Select Committee on European Union Twenty-Fourth Report

Environmental impact

50.  In its Explanatory Memorandum, the Commission argues that the proposal "will provide better protection for the environment by applying the polluter pays principle."[18] Under the heading of "sustainable development", the Commission goes on to elaborate this argument for the proposal, by saying that it is a means of requiring transport users to face up to the real costs of transport—including the negative externalities of transport.[19] The Commission claims that this particular proposal contributes to the goal of internalising the external costs of transport, which has been a key plank of the common EU transport policy since 1995.[20] The Committee therefore asked: how does the proposal serve to internalise and thereby reduce the external costs of transport?

51.  The Commission pointed out that the detours caused by the phenomenon of tank tourism have "negative effects on the environment because a longer distance is driven in comparison with what would be necessary if the different [fuel] duty rates would not exist."[21] As noted above (paragraphs 9 and 36), this is the point on which Commissioner Bolkestein laid stress: "Obviously the shorter the trips the less deterioration to the environment" (Q1).

52.  Since "these detours" make up only a small fraction of the sum total of vehicle kilometres involved in road haulage (see paragraph 36), however, this observation does not provide information on the net impact of the proposal. That impact can only be ascertained in the light of its calculable impact on taxes and prices, and in the light of evidence on the tax and price changes required to internalise external costs.

Impact on taxes and prices

53.  In regard to the proposal for a harmonised rate of excise duty on commercial diesel fuel, the Commission's Explanatory Memorandum, by highlighting the fact that "most Member States" would need to raise their excise duty rates (op. cit., p 17), has led a number of commentators to assume that the overall impact would be an upward adjustment of fuel taxes and prices. For example, the European Economic and Social Committee welcomed "the proposed upward harmonisation of taxes and excise duties" and offered advice on how best to use the new revenues.[22]

54.  It therefore needs to be emphasised that, for the EU15 considered as a whole, the proposal for a harmonised rate of €350/1000 litres on commercial diesel fuel would result in a reduction in the level of fuel duty relative to the current weighted average of €411/1000 litres—a reduction of 17%. In particular, it would result in a reduction in fuel duty in each of the four largest Member States—from €376 in France, €403 in Italy, €440 in Germany and €742 in the UK.

55.  The Commission's Explanatory Memorandum refers in passing to the possibility of Member States introducing new user charges to compensate for any reduction in fuel duty (op. cit., p 9). But this is not relevant to the task of assessing the impact of the proposal. In the event of the proposal being adopted, Member States would be obliged to adjust their fuel duty rates; this obligation would not be dependent on any requirement to introduce compensating charges. The impact of the proposal on the level of taxes can be quantified only by assuming other things to be equal.[23]

56.  The new development that must be taken into account is the agreement on the Energy Tax Directive. This Directive will increase the minimum rate of excise duty on all diesel fuel to €330/1000 litres. Consequently, 8 of the 15 Member States will have to increase their current rates of duty, which will result in an increase in the weighted average rate in the EU15. As a consequence of the Energy Tax Directive, which will increase the weighted average rate of fuel duty in the EU, a harmonised rate of €350/1000 litres on commercial diesel fuel would result in a far greater reduction in the average level of taxation on fuel than was previously the case.

57.  The agreement on the Energy Tax Directive is also relevant to the second part of the Commission's proposal—establishing a common minimum rate of €360/1000 litres for petrol and non-commercial diesel fuel from January 2006. The new minimum rates prescribed in the Energy Tax Directive are €421/1000 litres for leaded petrol and €359/1000 litres for unleaded petrol.[24] It follows that the Commission's proposal for a minimum rate of €360/1000 litres for the excise duty on petrol has been made redundant by the agreement on the Energy Tax Directive.

58.  The impact of this second part of the Commission's proposal would now be limited to requiring 8 of the 15 Member States to increase their rate of excise duty on diesel fuel used for "non-commercial" purposes by 9 % (from €330 to €360).

Tax and price changes required to internalise the external costs of transport

59.  The unanimous conclusion of the expert evidence received was that internalising the external costs of transport requires two steps:

(i) an increased differentiation in taxes and prices so as to reflect local circumstances; and

(ii) an overall increase in taxes and prices for road transport.

The ECMT Secretariat sums it up thus: "Charging for congestion, accidents and environmental impacts would result in higher taxes for trucks and cars in the major urban areas of Europe, and indeed higher charges overall though with much variation depending on location and reduction in charges in some instances" (p 21).

60.  In regard to the first point—the need for differentiation—the Commission for Integrated Transport drew attention to a recent study for the Department for Transport conducted by the Institute for Transport Studies (ITS) at Leeds. This study found that "marginal cost per veh/km (low cost estimate) varies from just under 2p on minor rural roads to […] £1.90 on minor roads in Central London" (p 17). Data submitted by Professor Nash clearly shows that this variation in costs is not currently reflected in a variation in taxes and prices (pp 34-35).

61.  In regard to the second point—the need for an overall increase in tax and prices—the most recent evidence is that available from the now-completed international research programme referred to in the ECMT Memorandum. For the three largest Member States—the UK, France and Germany—an optimal set of taxes, which charged for the marginal social cost of each trip, would deliver a weighted average increase of 66% in overall national revenues from transport—the result for the UK, at 65%, is almost identical to the weighted average.[25]

62.  Notwithstanding differences in emphasis and interpretation, the Committee did not receive any evidence to contradict these conclusions. For example, the Commission for Integrated Transport (CfIT), in line with its long-held position, stated that it had "not formed a view on whether the overall tax and duty paid by motorists and hauliers is too high, too low or about right" (p 17). However, the same ITS study which the CfIT cited as evidence on the variation in marginal costs as between rural roads and roads in Central London showed that road transport revenues across Britain currently cover only 36-50% of marginal costs.[26]

63.  The FTA cited research commissioned by the Department for Transport and published by National Economic Research Associated (NERA) to suggest that "the overall costs that lorries impose on the road network and the environment broadly reflect the tax take from lorries through Vehicle Excise Duty and fuel duty" (p 26). But the FTA's conclusion that "there is no justification on environmental grounds for any reform of lorry taxation that results in an increase in the overall cost burden on lorries" (ibid.) needs to be read in the light of the remit of the NERA study, which excluded congestion costs in that particular modelling exercise whilst acknowledging the need to include such costs in any optimal pricing system.[27]

64.  In addition to the evidence on the need for an overall increase in tax and price in order to internalise the external costs of transport, the Committee also received evidence on the ways and means of internalisation and its detailed impact. Industry and independent experts agreed that differentiated distance-based charges were the best instrument by which to effect internalisation. Hence the wide support for the Government's proposal to replace the current tax regime for freight vehicles by one which varies according to the distance travelled. Professor Goodwin summarised this support by saying that it "is a partial step […] in the right direction" (p 28).

65.  Professor Goodwin also noted that "the same logic […] would apply even more strongly to private cars than to freight, since these are a more rapidly growing cause of congestion and pollution" (ibid.). This inference corresponds with the evidence from the research programme cited above (see paragraph 61): the increase in taxes and prices required for internalisation is, everywhere, far greater in the case of cars than in the case of trucks.[28] On this point, the expert evidence supports the FTA's conclusion that "the Government's environmental, safety and congestion objectives can only be fully realised if the wider behavioural signals from road user charging are applied to other road user categories" (p 26).

66.  Professor Nash made the point that, given the price elasticities in the road freight market, "the resulting impact on freight volumes and mode split is probably not large" (p 32). But, as is evident from his data (p 34), given the pre-existing mode split, the impact on road and rail is not the same. This point can be explained by a simple arithmetic example: if the road/rail split is 80/20, then a 5% reduction in road's share (from 80% to 76%) would translate into a 20% increase in rail's share (from 20% to 24%).

67.  Finally, Professor Nash argued that, in the event of a more comprehensive reform of transport taxes including the comprehensive application of distance-based charges, it might be appropriate to "reduce tax on diesel […] to reflect solely the cost of global warming. Since this cost is essentially the same for a litre of diesel wherever in the European Union it is used, it might then be logical to harmonise the tax on diesel fuel. But this should be seen as a final step in the implementation of the Commission's pricing policy for road haulage; not […] the first" (p 33).

Does this proposal contribute to the internalisation of external costs?

68.  As shown above (paragraph 54), the Commission's proposal to harmonise commercial diesel fuel at €350/1000 litres entails a downward harmonisation relative to the current weighted average in the EU. The unanimous conclusion of the expert evidence received by the Committee was that, other things being equal, this is the opposite of what is required. The conclusion of the ECMT Secretariat—"Reducing fuel tax in isolation would have a strong negative effect on congestion and the environment" (p 22)—was echoed by the CfIT and by Professors Goodwin, Nash and McKinnon.

69.  Professor Goodwin pointed out that harmonisation per se, irrespective of whether it is upward or downward, represents "an almost complete abandonment" of the principle of differentiation:

"Transport prices for freight, in the name of 'harmonisation' between states, would become less harmonised with the variation in costs in specific circumstances. A tool—admittedly rather blunt—now available to national or indeed sometimes local administrations to take external costs into account, would not be sharpened, but blunted even further" (p 28).

70.  This corresponds to the findings of the recent research cited in paragraph 61 and paragraph 65, which show that, whilst optimal pricing would require an overall increase in taxation in the UK, France and Germany, it would deliver a reduction in the case of uncongested Finland.[29] In contrast, the Commission's proposal would impose reductions in fuel duty in the UK, France and Germany at the same time as imposing an increase in Finland.

71.  In regard to the UK, the Government, English, Welsh and Scottish Railway (EWS) and expert witnesses all referred to the impact of so large a reduction in fuel duty on the modal balance between road and rail. The Government have modelled the impact of reducing duty on diesel to the harmonised level set out in the Commission's proposal. They conclude that "the lower cost of road freight transport would result in a 23% fall in freight carried by rail (in terms of tonne kms) and a 12% decrease in the share of freight carried by both road and rail. The Commission's proposal would therefore reverse modal shift".[30]

72.  The Committee did not receive evidence on the quantitative impact of the Commission's proposal in regard to the taxation of petrol and "non-commercial" diesel. But—as was noted in paragraphs 57 and 58—the Commission's proposal for a minimum rate of €360/1000 litres for the excise duty on petrol has been made entirely redundant by the agreement on the Energy Tax Directive; and the effect of the proposal for an increase in the rate of excise duty on diesel fuel used for "non-commercial" purposes has been significantly reduced to requiring only a 9% increase in 8 of the 15 Member States and no increase at all in the four largest Member States.

Key conclusions on the environmental impact of the proposal

73.  The Commission's proposal to harmonise diesel fuel taxation does not contribute to the required internalisation of the external costs of transport—for the EU as a whole, it moves taxation in the opposite direction. The proposal would therefore have a negative overall impact on the environment.

74.  The Commission's proposal would lead to a significant reduction in the volume and share of freight carried by rail in the UK.

18   COM (2002) 410 Final, p 2. Emphasis in original. Back

19   ibid., p 8. Professor Goodwin explained that the environmental damage caused by transport "is substantial, and growing, with a wide range of impacts from the most local effects on air quality, noise, and the disruption of habitat and communities. In addition, when traffic increases faster than capacity, there is generally an increase in congestion, in duration, intensity or geographical spread, which itself has substantial economic costs, imposed not only on specific vehicles but ramifying throughout an economy. These wider costs-sometimes called 'social' or 'external' costs-are real, cause economic burdens and inefficiencies, and are generally only partly taken into account, or not at all, by the companies and individuals making transport decisions." (p 28) Back

20   The Commission Green Paper Towards Fair and Efficient Pricing in Transport: Policy Options for Internalising the External Costs of Transport in the EU (COM(95)691). Back

21   COM (2002) 410 Final, p 7. Back

22   See EESC, "Opinion on the Proposal for a Council Directive amending Directive 92/81/EEC and Directive 92/82/EEC to introduce special tax arrangements for diesel fuel used for commercial purposes and to align the excise duties on petrol and diesel fuel", CESE 73/2003, Brussels, 22-23 January 2003, paragraph 2.8, p 4. Back

23   Any anticipated future changes in the pre-tax price of fuel are irrelevant to assessing the impact of the proposal. For the purpose of this assessment, the impact of the proposal must be judged to be, on average, a reduction in taxes and prices for road freight transport. Back

24   These rates are to be implemented in most Member Sates as early as January 2004. Back

25   See Optimal Transport Pricing, Final Report of the ECMT/EC DG-TREN research project comparing current transport taxes and charges with an optimal pricing benchmark, London, February 2003, prepared as Chapter 2 of the forthcoming ECMT Report, Efficient Transport Taxes and Charges 2003, OECD Publications, Paris, 2003, p 6. Back

26   See Tom Sansom, Chris Nash, Peter Mackie, Jeremy Shires (Institute for Transport Studies) and Paul Watkiss (AEA Technology Environment), Surface Transport Costs and Charges: Great Britain 1998, Final Report for the Department of Environment, Transport and the Regions, Institute for Transport Studies, University of Leeds, Leeds, July 2001, Executive Summary, Table B. Back

27   See Lorry Track & Environmental Costs, A Report for DETR, prepared by NERA, AEA Technology & The Transport Research Laboratory, London, April 2000, Appendix B. It is true that the FTA's conclusion holds if the phrase "environmental grounds" is interpreted in a narrow sense; the point, however, is that the NERA study implies the need for an overall increase in taxes and charges to reflect all relevant external costs, including congestion. Back

28   See Optimal Transport Pricing, op. citBack

29   See Optimal Transport Pricing, op. citBack

30   Memorandum by Mr. John Healey MP (p 8). Submissions from the road industry (see the Memorandum by the Road Haulage Association and the Supplementary Memorandum by the FTA) have argued that price is not the main factor in determining the performance of the rail freight sector. But no quantitative evidence was submitted to suggest that the Government's estimates are wrong. Back

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