Iceland confirms it will be the first country to fully replace fuel tax with distance based road user charges

Early last year I wrote about how Iceland was the first country ever to mandate a distance-based road user charge for electric vehicles and plug-in hybrid vehicles, which it successfully implemented just over a year ago.  Iceland also passed legislation to enable RUC to apply to all light vehicles.

The current Icelandic RUC system is depicted here on the official website, displaying the rates for EV/Hydrogen vehicles and PHEVs, 

The rates are ISK6 (US$0.043) for EVs/Hydrogen and ISK2 (US$0.014) per kilometre for PHEVs.

Iceland's public broadcaster, RUV, has reported (Icelandic) that the system is now to be extended to other vehicles according to the Minister of Finance, and it will apply from the middle of 2025.  

Coinciding with this, fuel tax will be abolished. There are no key details from the report except that the Minister of Finance, Prime Minister and Transport Minister are working on arrangements to implement it, and it will be similar to what has already been introduced. 

Iceland's `"Roads to the Future" site is quite good on data and more information about the concept, but major questions remain unanswered. The site indicates that weight will matter, which of course is important once vehicles have a gross maximum allowable weight of over 3.5 tonnes, noting Iceland already has a distance tax for vehicles over 10 tonnes.  

No doubt this will be revolutionary, and by abolishing the fuel tax (although there may remain a carbon tax to reflect CO2 emissions, it will be the first country to abolish motoring tax on fuel altogether (the only other example even close to this is New Zealand having no such tax on diesel, in exchange for having road user charges on all diesel powered vehicles).

Some of the big questions are as follows:

• Will the rate for all other light vehicles be the same as the EV/Hydrogen vehicle rate? (seems logical)
• Will the rate for PHEVs rise to the same level as other light vehicles?
• What will the rate structure be for vehicles from 3.5 tonnes to 10 tonnes?
• What will happen to the heavy vehicle distance tax? Will it be raised to reflect abolition of the tax on fuel, or will it be replaced with the new RUC system as well?
• What efforts will be taken to minimise fraud with a system based on reporting odometer use?
• What have been the results of the introduction of RUC on EVs, PHEVs and Hydrogen powered vehicles so far? Any issues with non-compliance or fraud?
• Will the system be entirely based on manual reporting of distance (using mobile phones) or is Iceland open to more technologically sophisticated options to automatically report distance (particularly for heavy vehicles).
• Will it apply to motorcycles as well, and if so will it be using the same system?
• Will there be exemptions for travel off of public roads?
• Is revenue going to be hypothecated to spending on roads (as fuel tax was not)?
• Will future rate setting be informed by a cost allocation study/model, or by another approach that links prices to costs or another economic basis for price setting?

Principles of road user charging design in Iceland

Iceland is a small country with only 373,000 people and 12,898km of roads, but high ownership of private cars. 50% of newly registered cars are EVs or PHEVs, with over 18% of the light vehicle fleet now consisting of such vehicles.

It's notable that the Icelandic Government has calculated that with the new system it still will cost more to own and operate a petrol powered car than an EV.  Notable because it is a key concern that introducing RUC will disincentivise purchases of RUC.

 The taxes listed in Icelandic below are from left to right on the legend:

- Kilometre Tax

- Fuel tax

- Carbon Tax

- Energy cost

- Annual vehicle fee

- VAT

There is a presentation due to be made at the March 2025 Brussels RUC Conference, arranged by Akabo Media, on Iceland's system. It will be interesting indeed to see if there is anything to add.

Iceland and New Zealand: The first two countries to mandate road user charging for EVs

After many many years of others talking about it, one country has done it and another will soon follow.  On 1 January 2024, Iceland introduced mandated road user charging (RUC) for electric vehicles (EVs), Plug-In Hybrids (PHEVs) and Hydrogen powered vehicles, and from 1 April New Zealand will also do so for EVs and PHEVs.

Iceland

Iceland has launched EV RUC with a website called "Our Roads to the Future".  No later than 20 January 2024, eligible vehicles are required to have had their odometers read and recorded and transmitted to a government website or via a specific app. Those unable to use websites can go to an authorised service centre for an official reading.

The website indicates that the average petrol powered car pays ISK178,000 a year to use the roads (~US$1305) so the rate for EVs and hydrogen powered vehicles will be ISK6/km (US$0.044/km or US$0.07/mile), and for PHEVs at ISK2/km (US$0.015/km or US$0.024/mile). The lower fee for PHEVs reflect that they are still paying fuel excise for the use of petrol. Iceland presumably calculating that around two-thirds of kms driven by PHEVs is powered by petrol.

Iceland has indicated that this is a first step towards phasing out fuel taxes as a means of charging for road use, with the intention that RUC apply to all vehicles from 2025 (a distance-based tax already applies to some heavy vehicles). 

The reason given is the growing proportion of EVs and PHEVs in the vehicle fleet as illustrated by the graph below:

Proportion of private car fleet in Iceland with EVs or PHEVs

Furthermore, Iceland reports a 50% increase in distance travelled on its roads between 2012 and 2022, including a 36% increase in the number of registered cars.  On average vehicles are paying 30% less per vehicle in 2022 compared to 2012, because of the rise of EVs and PHEVs, as well as the emergence of more fuel efficient vehicles generally. 

In Iceland each vehicle owner will be invoiced monthly for distance travelled, which will be estimated based on the national average, until another odometer reading is reported after one year.  After that point motorists will be expected to supply more regular odometer readings.

Of interest is that the Icelandic Government has estimated that even after introduction of RUC, it will still be around ISK160,000 (US$1173) less per annum to drive an EV compared to an ICE vehicle, so that the impact of RUC on purchases of such vehicles is expected to be minimal. 

Some interesting stats from Iceland include:

• 75% of owners of EVs and PHEVs are located in Reykjavik compared to 64% of the population
• 64% of EV and 61% of PHEV owners are in the top three income deciles
• The highest distances travelled by residents are in those located in municipalities immediately surrounding the Reykjavik metro area, lowest by those in more rural areas.  This contradicts some concerns that distance-based charges would unfairly penalise those in rural areas.

Iceland has a population of 373,000 but has one of the highest car ownership rates per capita in the world, with a road network of 12,898km. Iceland is moderately larger than South Korea and Hungary, and smaller than Bulgaria.

New Zealand

NZ has long had a RUC system that applies to heavy vehicles and light diesel vehicles (since 1978), but an exemption for EVs was introduced in 2009 and it was done on the basis that it would be lifted once EVs reached 2% of the light vehicle fleet (which has occurred).  Following the recent change of government in New Zealand from the centre-left Labour majority government to a centre-right National led coalition government, the newly appointed Minister of Transport, Hon. Simeon Brown had announced that RUC will apply to both EVs and PHEVs from 1 April. 

Owners of both types of vehicles will get a two-month grace period to buy a RUC licence, which are available prepaid in blocks of 1,000 of kilometres (e.g. a motorist might buy 1,000 or could buy 100,000 kms, although there is a time limit on RUC expiry in the event of a price increase).  The RUC rate for EVs will be the same as light diesel vehicle at NZ$0.076/km (US$0.046/km or US$0.074/mile), but the rate for PHEVs is NZ$0.053/km (US$0.032/km or US$0.052/mile).  This reflects a calculation that the majority of PHEV distance travelled in NZ is undertaken using electricity (with the difference made up from fuel excise duty paid through petrol).

Owners of both types of vehicles will need to take odometer readings after 1 April and will have subsequent odometer readings verified through annual Warrant of Fitness (WOF) (vehicle safety) checks.

At the end of 2023, there were around 73,000 EVs registered in NZ, and around 30,000 PHEVs.  RUC in NZ is administered by the NZ Transport Agency, which receives all RUC revenue to distribute to road controlling authorities and regional councils (and itself for maintenance and development of the state highway network) through the National Land Transport Programme (NLTP).

New Zealand has a population of around 5.3 million, with one of the highest car ownership rates in the world. Its road network is around 97,000km long. New Zealand is larger than the UK and moderately smaller than Italy.

Similar to Iceland, New Zealand's government has also announced intention to phase out fuel tax as a means of charging for road use, although there is no timetable for that to be implemented. It is likely that following the EV and PHEV RUC introduction, that other ICE powered hybrids would be next to be transitioned to RUC.  That's because petrol hybrids will soon be paying the least of any cars on NZ roads, because their average fuel consumption is around half of the petrol vehicle average.

In NZ a cost-allocation model is used to inform the setting of RUC rates, based on forecasting revenues needs for the forward-looking expenditure in the NLTP, and allocating that based on various vehicle characteristics includes axle load, weight, road space occupancy, vehicle specific factors and on a flat per km basis (depending on the type of spending).  This informs setting of the entire schedule of RUC rates distinguished by weight band and axle configuration.  The light RUC rate is converted into the fuel excise duty rate for petrol, by basing it on the total vehicle kilometres travelled of petrol vehicles divided by the average fuel economy of all light petrol vehicles.  Fuel tax for petrol is then, on average, the same as RUC for light vehicles.  

As petrol hybrid vehicles generally have half the fuel consumption of the fleet average, they pay half as much as petrol vehicles per km, on average, and after 1 April 2024, they will be charged half as much as pure EVs and PHEVs.  It will be important for NZ to shift such vehicles onto RUC within the next few years.  

Iceland likely to be first European country to introduce RUC for light vehicles

Few remember Iceland when discussing experience in road user charging (RUC) in Europe, perhaps because it is an island (and so has virtually no foreign vehicles visiting), and it is also not a member of the European Union (but then neither are Switzerland or Norway). 

Iceland has had for many years a RUC for heavy vehicles, in the form of a fairly simple weight-distance charge on vehicles with a maximum allowable mass of ten tons or greater.  In 2008, it raised IKK1.083b (US$7.8m).  

RUC for EVs and plug-in hybrid vehicles

However, Iceland is about to leap ahead of all other European countries in being the first to implement a nationwide distance-based RUC for electric, plug-in hybrid and hydrogen vehicles from 1 January 2024.  Consultation on a draft Bill (Icelandic only) to implement this charge has recently closed. Iceland Monitor reports that the fee will be ISK6 per km for electric and hydrogen powered vehicles (US$0.043 per km or US$0.069 per mile), but hybrids will be charged only ISK2 per km (US$0.014 per km or US$0.022 per mile), to reflect that they continue to pay fuel taxes. 

Iceland has had a significant growth in electric and hybrid vehicles, with 85% of new light vehicles sold in Iceland in 2022 being electric or plug-in hybrids.  This reflects a VAT exemption for such vehicles, and other very low taxes. 73% of Iceland's electricity comes from hydro-power and almost 27% from geothermal energy, so electricity prices in Iceland are immune from international commodity prices.  Nearly 20% of all cars in Iceland are either electric or hybrid of some form, so the impacts on fuel tax revenues have been considerable.

So Iceland will have surpassed the rest of Europe as no European country has so far mandated or even agreed to introduce some form of distance-based RUC for any light vehicles at all. 

RUC for all vehicles

This isn't the end, as the Icelandic budget indicated that the introduction of the new fee will be monitored in 2024 with an eye to applying it to ALL vehicles under ten tons, and to review the future of taxation of petrol and diesel. This had led to speculation that Iceland could put all vehicles on RUC and reduce or abolish fuel taxes used to fund the transport system. If it does so, then it will be a world-leader in transitioning from fuel taxes towards RUC, and so shifting from taxing energy to taxing road use.