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.
Cabotage penetration of the UK road
haulage market is very low. Only around 0.4% of all domestic road
tonne-kms were carried in foreign vehicles in 2003 (0.58% of tonne-kms
moved by articulated vehicles with gross weights over 33 tonnes)[46].
(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
dutieswhich 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:
1. A high price will have to be paid for
operating the LRUC over the years when only a small part of its
full functionality will actually be used. Estimates of the annual
operating costs of LRUC (and the associated fuel duty rebate system)
range from £400-700 million[55].
It is not clear who will cover these costs. As the Chancellor
has assured the British road haulage industry that their tax burden
will not increase, the only new revenue will be that raised from
tolls on foreign operators. Given current fuel duty and VED rates,
this additional revenue from this source is unlikely to cover
more than a third of the annual operating costs of LRUC. If the
remaining cost is internalised in the tolls paid by UK hauliers,
the Chancellor's promise of tax neutrality will be broken and
the haulage industry will quite rightly complain that they are
having to cover the cost of a tolling system that is much more
elaborate than required.
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.
3. Common standards of electronic road tolling
are likely to be established across the EU in the next 5-10 years.
This will permit inter-operability of tolling equipment across
the EU and remove the need for a separate charging system for
"low use" foreign operators making only occasional visits
to the UK[56].
By delaying the introduction of LRUC, the government could ensure
that the British system was compatible with EU standards.
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
46
Department of Transport "Survey of Foreign Vehicle Activity
in GB-2003" London, 2003. Back
47
Dings, J and Liechti, M "Electronic Kilometre Charging
for Heavy Goods Vehicles in Europe." (revised edition)
European Federation for Transport and Environment, Brussels, 2000. Back
48
European Conference of Ministers of Transport "Reforming
Transport Taxes" Paris, 2003. Back
49
Department for Transport "Transport Statistics: Great
Britain" London, 2003. Back
50
ibid. Back
51
Freight (Freight Transport Association magazine) April
2005, p5. Back
52
Department for Transport "Feasibility of Road Pricing
in the UK: Report" London, 2004. Back
53
The Secretary of State for Transport has stated that, "There
is a world of difference between 460,000 lorries and 26 million
cars, but that technology could be available to us in the next
20 years or so" (Edinburgh Evening News, 13 February
2004). Back
54
Interview with Treasury Minister, John Healey in Motor Transport
16 September 2004. Back
55
INPUT "Pre-tender Analysis Programme: Lorry Road User
Charge (LRUC) " 2004; McKinnon, A C "Lorry Road
User Charging: A Review of the Government's Proposals"
Logistics Research Centre, Heriot Watt University (http://www.sml.hw.ac.uk/logistics). Back
56
HM Treasury "Modernising the Taxation of the Road Haulage
Industry: Progress Report 2" London May 2003. Back
57
This is outlined in greater detail in McKinnon, A C and McClelland,
D. "Taxing Trucks: An Alternative Method of Road User
Charging" Logistics Research Centre, Heriot-Watt University
(http://www.sml.hw.ac.uk/logistics). Back
58
Swiss Federal Office for Spatial Development (ARE) "Fair
and Efficient: The Distance-related Heavy Vehicle Fee (HVF) in
Switzerland" Berne, 2002. Back
59
Department for Transport "Transport Statistics Report:
Maritime Statistics 2002" London 2003. Back
60
Department for Transport "Feasibility of Road Pricing
in the UK: Report" op.cit. Back
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