Friday, 19 March 2021

The case for road pricing in the UK

(This follows on from a submission to the Transport Committee of the UK House of Commons calling for written evidence on an inquiry on zero emission vehicles and road pricing prepared by a consortium of experts, comprised of Ian Catling, Andy Graham of White Willow Consulting and Andrzej Kowalski, with Steve Morello from Milestone Solutions (as am I))

The primary reason there is any political interest in road user charging in the UK today is fiscal pressure.  However, there is a wider economic, social and environmental case for moving towards road pricing, not least because existing charging mechanisms are very poor at sending price signals to road users about vehicles use.

The revenue case

As the UK vehicle fleet transitions to more fuel efficient engines, including all types of hybrids and electric vehicles, and this accelerates due to the looming ban on sales of new internal combustion engine (ICE) powered road vehicles, fuel excise duty revenues are in decline as fuel consumption per mile driven drops.   The UK Office of Budget Responsibility’s last published forecast of fuel duty revenue was in March 2019, when it forecast that fuel duty revenue would fall by 0.1% of GDP by 2023/2024 (from 2018/2019), that assumed that fuel duty would rise by inflation (Retail Price Index) from 2020/2021, which has just been stopped by the Chancellor of the Exchequer.  

A report by the Institute for Fiscal Studies in October 2019 looked at fuel duty and made a number of conclusions.  

Fuel duties have a roughly equal impact (as a share of spending) across the income distribution, but among car owners make up a greater share for lower-income households. For nearly one household in twenty, fuel duties (and the VAT on them) make up a tenth of their total non-housing budget and for many driving is a necessity, one reason why this is an unpopular tax. 

There is a long term trend of reducing road transport emissions, with emissions having dropped 4% in 25 years, despite considerable growth in demand, but the UK Government announced last year that sales of new petrol and diesel light vehicles will be banned after 2030, with hybrid vehicles only permitted to be sold until 2035.  This is expected to have a significant impact on the fleet during the next decade.  In 2018 only 6% of vehicles sold were “alternatively fueled” (electric or hybrid), but in 2020, despite a 29% decline in sales due to Covid19, the share of sales by electric and plug-in hybrid vehicles increased to a 10.7% share, with conventional hybrids as another 6.8%.  This compares to 3.1% for electric and plug-in hybrids in 2019, and 4.3% for conventional hybrids.  Although a true picture wont be clear until there is a year without Covid19 dramatically hindering the economic, the trend away from conventionally powered vehicles is clear. It indicated that revenue from fuel duty will progressively disappear in coming decades and that the time to address this is now, as it will become increasingly difficult to replace this revenue if a high proportion of the fleet becomes vehicles that are not subject to any form of charging for road use.

Around £28 billion a year is raised from fuel duty and another £6.5 billion from vehicle tax (formerly called vehicle excise duty).  Some argue that fuel duty is a good way of recovering the monetised social costs of road vehicle use, but it simply isn’t. The IFS noted that although the social costs of car use were estimated to be £0.169 per kilometre in 2015, 78% of those costs are generated by congestion, with only 7% of those costs attributable to either climate change or health impacts of noxious emissions.  The average amount paid per vehicle per km is around £0.07, but if most of the other costs are congestion then it’s worthwhile to ask some serious questions as to whether fuel duty is an effective way of recovering those costs.

Fuel duty is arguably a good tax to charging for CO2 emissions, and an acceptable tax for noxious pollutants, but it is an awful way of charging for congestion, not least because it charges all vehicles the same regardless of where or when they are being driven.  

The IFS noted that the most congested roads (London A Roads) have marginal congestion costs of around £0.80 per km, but comprise only 3.5% of all trips in the UK. By contrast, 23.2% of all road trips are on rural A roads, but the congestion costs are only £0.026 per km.  Fuel duty charges vehicles based on fuel consumption, which varies by engine type, driving style and road conditions, but not by that extent.  Furthermore, those costs vary by time of day.  The IFS noted that congestion costs at weekday PM peaks are on average nearly four times as high as offpeak.  However, this is all academic for electric vehicles as they pay no fuel duty and so do not arguably pay for any externalities.

So for around half of all car trips, fuel duty over recovers the social costs of driving, with this over recovery disproportionately affecting driving in rural areas and at off peak times.  If you usually drive in London at peak times then fuel duty is “too cheap” (and the chronic congestion in usual conditions reflects this), but if you usually driven in rural areas at most times, or in regional towns and villages outside peak periods then fuel duty is “too expensive” as a tax.  However, what is the point of taxing congestion if it has a negligible impact on it at all?  Much earlier work on the effects of fuel duty on overall driving demand indicated an impact of about 10% on total vehicle kilometres driven.  This isn’t insignificant, as it assumes that if fuel duty were abolished, there would be around 10% more road travel, but this is exactly how electric vehicles are treated today.  Electric vehicles contribute nothing towards road maintenance, or any other externalities, and they are the future.

Fuel duty has only three advantages: it is very cheap to collect, difficult (although not impossible) to evade and does effectively target CO2 emissions.  However, it is blunt, it does not reflect the wide range of variations in congestion costs and is inequitable, as for many motorists it means they are charged too much to use the roads.  

IFS concluded: 

Alternative taxes will be needed to ensure the social costs of motoring are reflected in the prices people pay. The government should take the opportunity it has now to set out both its long-term strategy for taxing motoring and how it will get there. There is a window of opportunity to do this quickly, before revenue from fuel duties disappears entirely.

The wider policy case for road pricing

If it were just about revenue, the simple answer to the end of fuel duty would be to tax vehicle ownership.  This would mean that vehicle owners would pay thousands of pounds every year to register a vehicle, regardless of how little or how much they use the road network.  This would obviously have a negative impact on the road network, as it would mean those that use the roads the most are cross-subsidise by those that use it the least, so any replacement of fuel duty has to be a charge on using the roads.  It means embracing the user-pays principle and linking what is paid to the costs of what is being used.

Road pricing or road user charging can be used to link paying for the road to a number of factors such as:

Road infrastructure costs, which vary somewhat by location, but also vary considerably by vehicle type and weight (in particular, heavy vehicles generate exponentially more wear and tear on the network than cars do, but noting that around half of all road maintenance costs are attributable not to road use, but simply the effects of the climate (sun, rain, snow and temperature changes) on road structure).  Charges can vary by vehicle type and configuration (as is done in many countries for heavy vehicle road user charging).

Congestion.  This is a factor of both location and time of day, but road pricing can allow for charges by those factors, to help encourage changes in road demand.  This could be to change time of travel, mode of travel or route.

Environmental factors.  Road use might be charged based on emissions or by location to reflect the environmental sensitivity of a specific location (to deter its use for through traffic). 

What determines what road pricing is used for are the other policy objectives that politicians want to apply beyond simply raising revenue.  The submission suggested the following:

• Reducing emissions and carbon impact, and improving other environmental outcomes (including supporting transition to EVs)

Road pricing, even if it replaces fuel tax, can be structured to reduce emissions and support better environmental outcomes.  The simplest way to do this is to have charge rates that vary by Euro engine rating as is commonplace for HGV charging schemes in continental Europe.  This could be applied to all vehicles, and incentivise zero-emission vehicles (without making them exempt) and disincentivise the highest emitting vehicles.  There is some evidence that this approach has been successful in Germany in driving greater use of Euro 5 and above rated vehicles on motorways.  

A more complex approach would use location and time of day to incentivise more environmentally behavour.  Congestion pricing in itself would have environmental benefits in reducing emissions through better traffic flow, but location based charging could also see higher charges for driving on roads which expose people or sensitive ecosystems to higher environmental impacts.  This could encourage changes in route or mode, and combined with differential charges for vehicles based on emissions.

Emissions could be reduced by having preferential rates for lower emitting vehicles compared to others.  Zero-emission vehicles could be charged less than those with low-emissions which are also charged less than higher emitting vehicles.  Just because road pricing might be introduced doesn’t mean there cannot be higher charges for the most polluting vehicles.  

 • Delivering a better level of service for all road users (to give a secure funding stream to address the maintenance deficit and reform highway governance to be more accountable to road users)

A better level of service could be achieved by more fundamental structural reform in how highways are funded and managed. Revenues from road pricing could be dedicated to funding road maintenance on a long-term basis, much like revenues from water and energy bills are dedicated to funding their relevant network infrastructures. Highway governance could be reformed (perhaps following on from the relative success of Highways England as an independent professional highways manager led by meeting performance targets informed by what users want), and the long-standing maintenance backlog with roads (particularly local roads) could be addressed by a sustainable programme of improvements. There are unseen costs to poor road maintenance, in safety (particularly for pedestrians and cyclists), delays, higher fuel consumption and in some cases detours (especially for heavy vehicles facing weight restrictions on life-expired bridges). All road maintenance should be on a long-term performance-specified basis, so highway contractors can establish economies of scale and the staff with professionals on a long-term basis, like with energy and telecommunications contractors, rather than rely on ad-hoc politically driven pothole funds, which literally patch up a problem that arises from the governance model for roads. Road pricing can link the user to the provider, and enable those structural issues to be addressed and for funding above that to be available to deliver the many high-road improvements needed to address road safety blackspots, congestion bottlenecks and access issues on parts of the network, informed by user demand.

The primary objective would be to put all roads on a sustainable long-term funding basis, linked to what users pay and users needs, economic efficiency and be able to more dynamically respond to changes in vehicle and traffic trends, which vary considerably across different communities.  A hypothecated roads fund, with an independent regulator to allocate funds and monitor how they are spent by highway authorities could form the basis for this.

 • Better managing congestion, or distributing it across wider time periods, places and routes

Congestion may be much better managed if road pricing includes measurement of trips by time of day and location, as congestion pricing may be introduced strategically on parts of the road network. Rather than blunt cordon/area charge schemes as have been introduced in London and proposed for other cities, congested corridors may be charged a higher per mile rate at peak times, with small increments, and charged less off-peak, encouraging motorists to change trip times, route or mode of travel.  No other single policy measure would be more effective in reducing congestion. Although network wide road pricing with time and location would require a lot of vehicles to be equipped to measure road use by such factors, the benefits in reduced congestion could be dramatic, with much of the impact coming from changing time of travel as prices during off peak periods could be commensurately lower, so that overall the same amount of revenue is collected, but with much less paid by drivers in rural areas or during off peak times. The congestion reductions would automatically increase the capacity of bus networks, as buses would not be trapped on congested roads so could undertake trips more quickly, and more frequently, and so be able, in part, to meet higher demand for their services.  However, to do this would require a much bolder step technically than just introducing a per mile charge, which would take more time and at greater cost.  The policy question is whether to do this at the same time as introducing a distance-based charge or to leave it as a subsequent step.

If road pricing includes location and time of day (which would require the use of GNSS telematics either built into vehicles, installed or reliably linked to a vehicle through a smartphone) then it could vastly reduce congestion on UK roads. Studies from 15 years ago indicated that a good national road pricing system could HALVE congestion in the UK.  It is not economically efficient to price all congestion off the roads, because some congestion is due to bottlenecks in the network that haven’t been efficiently relieved (e.g. London’s North Circular Road has three locations where capacity significantly reduces compared to the adjacent section of road), but also it is likely to be efficient to allow some reduction in level of service at peak times, as long as it ensures optimal flow of traffic.  The M25 may function more efficiently at 50mph than 70mph at peak times, so there is no need to price it to sure a consistent 70mph speed of travel.  

The management of congestion should be understood as not being about pricing trips off the network, but rather a mixture of behavioural responses:

Most motorists will continue to drive as they do now, paying for a better level of service than they get now. Experience with sophisticated congestion pricing schemes, such as Singapore, indicates perhaps 70-80% of trips do not change;

Some will change time of travel, to a cheaper time with more spare capacity. Around half may do this;

Some will change route, as in some cases the congested route is parallel to less congested alternatives;

Some will change mode of travel, dependent on the convenience, cost and speed of an alternative mode;

Some will choose not to travel at all, which may mean fewer trips, but the same tasks undertaken by those fewer trips (logistics companies already seek to do this, but it might mean some people plan appointments together on one day rather than on multiple days).

 • Better recovering road user costs from foreign vehicles as well as UK vehicles

Road user costs from foreign vehicles are only partly recovered now from vehicles over 12 tonnes with the HGV Levy.  Road pricing could enable all foreign vehicles to be charged, and for the flat HGV Levy (which is a charge on the number of days a foreign lorry can access UK roads) to one based on actual usage.  By enabling interoperability with systems in continental Europe (at least for heavy vehicles as there are no light vehicle network road pricing systems in continental Europe so far), then foreign vehicles could be charged per mile for using British roads on the same basis as UK vehicles.  This avoids the trend for some to refuel outside the UK to avoid the UK’s higher fuel duty.  Longer term care will be needed to address concerns if the UK has abolished fuel duty but neighbouring countries have not, but this effect is nullified somewhat if road pricing has equivalent costs.  Filling up on fuel in the UK might be cheaper, but to actually USE UK roads for that purpose will be more expensive, and it will still only be an activity undertaken if there is business in the UK (notwithstanding some potential issues with the Irish border).  

• Digitising highways – making the most of the rich seam of anonymised data from connected vehicles for improved network management, road safety and network planning

Road pricing has the potential to more digitise how highways are managed, by providing an extensive amount and breadth of anonymised data from road users to improve network management, predict maintenance requirements and schedule works.  From the timing of road works, to the provision of information to road users on diversions through to information about the number and average weight of heavy vehicles using roads (and how that affects maintenance) can make the highway network as a whole run more efficiently by delivering operational and asset management savings over time.  Increased data about congestion and what sorts of vehicles are affected by it can help inform interventions to alleviate congestion, or choices about allocation of road space.  For example, what would be the impact of reallocating road space to cycling and pedestrians, as to what types of road users are affected, and how pricing itself might target congestion.

• Other policy objectives, e.g., supporting walking and cycling, modal shift, levelling up costs of travel

Finally, by having road pricing, there is a pricing tool that can be used to meet a range of other policy objectives.  For example, it could discourage short motoring trips to help promote walking and cycling, or it could price differently if there is a lot of spare public transport capacity in parallel.  Pricing offers flexibility that doesn’t exist with fuel duty, albeit the greatest flexibility will need more sophisticated systems capable of measuring distance varying by time of day and location.

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