets built into the cost of goods, such as fuel. Others have considered taxing carbon dioxide production, through taxing fossil fuels. Carbon taxes can be implemented in a range of ways, with the least administratively burdensome being upstream taxes so that the cost is built into the price of fuels. Indeed the key to making such taxes work to reduce emissions is a combination of universality of application and the level they are applied at. Without universal application, activities are incentivised towards those that are not taxed.

In the field of road transport, an obvious option is to apply a tax on fuel so that motorists reflect the cost of carbon dioxide in that consumption. The one thing that fuel tax is optimal for is being a tax on consumption of that fuel and the resulting carbon dioxide emissions (it isn't necessarily that good for noxious emissions, which vary based on engine design, emissions controls and driver behaviour).  

However, if a jurisdiction's policy is to replace fuel taxes then if it doesn't already have a carbon tax, it may be politically difficult to justify retaining fuel taxes for emissions as well as adding RUC. After all, if the public has been convinced of the merits of RUC as a fair way of paying for the roads to replace fuel tax, it is also likely to be convinced that fuel taxes are to be abolished. Keeping or adapting fuel taxes to become a carbon tax is highly likely to be politically difficult.

There is an alternative, put forward by Jim Whitty, to have a downstream carbon tax as part of RUC, which could use technology to measure and charge actual emissions, along with distance, or average emissions. Revenue from such a carbon tax could also be recycled to further support emissions reduction or address distributional concerns about the effects of carbon tax on those with low incomes. 

Jim Whitty is best known for having been the Manager, Office of Innovative Partnerships and Alternative Funding at the Oregon Department of Transportation (USA) from 2004 until 2016, where he led three pilot programs for RUC for light vehicles.

The recently published paper he has led is titled "Consumer Participation in Transport Carbon Reduction Through Transparent Downstream Carbon Taxation and Spendable Carbon Mitigation Credits" (yes the title is far too unwieldy, but it basically is "Using RUC to implement a carbon tax and recycling the revenue".

The full paper is available to download and read here (PDF). It was written by Whitty, Travis Dunn, myself, Roshini Durand Mootoosamy and Jeff Doyle of the then Milestone Solutions LLP. 

The start of the Executive Summary is reproduced here (note it is written in American English):

Twenty years ago, economists described a carbon price directly charged on vehicle emissions and paid by emitters as a “purely downstream” approach as opposed to upstream or midstream along the supply chain. The vigorous research and development that made road usage charges viable for transportation funding over the past decade have now also made the purely downstream, or “transparent” approach to carbon taxation, feasible.

This paper shows how a carbon tax can be collected directly from light-duty vehicle owners as a policy to reduce greenhouse gas emissions, either alone or in combination with a road usage charge. By collecting a carbon tax via a road usage charge system, a governmental jurisdiction can collect a carbon tax directly from drivers, affordably and transparently, to encourage better energy consumption choices. A road usage charge system collects the same data required for calculation of a per-mile charge—distance traveled and fuel consumption—for calculation of a carbon tax charged directly to owner/operators of light-duty vehicles.

Under the concept introduced in this paper the bulk of dollar amounts paid on light duty vehicle emissions would create climate mitigation credits available for purchasing zero-emission vehicles (ZEVs). ZEVs purchased in this manner would replace vehicles that emit GHG from the tailpipe. A vehicle owner’s climate mitigation credits would accumulate over time, until applied to a ZEV purchase, and listed on a periodic carbon tax invoice.

The key potential here is that RUC need not undermine environmental policy around climate change, but rather complement it, if a jurisdiction has not implemented policies to internalise climate change costs from road users. Options to use the revenue are widespread and open for much more research.  

Denmark to introduce distance-based road user charging for trucks UPDATED

As part of climate change policy the Danish Government announced in December 2020 that it is introducing distance-based road user charging (RUC) for heavy goods vehicles (press release in Danish).  In Europe this is typically referred to as "truck tolling" although it is distance based charging and is applied across a wide network, not point based charging on a specific road (which is the traditional definition of tolls).  This is part of a national policy goal to reduce emissions by 70% by 2030.

The intention is to introduce the new system from 1 January 2025, which will replace Denmark's participation in the Eurovignette (time-based) RUC scheme.  The objective of the new RUC scheme is to improve incentives to change the heavy vehicle fleet towards lower emission vehicle, but will be designed to reflect:

• Infrastructure, road wear costs;
• Noxious emissions;
• Climate change impacts; and
• Noise.

As with the Eurovignette, it will apply to Danish and foreign registered trucks (apparently not buses) with a gross maximum laden weight of 12 tonnes or more. Eurovignette is estimated to generate DK0.5 billion (US$79.8 million) revenue from Denmark at present from such vehicles, of which 20% is from foreign vehicles.  The proposed new RUC system should generate the same amount of revenue in the years 2025-2027 and then increase to DK1 billion (US$159.6 million) from 2028 onwards (which assumes a sizeable increase in charges). 

Estimated costs for establishing the system are DK200 million (US$32 million), with ongoing operating costs of DK175 million (US$23 million), with depreciation at DK25 million p.a. (US$4 million).  Within those costs are enforcement, estimated to cost around DK10 million (US$1.6 million) p.a., which is expected to be fully recovered from fines.  

These forecast costs are a far cry from levels seen in previous estimates or from schemes introduced ten or more years ago.  This is due to significant drops in the cost of GNSS telematics OBUs, drops in the cost of mobile data communications thanks to 4G (and soon 5G) technology. reductions in the costs of enforcement equipment and systems (notably ANPR cameras) and the emergence of a competitive market in RUC service provision in Europe.  The latter is particularly notable, as early schemes (such as the German LKW-Maut) had a single provider of services, but in the past decade a more open market approach has emerged, putting pressure on both equipment and operating costs.  This was pioneered in New Zealand in 2011 with its introduction of eRUC, and the introduction of a certification system for service providers supporting the electronic option to charge RUC in that country (which now has three service providers), followed by Oregon which has done the same for heavy RUC and its light RUC pilot. In Europe it was pioneered in Hungary shortly thereafter.

I suspect the costs for enforcement are too low, unless the labour costs are seen as overlapping with safety enforcement activities (so the incremental cost of enforcing RUC is insignificant). 

Interestingly, the press release indicates there has been extensive dialogue with the Danish trucking industry and the introduction of RUC may parallel some liberalisation of rules around the use of double trailers and reform of the mass and dimensions rules around trucks. This could help with acceptability by enabling higher productivity vehicles (larger trucks) to operate on Danish roads, with greater capacity (and as a result using less fuel and producing less emissions to move the same freight). 

The project is being managed by Sund & Bælt. a Danish Government owned company that is responsible for several very large infrastructure projects (it is best known for being responsible for crossings such as Storebælt fixed link between Zealand and Sprogø, the Danish part of the Øresund fixed link and the under construction Fehmarnbelt fixed link between Germany and Lolland, Denmark).  It is to be responsible for implementation and operations, as well as enforcement. The reason for granting authority to Sund & Bælt is because it was assessed as having experience with similar tasks and having the necessary competencies, as it has over 20 years experience in operating tolling, it is believed to have some of the project and operational competencies around customer service, technical monitoring, charging systems, technical knowledge and communication. 

It's worth remembering that Denmark pursued heavy vehicle RUC before, which I wrote about in 2012 and 2013 when it was abandoned.  It appears the primary reason it was abandoned was cost, although Hungary and other European countries have subsequently been able to address this (suggesting that perhaps the concept of operations and the procurement approach taken at the time was not optimal).  

There are limited details of what the Danish scheme will look like, including its scope (both in terms of applicable vehicles and the network subject to RUC), but it could apply to all goods vehicles over 3.5 tonne and given experience of all European heavy RUC schemes (except Switzerland and Iceland) it will likely apply to motorways and national highways (although it could apply to all roads if desired).  There is also little indication of forecast revenues and costs, although EU Directive 1999/62 does set some clear rules around rate setting, so Denmark cannot over recover such costs.  

Denmark has had to its south the German LKW-Maut scheme, which charges all heavy goods vehicles over 7.5 tonnes on all German Federal Highways since 2005, and of course multiple other similar schemes in other European countries such as Belgium, Switzerland, Hungary and Slovakia.  The system is required to be interoperable, so it is possible that vehicles with accounts and devices for the German LKW-Maut scheme will be able to be used for the Danish system.  Denmark notes it needs to have dialogue with neighbouring EU Member States to ensure compliance with EU law.

The Eurovignette remains of course in Luxembourg and Sweden, given the Netherlands previously announced it is introducing a heavy vehicle RUC system (and Sweden continues to develop such a scheme).  Given these trends, will it be that Luxembourg has the rump of the Eurovignette, which once applied across central Europe (including Germany) or will Luxembourg introduce its own heavy RUC scheme, taking advantage of the fact that its neighbours (bar France) all have heavy RUC schemes?

UPDATE:  Hat Tip to Søren Have from Denmark who via Twitter directed me to additional sources of information on the project, in Danish.  Documentation in available here (in Danish), but through Google Translate I can add the following points (and have edited above).

The technical solution, unsurprisingly, is a GNSS telematics on-board unit, which is estimated to cost DKK1000 (US$160) including installation, with an option for cheaper self-installed units. Devices are not expected to be purchased, but rather supplied as part of service provider contracts. No manual option will be provided, reflecting the extent to which vehicles particularly from Germany are expected to be equipped (as well as those registered in Denmark that regularly travel to Germany). 

Project schedule appears to be as follows:

• Political clearance by mid 2021
• Establishment of project and organisation by mid 2021
• Legislation for implementation introduced mid 2021, passed mid 2022
• Procurement and delivery of solution from mid 2021 through to early 2024
• Negotiations with service providers early 2022- late 2024
• Preparation and operation of testing and commissioning early 2023 - early 2025

The scheme is forecast to reduce total truck traffic by 2-3% primarily by:

• Reducing demand for road freight;
• Productivity improvements in the road freight sector that are expected to parallel the move
• Modal shift (although this is questionable).

Certainly if the increase in revenue after 2027 is primarily due to significant increases in charges there would be expected to be a demand impact.