Memorandum from the Automobile Association
As a policy tool to help the UK meet its international
climate change obligations, the fuel tax escalator has been expensive
to all motoring households; a disproportionate and excessive cost
on less well-off car-owning families, and a huge political failure
which has harmed the overall promotion of genuine environmental
It is an indictment of the flawed fuel tax escalator
policy that successive governments did not develop cost benefit
models similar to the AA's, and never challenged the AA's own
model which showed clearly that the fuel tax escalator was an
expensive and cost ineffective measure to reduce CO2
The tax concession given in the 1999 Budget
for ultra low sulphur diesel has been a spectacular success. The
concession the Chancellor has promised for ultra low sulphur petrol
will mean nearly all petrol vehicles will produce materially lower
toxic emissions by April this year. This demonstrates that the
motoring tax system can be used highly effectively for environment
advances, as seen from the introduction of unleaded fuel onwards.
The push of technologies and the pull of financial
incentives and regulation are now playing a significant part in
helping to achieve the Government's environmental policy objectives.
Policy must blend revenue neutral tax changes and technology and
regulations so they work in harmony.
The Chancellor's strategy to change the basis
of the road fund licence and company car taxation is ambitious
and reforming, and will support the toxic and greenhouse emission
strategies. It reinforces the key EU/ACEA agreement as ever more
fuel efficient vehicles are brought forward.
These welcome motoring taxation reforms enable
positive signals to be sent to consumers maximising the chance
of favourable reaction because the measures are tax neutral, are
easy to package and to present to motorists, and motorists will
see them as logical and sensible.
The Chancellor has taken key reforming steps
to modernise motoring taxation and the AA has urged him to embark
on further reforms in his next budget and undertake to:
motoring taxation to reduce reliance on fuel tax for general government
spending, from the current £1 in £7. A long term commitment
not to increase general fuel taxes in line with inflation in future
budgets would be a well recognised way of achieving this;
announce a general review of road
taxation with a key goal of re-establishing trust and making clear
what social, environmental and infrastructure funding, and general
taxation principles are guiding motoring taxation policy. In particular
the proportions of road tax and fuel duty that fund roads should
be separated and made transparant from those levied for general
monitor fuel prices to ensure that
consumers receive the tax reduction from ultra low sulphur fuels
The Chancellor in his Pre-Budget Statement confirmed
the end of the fuel tax escalator, gave a commitment to reduce
the duty on "greener" petrol and diesel, and undertook
to freeze fuel duty increases in his 2001 Budget. He also set
out details of reform to the road fund licence for cars and lorries,
and gave further reductions in the road fund licence for smaller
engined cars. These announcements were welcomed by the AA as positive
steps but more needs to be done if our archaic motoring taxation
system is to be reformed and trust re-established.
The Committee has focused on three specific
questions. The AA's response is drawn from the extensive research
we have commissioned over the past five years. Attached to this
submission are the following AA reports:
"Tracking CO2 emissions
from UK homes and cars". December 1997.
"Fair payment from road users:
A review of the evidence on social and environmental costs"
by Professor David M Newbery. February 1998.
"The effect of fuel prices on
motorists" by Professor Stephen Glaister and Dan Graham.
(i) What is the case for using fuel duty,
amongst other measures, to help us meet UK air quality targets
through reducing demand for transport?
The UK has two air quality targets: The National
Air Quality Strategy, and the UK Climate Change Programme.
The National Air Quality Strategy (NAQS)
This defines air quality standards for eight
major pollutants, and sets objectives for reductions in the concentrations
of these pollutants. The elasticities of petrol use with respect
to price are so small that, even with a 6 per cent fuel tax escalator,
they are overtaken by growth in incomes within the year.
Fuel duty change to all intents and purposes
has no impact on NAQs. In contrast technological development,
particularly engines and fuels, have ensured that for most pollutants,
and in most areas of the country, the standards will be achieved.
A new car made today produces less than 5 per cent of the toxic
pollution of one made 25 years ago. The AA Toxic Tailpipe Indices
for toxic pollutants show that since 1992 pollutants from the
tailpipes of the nation's cars have fallen.
|The AA 1999 Toxic Emissions Indices Reduction in Emissions (%) from Cars Since 1992
Further reduction in pollution from the next generation of
new cars will result from the implementation of Euro III and Euro
IV which will come into force in 2001 and 2005 respectively. These
are shown in the following table.
|The Relative Fall in Toxic Emissions Since 1992 as a Result of the Euro Standards (medium-sized car, urban test cycle)
|| 9|| 19
|| 4|| 9
|| 3|| 6
|| 2|| 3
|Diesel||pre-Euro I|| 7
|| 10|| 43
|| 4|| 29
|| 3|| 21
|| 2|| 13
|| 1|| 7
In short, the AA has supported and promoted the introduction
of Euro-IV technologies because, although these bring increased
costs to motorists (eg cost of catalytic converters), those costs
are justified by the benefits based on a national approach. The
AA has also promoted and supported enforcement against wilful
There will be "hotspots", where air quality objectives
will not be met. These will be mainly in some inner city areas
with high concentrations of ageing buses and lorries running on
old and polluting diesel technologies, and other local sources
of pollutants. Specific action is needed to get these old technology
vehicles replaced with newer cleaner technologies.
The tax system can be used highly effectively for environmental
advance as seen from the introduction of unleaded fuel onwards.
The Government's proposals for reform of lorry road tax to improve
environmental performance, and to provide a ring-fenced fund of
£100 million to incentivise and give allowances for old technology
lorry scrappage are welcome steps.
The tax concessions given in the 1999 Budget encouraged take-up
of ultra low sulphur diesel. This has been a spectacular success.
Virtually all diesel sold in the UK is this cleaner ultra-low
sulphur variety, and the UK is one of the few countries in Europe
to be benefiting from its use.
The AA believes the Chancellor's commitment to reduce fuel
tax on ultra low sulphur petrol by 2p a litre in April (in addition
to the 1p a litre given from October 2000) will stimulate a successful
switch to production and distribution of this fuel. For example,
Esso's Fawley refinery commenced production of ultra low sulphur
petrol last October in a response to the 1p tax reduction.
The AA submission to the Chancellor in October 2000 called
for further tax concessions to encourage the take-up of ultra
low sulphur petrol. The AA subsequently welcomed this decision
which means nearly all petrol vehicles will have materially lower
toxic emissions by April 2001
Not only will the widespread use of ultra low sulphur fuels
reduce the emissions of NOx, CO and VOCs from tailpipes, it is
also an enabling fuel to allow the introduction of new petrol
engine technologies, such as gasoline direct injection, which
offer significant improvements in fuel efficiency and hence a
reduction in greenhouse gas emissions from cars. The longevity
of catalytic converters is also expected to increase.
The push of technology and pull of regulation and financial
incentive will support both the Government's National Air Quality
Strategy and its Climate Change Programme so playing a significant
part in achieving environmental policy objectives. The AA rejects
approaches to environmental policy that do not work with the grain
of people's everyday lives and win reasonable people's acceptance.
Revenue neutral tax changes, technology and regulation can be
made to work in harmony.
The UK Climate Change Programme
Petrol and diesel in the UK is the most heavily taxed, and
the most expensive in the developed world. This results from the
policy of successive Chancellor's of the Exchequer to increase
fuel duty by up to 6 per cent annually above the level of inflation.
The table highlights the effect of this policy on the UK price
of motoring fuels.
|Petrol Prices and Taxes EU Member States9 October 2000
|Taxes and duties|
|Pre-tax price per litre
Successive chancellors, regardless of political party, have
tried in public to justify the fuel tax escalator on environmental
groundsthat increasing the price of fuel was necessary
to help the UK meet its international obligations to reduce greenhouse
gas emissions. However, the order of priorities was best explained
in the Chancellor's 1999 Pre-Budget Statement when he scrapped
the fuel tax escalator stating:
"The fuel escalator was inherited from the previous Government.
Since 1997 the escalator has been needed to reduce the £28
billion deficit we inherited as we put in place our new measures
to protect the environment. Those who have opposed the escalatorincluding
some who originally imposed ithave to explain how, without
it, they would have cut the deficit, made money available for
public services and in the last two years been meeting our environmental
Eminent economists have argued that the fuel tax escalator
was a blunt instrument, and a most expensive one for families.
The impact of the escalator in terms of reduced emissions of CO2
from cars has been minimal. Nor were claims of fast growing emissions
from cars truthful. CO2 emissions from cars were stable
throughout the 1990s despite traffic growth because of technological
The agreement between the European Commission and the car
manufacturers will significantly reduce CO2 emissions
from cars in the future, despite traffic growth. As with toxic
pollution it will be technology and not taxation that has, and
will continue, to deliver the policy objective of improved fuel
consumption and even more efficient vehicle use.
The economic basis for increasing fuel taxes as an environmental
policy objective has been challenged by Professor David Newbery,
Director of the Department of Applied Economics at Cambridge University.
In his AA commissioned report `Fair payment from road users: a
review of the evidence of social and environmental costs'. He
"... if environmental and social taxes (or `green' taxes)
are to be both politically attractive and economically effective,
they must be clearly distinguished from other taxes or charges,
set at levels determined by acceptable methods of computing the
cost of the damage done, and applied uniformly to all sources
of the same damage. That is `green' taxes should be distinct,
non-discriminatory, and defensibly quantified."
Professor Newbery defines these three terms as:
Distinctthe basis for setting other road taxes needs
to be clear, and the logical approach is to distinguish road-user
charges from other road taxes.
Non-discriminatorysimilar taxes should also be applied
to other similar sources of environmental and social damage.
Defensibly quantifiedthe revenue raised should be allocated
cost effectively to reduce the damage caused.
Professor Newbery argued succinctly that the fuel tax escalator
failed all three of these tests.
The AA is committed to genuine debate and analysis of policies.
Raising the price of fuel must have some effect on demand, however
small. In the report "The effect of fuel prices on motorists"
commissioned by the AA and the UK Petroleum Industries Association
(UKPIA), Professor Stephen Glaister of Imperial College found
that even a 6 per cent tax escalator would struggle to hold demand
steady in the face of normal growth in incomes, let alone improvements
in fuel efficiency. He found that it was low-income car reliant
families that were disproportionately hit very hard by the policy.
"Unfortunately the usual practice in the United Kingdom
has been to set fuel tax rates in isolation, without reference
to possible complementary tax or expenditure changes. So it is
useful to analyse the effects of fuel tax increases in isolation.
We have shown that there are many relatively high-income households
who would not be much affected by the fuel tax escalator. Conversely
there will be some poorer households who would be badly affected
in relation to their incomes. They may not be numerous but they
are not unimportant in terms of overall policy."
The fuel tax escalator was successful in raising general
revenue until the public became aware of the rate of tax on fuel
and overwhelmingly judged it unreasonable. As a policy tool to
help the UK meet its international climate change obligations,
it has been expensive to all motoring households, a disproportionate
and excessive cost on less well-off car owning families, and a
huge political failure which has harmed the overall promotion
of genuine environmental advance.
On the other hand, the Chancellor's strategy to change the
basis of the road fund licence and company car taxation to encourage
the take-up of cleaner and more fuel efficient cars, and the incentives
for the rapid take-up of ultra low sulphur petrol, is ambitious
and reforming. The Chancellor is to be congratulated for taking
these reforms forward. These fiscal changes will support the Government's
air quality strategies, and reinforce and complement the EU/ACEA
agreement as even more fuel efficient vehicles are brought forward.
The power of these measures is that they influence the choice
of car at the point of purchase and every mile driven thereafter.
The Chancellor has also announced a £10 discount on
the new graduated VED for cars using cleaner fuels and technology,
such as cars running on road fuel gas, bi-fuel and dual fuelcars,
and cars using hybrid technology. However, while this is a welcome
signal to consumers a £10 annual saving on VED in comparison
with, for example, a £5,000 additional purchase cost for
a hybrid car is unlikely to stimulate interest in new technology
cars. A review to find ways of giving consumers positive financial
incentives to purchase new technology cars should be undertaken.
In its October submission the AA urged the chancellor to
review fuel taxation policy in order to establish its purpose
and guide conflicting social, safety, environmental, infrastructure
funding, and general tax raising objectives. In particular, the
AA advocates the separation of charges to use roads from taxes
for general expenditure.
The AA urges the Chancellor to reduce gradually tax rates
on motoring to progressively reverse the trend of the last 20
years. There is a strong political and social case to bring general
tax rates down to levels applied in other sectors of the economy
allowing funds to be freed up for investment at economically rational
The AA believes it most unwise and acceptable to be so reliant
on the road user for funding £1 in £7 of everything
the Government spends.
(ii) What is the relationship between fuel duty and
fuel prices, and the value of long term signals to consumers?
Duty and VAT currently represents 75 per cent of the retail
price of petrol and diesel. This is the highest tax level in Europe,
making motor fuels in the UK the most expensive in Europe. There
is deep resentment among motorists about the level of tax and
the price of the fuel they must buy.
AA surveys over three years have found increasing awareness
of the level of tax paid. In 1997 just 5 per cent of motorists
could say (within 5 per cent) how much the price of a litre of
fuel was tax. In September 2000, awareness had increased to 62
The current level of awareness, and hostility, owes much
to the fuel protests when the tax paid by motorists became the
real issue. The fact that the Chancellor scrapped the fuel tax
escalator, has committed to reduce the duty on ultra-low sulphur
fuels, and then to freeze the duty until at least 2002, illustrates
that the current high levels of duty are not politically sustainable.
The AA acknowledges that there is value in giving long term
signals to consumers to persuade them to support environmental,
and road safety, objectives. The Chancellor's reforms of the road
fund licence and company car taxation will send out these signals
and the AA has no doubt that consumers will react favourably.
They will do so because the measures are tax neutral, they are
easy to package and to present to motorists, and motorists will
see them as logical and sensible.
On the other hand, the fuel tax escalator was surrounded
by a "green fog" that in reality had little environmental
focus and was levied to raise revenue.
The system of charging motorists to own and use cars needs
a review. New charges on motorists are plannedcongestion
charging and workplace parking charges. These new charges will
be on top of the most highly taxed and highly priced petrol and
diesel in Europe. In the absence of new ways of taxing and charging
motorists, these new charges may become a "poll tax on wheels".
Only through a fundamental review of all the taxes and charges
paid to own and use cars can trust be restored in what today is
viewed as a thoroughly discredited motoring taxation system.
(iii) The Government's appraisal of the impact of
fuel duty policy changes
The DETR report "Climate Change: Draft UK Programme"
states in respect of the fuel tax escalator:
"Taken in isolation increases in (fuel) duties between
1996 and 1999 are estimated to have produced annual carbon savings
of between 1 and 2.5 million tons of carbon by 2010."
In the same report it is stated:
"The voluntary agreements (between the car manufacturers
and the European Commission) along with the changes to Vehicle
Excise Duty and company car taxation will result in savings of
around 4 million tons of carbon by 2010."
The fuel tax escalator has been the most expensive and least
cost effective measure to reduce CO2 emissions. Work
commissioned by the AA in 1997 (UK Centre for Economic and Environmental
Development) suggested a cost to consumers of £2,000 for
each tonne of carbon saved. This compared most unfavourably with
alternative measures such as energy efficiency in the home which
paid for themselves over a short period of time with a net benefit
to both families and the economy. Details are set out in the AA
report "Tracking CO2 emissions from UK homes
It is an indictment of the flawed fuel tax escalator policy
that successive governments did not develop this type of cost
benefit model, and never challenged the AA's own model of costs.
The Chancellor's tax reductions for ultra low sulphur petrol
will achieve both immediate reductions in key pollutants, and
will facilitate the earlier introduction of advanced technology
cars that will reduce overall fuel consumption. The AA's sister
motoring organisation in Germany (ADAC) has produced models of
the effects of the introduction ultra-low sulphur petrol, and
these confirm the DETR's own projections.
One area where a firm decision is needed is in respect of
Liquid Petroleum Gas (LPG). Momentum is beginning to grow around
LPG but the viability of the fuel is dependent both on the Government's
funding of the Energy Savings Trust scheme to convert vehicles,
and the sustainability of the fuel taxation advantages. A recent
AA review concludes that the Treasury must make clear whether
or not it will continue to favour LPG as Euro IV technology becomes
mandatory and the environmental advantages of LPG become less
clear-cut. Without such assurances, uncertainty will undermine
confidence in the investment in fleets, facilities and vehicles.
The AA would favour a clear statement in the 2001 budget
that the current LPG concessions will remain for a minimum of
seven years in order to give certainty to individuals and businesses
about the future. A clear decision is needed.
Since 1992 the fuel tax escalator was sustained on dubious
environmental claims, and continued by successive chancellors
in the guise of an environmental tax, but with revenue as the
key objective. The fact the Chancellor has scrapped the escalator,
reduced fuel tax, and committed to a freeze on duty increases
at least until 2002 is a welcome recognition that the fuel tax
escalator is dead.
On the other hand the Chancellor has been bold in taking
forward reforms that will use motoring taxation to incentivise
the widespread take-up of cleaner fuels and more fuel-efficient
cars in the future. The AA applauds the Chancellor for taking
these key reforming steps, but has also urged him to embark on
further reforms in his next budget. He should:
undertake to "de-escalate" motoring
taxation to reduce reliance on fuel tax for government spending,
from the current £1 in £7. A commitment not to increase
fuel taxes in line with inflation in future budgets would be a
well recognised way of achieving this;
announce a general review of road taxationto
separate and make transparent the proportions of road tax and
fuel duty that fund transport services, from those taxes levied
for general expenditure;
monitor fuel prices to ensure that consumers receive
the tax reduction for ultra low fuels in full.
Modernisation of the current discredited system would allow
new ways of charging motorists to use roads, and allow corresponding
reductions in motoring taxation. The average family would pay
no more under the new system, but would benefit from flexibility
and choice in transport services, as well as having the best transport
services in Europe.
All reports published and available from, AA Group, Norfolk House,
Basingstoke, Hampshire RG24 9NY. Back