New Zealand's next steps to road user charging for all vehicles UPDATED

I've written twice before (here and here) about the policy announcement from the New Zealand (NZ) Government around introducing road user charging (RUC) for all vehicles.  This was a policy commitment by the National Party-led coalition government after it was elected in 2024.

On 6 August, Minister of Transport, Hon. Chris Bishop, has made a further announcement about this.

On the face of it, it looks like following Iceland to become the second country in the world to phase out fuel excise duty (FED) in favour of charging vehicles for road use by distance and vehicle class. For those who know about NZ's RUC system I don't want to go into detail as to how it works now (there is a Handbook with information here published by the NZ Transport Agency which manages the existing RUC system), but here are some very quick points for those unfamiliar with it.

NZ's RUC system

In NZ motor vehicles registered to use public roads either pay based on consumption of a taxed fuel (petrol/gasoline, LPG and CNG) or on distance based on vehicle class (RUC).  In summary (I've omitted some details that are inconsequential, for the sake of pedants):

• All RUC and Fuel Excise Duty revenue is hypothecated into the National Land Transport Fund (NLTF), which is used by the NZ Transport Agency (NZTA) (along with revenue from motor vehicle registration and licensing fees, and direct government funding from the Crown) to fund the National Land Transport Programme (NLTP), which is central government's funding of roads, public transport, walking and cycling infrastructure, rail and coastal shipping.
• RUC rates are informed by a cost allocation model applying economic and engineering principles to future NLTP spending.

Depiction of how New Zealand's RUC rates are based on cost allocation

• 1.2 million vehicles in NZ are subject to RUC. This includes all heavy vehicles regardless of fuel source (vehicles with a Gross Vehicle Weight of over 3.5 tonnes) and all light vehicles that are diesel, electric (EVs) or plug-in hybrids (PHEVs). Around 80% of vehicles subject to RUC are light vehicles.
• RUC raises NZ$2 billion (US$1.19 billion) per annum in net revenue, which is around 40-45% of the revenue to the NLTF. Fuel excise duty raises around the same from petrol powered light vehicles only.
• The RUC system comprises prepaid distance licences, either paper or electronic.  The rate structure for RUC varies by vehicle class and weight, based on a cost allocation model that allocates future spending based on the consumption of that spending by vehicle class/weight.
• Over 95% of light RUC vehicles and a majority of heavy RUC vehicles are on the "manual system". This means regular checking of the paper RUC licence against odometer (hubodometer for heavy vehicle) readings, and purchases of new licences in blocks of 1,000kms or more either online or at retail outlets.  Once purchased the new RUC licence is issued and is typically displayed on the vehicle windscreen in the bottom corner.  At regular safety inspections, the odometer reading is recorded by the inspector and forwarded to NZTA to check against the latest distance licence.

Sample RUC distance licence as displayed on windshield

• Over half of heavy RUC revenue is raised through eRUC system providers:  Three companies offer eRUC, with electronic distance recorders that measure distance matched against locations, primarily for commercial vehicle fleets to more efficiently manage RUC and their vehicle fleets. These companies collect revenue for NZTA at virtually no cost to government, and attract commercial vehicle fleets due to the convenience of billing them for all vehicles, rather than monitoring and buying RUC licences for each vehicle.  The three companies are telematics providers (EROAD, Teletrac Navman and RUC Monkey).  The market for these systems was legally established in 2009.

Teletrac Navman electronic hubodometer

 

Early EROAD distance measurement device

• Electric and plug-in hybrid light vehicles were added to the RUC system in 2024. This was around 120,000 vehicles with over 95% compliance.
• Heavy vehicles are required to have either hubodometers or electronic distance measurement devices installed to be registered. This includes all heavy trailers, in order to capture variations in vehicle configuration that affect applicable RUC rates.

Hubodometer as required to be installed on all registered heavy vehicles

• Distance travelled off public roads is not subject to RUC. Vehicles with eRUC automatically have off-road distance not measured to avoid consuming RUC, owners of vehicles on the manual system may apply for refunds through a manual (and time consuming) process.  The same applies to petrol powered vehicles operating off of public roads and any other equipment using petrol. It is possible to apply for refunds of FED, but many do not do so because of the time and complexity required.
• NZ has an Emissions Trading Scheme, which sees a cost of CO2 emissions included in the price of fuels used domestically in NZ. FED has never been designed to be an environmental tax, noting there is no FED on diesel.  FED is a proxy road user charge.

What's the objective?

Revenue sustainability and fairness.

While FED is a very cost effective way of raising revenue, the variations in what petrol vehicle owners pay are considerable based not only on engine size but engine type.  Although EVs are on RUC now, as are PHEVs (at a reduced rate to reflect their use of petrol), battery electric hybrid vehicles (BEHVs) and small fuel efficient petrol vehicles are paying much less per kilometre to use the roads compared to the average petrol powered car.  There are already 350,000 BEHVs effectively paying half as much as all other light vehicles to use the roads.

In future years, rates of RUC and FED would both need to increase to reflect inflation and the Government's ambitions for significant capital spending on improved roads. While tolls are to be used to help with some projects, they will not be able to be applied to many capital improvements. Raising FED creates a distributional impact on those unable to afford new vehicles that are more fuel efficient or have different drivetrain technologies such as EVs, PHEVs or BHEVs.  FED is simply no longer fair compared to RUC which can apply a flat rate across all light vehicles to reflect their use of the road network and the spending from the NLTP that benefits them all equally.

Putting all vehicles on RUC means that changes in vehicle technology won't affect revenue and future RUC increases will apply equally to all light vehicle owners, reflecting spending on land transport infrastructure.

What's going to happen?

RUC legislation will be amended:

• to remove the requirement for paper RUC licencesa and prepaid licences.  This will enable RUC to be billed based on past travel, rather than future distance travelled. 
• to enable use of telematics systems already built into vehicles as a means of measuring and reporting distance travelled, rather than simply the odometer or a third-party device.
• Separating NZTA's role as regulator of electronic system providers and provider of the manual RUC system, to remove conflict of interest in encouraging competition in the supply of RUC service provision.
• Allow tolling and future congestion pricing services (time of use charging in NZ parlance) to be bundled with RUC for those choosing to use electronic system providers, to avoid the need for multiple accounts.

The intention is that this should enable a wider range of technical and commercial options to measure, report and bill for RUC.  With the existing market base of around 1 million vehicles on the manual RUC system, the potential should be there for new providers and technical solutions that are cost effective.

The expectation is that by 2027 a next generation of RUC providers and options will be available supplied by private companies, to attract existing RUC users from the manual system and make it easier to transition other light vehicles onto RUC.

No deadline for the RUC transition has yet been set, which is sensible as there are some major issues to work through.

It appears that the manual system will remain and that location will NOT be mandated as part of an eRUC system. This should help address concerns about privacy.

Unanswered questions

While there is a lot of speculation as to what will happen and when, some of the big issues remain to be worked out in the coming years. These include:

• Will the manual RUC system remain in some form? There is an argument to retain it for vintage vehicles and some older vehicles that are not suited for third party devices for various reasons. Furthermore, retaining the manual system will address a raft of privacy concerns for many people, even if it is modernised to be based on reporting distance travelled rather than prepaid distance.  On 7 August the Minister indicated that a manual option will remain for those who want it. 
• How will the transition be structured?  Vehicles using a specific fuel can either be switched all over overnight or in groups, while having some means of exempting, refunding or crediting FED as long as it remains.  There are merits and costs in both approaches, and there should be flexibility around FED to facilitate the latter by technical means.
• Will RUC remain a single national rate for the time being?  The merits of eRUC which includes location are minimal for light vehicles that don't go off road, so the transition raises questions as to wider reform of pricing roads.  On 7 August the Minister indicated that location measurement would not be mandatory.  Given the commitment to more tolls and time of use charging, location will be an option for those wanting to use eRUC as an interface to such systems, but they will remain separate policies. Existing governance structures are almost certainly not going to be able to deliver more disaggregated road pricing by location and time of day efficiently, and there are reasonable concerns as to whether future government may use it to act punitively against certain classes of vehicles in specific locations.  Not mandating location should ameliorate those concerns.
• How is non-compliance going to be managed? There are obvious merits in treating road as a utility, but there are costs too which are born by utilities. These are around customers at the margins of being able to pay invoices and those who seek to evade the system altogether (along with vehicle licensing and safety inspections). Existing RUC compliance is focused on heavy vehicle compliance generally, with one means of checking light RUC compliance, this is unlikely to be adequate for a system that will have 95% of its customers as private vehicle owners.
• How will the market for eRUC service providers be adequately incentivised?  It is not a brand-new market but the market for eRUC for private vehicle owners is almost non-existent under current settings. Some mix of mandating RUC and allowing a wholesaling of RUC may provide the answer to this, but other options may need to be considered, such as revenue sharing.
• Will OEM (Original Equipment Manufacturer) telematics systems be opened up to enable use of data for RUC? Whether by OEMs or by legislation, being able to unlock the potential for these systems (which raises some issues in itself) for service providers to bill vehicle owners, will be important in maximising convenience, compliance and minimising costs.

Assuaging concerns

There may be some work to be done in convincing the public that FED will be abolished and people won't be paying twice. Associated with that will be concerns about RUC being used to raise much more revenue at higher rates, although this was entirely possible with FED (and for many years part of FED revenue was general Crown revenue not hypothecated to the NLTF. This was abolished in 2008 as the Government spending on land transport had been increased considerably, and there had been a successful political campaign for some years to end FED revenue being split between the NLTF and the Crown.  One way of assuaging concern about rates would be to review and update the Cost Allocation Model used to inform the setting of RUC rates, so that it is at least seen as being based on economic calculation to generate revenue for specific land transport spending and not simply political whim.

There is also some concern about privacy, if everyone is required to have an electronic device or system that measures and reports distance by location (which isn't essential if RUC is going to remain a single national rate for some time).  Other concerns are around use of data, especially the idea it might be used for speed enforcement. While it seems highly unlikely that the current centre-right government would want to implement such a policy, it is not inconceivable that a different government which seeks to rigorously pursue a policy of zero road fatalities and to discourage private motoring might use such a system punitively.  The current eRUC system allows fleet operators to be notified if their drivers exceed speed limits, but this is entirely voluntary and does require real time tracking, which is not cheap to implement given data requirements (and is typically applied by fleet operators to ensure that their expensive vehicles and cargos are being protected).  RUC legislation ought to be drafted to ensure that it addresses concerns around privacy and scope creep.

Ultimately this is a revolutionary move, far moreso than any of the US states moving towards RUC for EVs (with the possible exception of Hawaii which IS looking to transition all light vehicles onto RUC by 2033), and more than any countries in Europe, which all struggle to implement RUC on light vehicles. If successful, it will certainly put NZ at the leading edge of RUC internationally.

All of this at the same time as NZ is progressing legislation to enable congestion (time of use) pricing (see the Bill for that here), which is expected to be implemented using automatic number recognition technology in the foreseeable future.

UPDATED: Following a TVNZ news story which included an interview with Hon. Chris Bishop on 7 August which provided further elaboration of his intention, several elements of this post have been amended.