House of Commons - Transport - Written Evidence

Select Committee on Transport Written Evidence

Memorandum by Professor Alan McKinnon (RP 34)

ROAD PRICING

This memorandum questions the government's current plans for Lorry Road-User Charging (LRUC) and proposes an alternative method of taxing trucks which would meet most of the main objectives at much lower cost, risk and disruption.

1. OBJECTIVES OF ROAD-USER CHARGING FOR LORRIES

The main objectives are as follows:

(a) Tax foreign operators on a similar basis to UK-registered hauliers for their use of our road network

British hauliers are justifiably aggrieved that they have to compete with foreign operators who pay much lower taxes in total and make virtually no contribution to the UK Exchequer. The resulting distortion of the UK road haulage market is not as great as is sometimes suggested, however, for several reasons:

— Differentials in vehicle excise duty (VED) between British and foreign operators are now much narrower than they were before 2001.

— UK international hauliers can buy most of their fuel outside the UK, escaping our high fuel taxes and bringing their fuel costs more into line with foreign competitors.

(b) Decouple the taxation of trucks from that of cars

This would allow the government to use taxation more flexibly in managing transport demand. It could, for example, grant fuel tax concessions exclusively to freight vehicles or exempt lorries from fuel duty rises targeted mainly at the private motorist.

(c) Vary taxes on trucks in relation to the distance travelled, vehicle weight class and emission standard

These distance-based taxes would be more closely correlated with environmental and road track costs. It is argued that they will give hauliers greater incentive to fill their vehicles and promote greater use of alternative modes[47]. In recent years the level of VED has been sharply reduced, greatly increasing the proportion of lorry tax revenue raised by fuel duties—which are essentially distance-based. For the average 38 tonne (4x2 axle) articulated lorry, for example, fuel tax now accounts for 93% of total annual taxes as opposed to 83% in 1998. The case for a separate system of distance-based taxation has therefore weakened, though is still quite strong. After all, some externalities, such as the emissions of noxious gases and noise, are not simply a function of fuel consumption. They are also affected by the Euro-emission standard of the vehicle. Cleaner vehicles, qualifying for "reduced pollution certificates" (RPCs), pay discounted VED rates, but as VED levels are now relatively low, the scope for discriminating in favour of cleaner vehicles is limited. A new system of distance-based taxation would give the government greater leverage over environmental standards in the national lorry fleet.

(d) Vary taxes in relation to geographical differences in environmental impact and track costs

This would bring charges more closely into line with marginal social costs[48], but would be problematic in several respects. First it would require a detailed evaluation of the environmental and track costs of lorry traffic at the local level. Second, some of these environmental costs, such air pollution, traffic accidents and noise disturbance, vary as much during the day, week and year as geographically. Third, companies would have great difficulty adapting their road transport operations to a complex patchwork of variable tolls. By the time that such a system is technically feasible, the nation's lorry fleet will be substantially cleaner and quieter as a result of tightening Euro-emission standards, and the vast majority of heavier vehicles will have "road-friendly" air suspension. By then the marginal benefits of moving to geographically-differentiated environmental charging will be low.

(e) Vary taxes by time of day, road type and geographical area in relation to the level of traffic congestion

In the longer term, we will probably have little choice but to apply congestion charging to all categories of traffic across the road network. It would be wrong, however, to impose it solely on lorries, many years before its application to other categories of vehicle. The arguments against lorry-only congestion charging are summarised in the next section.

2. THE CASE AGAINST LORRY-ONLY CONGESTION CHARGING

Lorries represent only 7% of all traffic on the road, 14% if you assign them a weighting of 2.5 passenger car units (PCUs) to reflect the relative amount of road space they require[49]. According to the government's traffic forecasts, lorries will only account for 4% of traffic growth between 2000 and 2010, even with the 2.5 PCU weighting[50]. Cars and small vans, on the other hand, will be responsible for respectively 70% and 14% of this traffic growth. These types of vehicle are far and away the main causes of traffic growth and congestion. If congestion charging managed to reduce the amount of lorry traffic at peak periods, the small amounts of road space that would be released would be quickly absorbed by the growth of car and van traffic. Moreover, it is unlikely to be in the best interests of the UK economy to reallocate road space from freight traffic to private cars.

It is also doubtful that congestion charging of freight operators would significantly reduce lorry traffic at peak times. The rescheduling of freight journeys to avoid premium tolls at peak periods will be constrained by the complex regulatory frameworks governing drivers' hours and working time (particularly following the application of the EU Working Time Directive to road haulage operations in March 2005) and by the need for road transport to synchronise with production and distribution operations. The suggestion that lorries could interrupt their journeys and be "parked up" during peak periods is impractical. Given the high cost of operating heavy goods vehicles (eg around £44 per hour for a 44 tonne artic[51]) and the new constraints soon to be imposed on drivers' working-time, peak-time tolls would have to be set at punitive rates to make this worthwhile. It is also questionable if there would be sufficient off-road parking space to accommodate enough trucks to have a noticeable effect on congestion levels.

The government has indicated that it will be after 2015 at the earliest before congestion charging is applied to all classes of vehicle across the road network[52]. Ministers have suggested that it may well be after 2020 before it is introduced[53]. If, as planned, LRUC is implemented in 2008, the government will have the capability of imposing congestion charging on trucks 7-12 years before it will be applied to other types of vehicle. It has indicated that it may not employ this capability as traffic management is not the main purpose of LRUC[54]. If this is true, then investment in LRUC at this stage seems very premature. The functionality that will be built into the proposed LRUC system from the start can only be justified if it is to be used for congestion pricing. Government officials have argued that even if the ability to vary charges by road type and time of day is not actually exploited for many years, it can still be defended on grounds of "future proofing". This argument is deficient in several respects:

2. The telematics technology used for road tolling is steadily improving. By the time the government is ready to introduce congestion charging for all vehicles, systems will be available which are more flexible, reliable and cost-effective. Committing to currently available congestion-charging technology at least a decade before its full capability is required is likely to prove a costly mistake.

Delaying congestion tolling of trucks until a similar road charging system could be applied to all vehicles would offer other advantages. It would create a more equitable and economically-efficient means of allocating road space between different categories of vehicle. The imposition of congestion charging on cars would give highway authorities much greater leverage over the total volume of traffic, and hence traffic flow, particularly at peak periods. In return for paying premium tolls at these times, hauliers could then expect average journey speed and reliability to improve. Companies would also be given more time to adapt their production and distribution systems to a new congestion-charging regime.

Of the five objectives of road user charging stated at the outset, only the first three need to be addressed at present:

1. Establishing tax parity with foreign operators

2. Relating vehicle taxes more closely to environmental and track costs on a distance-travelled basis

3. Decoupling the taxation of lorries from that of other classes of vehicle

We have devised a method of achieving these objectives which would be relatively easy, quick and cheap to implement. It is outlined in the next section.

3. AN ALTERNATIVE METHOD OF TAXING LORRIES[57]

Procedure for UK-registered vehicles:

All heavy goods vehicles (of over 3.5 tonnes gross weight) must have an annual MOT inspection starting on the anniversary of first registration. At this inspection the distance that the vehicle has travelled over the past year is recorded from the tachograph. A kilometre-based toll would be levied on the vehicle which took account of its type, weight class, axle numbers, Euro-emission standard and any other environmental characteristics which the government considered appropriate.

We propose that VED be reduced to the minimum level permitted by the EU or to a basic vehicle registration fee sufficient to cover the DVLA administration costs (which ever is greater). This reduction in VED, which is a fixed duty that takes no account of distance travelled, would align tax more closely with distance. Fuel duty would account for almost all the tax that lorry operators paid during the year. This fuel duty would be rebated against the annual toll, just as currently proposed for the LRUC scheme. This would discourage operators from under-reporting the distance the vehicle actually travelled and help to make the system self-enforcing. The government could also use benchmark fuel efficiency (mpg) figures in calculating the rebate for different categories of vehicle. Initially these could be set at current industry averages, though through time the benchmarks might be gradually raised to incentivise companies to run their vehicles more fuel efficiently.

The British government would not charge UK-registered vehicles engaged in international haulage for mileage run in other countries. It would be necessary therefore to take tachograph distance readings at the points of exit from and entry to the country. Drivers could be asked to make signed declarations of the distance readings with random checks and heavy penalties on vehicle operators for mis-reporting to ensure compliance. The distance run outside the country would be recorded and aggregated for all the foreign trips made during the year. The total distance run on foreign roads would be deducted from the annual tachograph distance reading to calculate the annual toll. This would be offset against fuel duty paid in the UK just as in the case of lorries solely undertaking domestic haulage within the UK.

Table 1 gives an example of how the proposed system could work for a British-registered articulated lorry running 140,000 kilometres annually on the UK road network. It shows how the total amount of tax paid would depend on its fuel efficiency.

Procedure for foreign-registered vehicles:

An identical set of kilometre-based tolls would be imposed on foreign vehicles using UK roads. On entry to the country for the first time, a foreign vehicle would have to be registered by its driver. It would then be assigned a registration card with a smart chip containing relevant information about the vehicle and its owner. Every time the vehicle entered and left the UK, the driver would have to make a signed declaration of kilometre readings from the tachograph in the same way as British international hauliers. A similar system of spot checks would be used to discourage drivers from making fraudulent declarations. On leaving the country foreign-registered vehicles would be required to pay a toll for the total distance travelled in the UK. This is a similar system to the one that has been operating successfully in Switzerland for vehicles without on-board tolling devices since 2001. It would be much easier to operate in the UK than in Switzerland partly because it is an island, but also because of the much smaller volumes of cross-border traffic. Approximately 12,000 trucks a day enter Switzerland through 100 border stations equipped with tolling equipment[58]. Only 5,000-6,000 trucks enter the UK daily, with over 95% of them arriving through only seven points (Channel Tunnel and six major ro-ro ports)[59]. There would, nevertheless, be one important difference between the system we are proposing for the UK and the Swiss system. To ensure parity with UK operators, foreign hauliers would also be able to rebate fuel duty against the distance-based toll. A deduction would be made for any fuel duty paid within the UK at the same benchmark mpg levels as applied to British-registered trucks. The proposed charging system would ensure identical treatment of British and foreign-registered hauliers, both in terms of the level of toll per kilometre and cross border procedures, thus satisfying EU requirements.

Table 1

EXAMPLES OF THE PROPOSED LORRY TAXATION SYSTEM

	above average fuel efficiency	below average fuel efficiency
(a) Possible toll (based on vehicle specifications): pence per km	18.6	18.6
(b) Annual distance travelled on British roads: kms	140,000	140,000
(c) Annual distance-based toll: (a x b)	£26,040	£26,040
(d) Average fuel efficiency: kms per litre	3.1	2.7
(e) Total annual fuel consumption: litres (b / d)	45,161	51,852
(f) Current fuel duty (conventional diesel): pence per litre	53	53
(g) Benchmark fuel efficiency for rebating of fuel duty: kms per litre	2.9	2.9
(h) Total fuel duty rebate: (b / g x f)	£25,586	£25,586
(i) Supplementary distance toll at benchmark fuel efficiency: (c-h)	£454	£454
(j) Actual fuel duty paid: (b / d x f)	£23,935	£27,481
(k) Fuel rebate surplus (+) / deficit (-): (h-j)	+£1,651	-£1,895
(l) net refund to (+) / payment by (-) operator: (k-i)	+£1,197	-£2,349

As at present, the main source of tax revenue from lorries would be fuel duty. Around 95% of the tax paid by the heavier classes of lorry currently comes from fuel purchases and so is already closely correlated with distance travelled. This is tax revenue which would be paid throughout the year in the normal course of operations, giving the Exchequer a steady flow of income. The annual levy of a distance-based toll would, for many operators, represent only a minor financial adjustment. In the case of a company running of a vehicle with low fuel efficiency and / or poor emission rating the annual toll would be likely to exceed the fuel duty paid requiring it to make a supplementary payment. In contrast, vehicles meeting the highest Euro-emission standards and being driven very fuel efficiently might qualify for a small refund on their fuel duty (Table 1).

3. BENEFITS OF THE ALTERNATIVE METHOD OF TAXATION

The proposed system would:

— be relatively inexpensive to set up and to operate. The marginal cost of recording and processing tachograph distance readings would be very small. The main additional expenditure would be in the creation of the fuel duty rebate system and establishment of toll payment points at ro-ro ports and the Channel Tunnel. The government is planning to set up a fuel duty rebate system anyway as part of the LRUC system. Our proposed rebate system would be much simpler and cheaper, however. Unlike the LRUC, our alternative road user charging scheme would not create a major new revenue stream. The LRUC will generate around £2-3 billion in addition to all the fuel duty paid by lorry operators. The billions of pounds of fuel duty will then be paid back to around 70,000 vehicle operators. In our system, the conversion of fuel duty into distance-based taxation involves only an annual reconciliation of distance records and fuel tax receipts. Relatively small sums of money would be transferred;

The full LRUC system with its tolling, enforcement and fuel rebate systems will be an order of magnitude more expensive to implement than our proposal. The incremental cost of our proposed scheme would be less than the additional revenue raised from foreign hauliers, making it self-financing. This would relieve both the UK haulage industry and the Treasury of any additional financial burden.

— be much less risky than the LRUC. The proposed LRUC scheme will be dependent on complex technology, highly sophisticated IT systems and the near-total reliability of hundreds of thousands of on-board vehicle tracking units. The disastrous experience of the German Maut over the past two years illustrates the potential dangers in opting for a high-tech tolling system. The alternative method of road charging outlined in this paper is essentially low-tech and relies heavily on existing systems of taxation and data collection;

— be quicker to implement than LRUC. The competitive "playing field" between UK and foreign hauliers could be levelled sooner than the 2008 start date for LRUC;

— be largely self-enforcing. The use of fuel duty receipts will provide an independent check on the distance that vehicles travel, making it difficult for operators to defraud the system by under-reporting annual mileages; and

— give companies an incentive to improve fuel efficiency. The use of benchmark mpg values for the fuel rebate system could help to reinforce the efforts of the government's Transport Energy programme to cut energy consumption and CO2 emissions in the road freight sector.

4. CONCLUSIONS

Over the past three years, lorry road user charging has evolved from being a system to harmonise the taxes paid in the UK by British- and foreign-registered hauliers into an elaborate road pricing scheme for trucks. The government now sees LRUC as a "valuable step"[60] along the way to full road user charging for all vehicles. At least 7-12 years will elapse, however, between the implementation of LRUC and the introduction of general road pricing. In the intervening period, a hugely expensive and complex tolling system will exist for trucks which will give the government the means of congestion tolling this one class of vehicle. We contend that lorry-only congestion charging would be unfair and ineffective. If, on the other hand, the government is not planning to use LRUC for traffic management purposes until a more general congestion charging scheme can be introduced, it must be asked why it is incurring the high cost and risk of developing such a system at this stage. The alternative method of lorry taxation which we are proposing would meet all the other major objectives of LRUC at a fraction of the cost and risk and could serve as an interim scheme until a full roll-out of congestion charging is technically feasible and political acceptable for all vehicles.

Professor Alan McKinnon

Logistics Research Centre

Heriot Watt University

November 2004