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.