Earlier this week the “fuel excise duty” (FED) increased by 2 cents per litre. As the Herald noted, taxes of one form or another now make up nearly $1 pre litre from what you pay at the pump:
* Fuel excise – 50.524c
* GST – 27.77c
* ACC levy – 9.9c
* Local authorities fuel tax – 0.66c
* Petroleum monitoring levy – 0.045c
* Total tax – 88.899c.
This money, plus road user charges for diesel vehicles, adds up to around $3 billion a year and makes up all the money that NZTA spends on transport projects – from building new state highways to helping maintain local roads and paying for public transport services.
Fuel taxes are a pretty efficient way to raise money, with there being little in the form of transaction costs – at least compared to complex tolling systems. Presumably the oil companies keep track of how many litres of fuel they sell and just send NZTA a few big cheques every once in a while. Fuel taxes also have the benefits of encouraging us to drive less, drive more fuel efficient vehicles and also – at least in theory – could compensate for the environmental externalities created by burning fossil fuels. The more fuel we go through, the more tax we need to pay.
However, fuel taxes also have a bit of a problem in the longer term – especially as vehicles become more and more fuel efficient and as we shift to hybrid and fully electric vehicles. The problem is that the amount of revenue raised per vehicle kilometre travelled will inevitably decrease.
NZTA have had significant revenue problems in recent times, having to borrow quite a lot of money from Auckland Council for example. I’m not sure the extent to which this is caused by improved fuel efficiency or the extent to which it’s because traffic growth has stalled, but the issue of having less fuel tax being raised than expected is a real one – perhaps the ‘elephant in the room’ when it comes to our ability to actually fund the transport programmes we have proposed.
As time goes by we do have the option of continuing to raise fuel taxes to ensure enough money is raised to pay for the transport programme. Compared to many other countries around the world New Zealand has a pretty low petrol tax. This is highlighted in the graph below, which was from the Ministry of Transport’s briefing to the incoming minister (BIM), released earlier this year:
A higher fuel tax would probably be fairly effective at encouraging people to shift to more fuel efficient (hybrid or full electric) vehicles as those become increasingly price attractive. This is a good thing for the environment and for reducing our dependence on imported fuels, but isn’t really a long term solution to the revenue problem. Quite obviously, as we tax petrol at a higher and higher rate we will encourage more and more people into electric and hybrid vehicles – meaning we need to find a way of raising revenue from those road users.
Presumably fully electric vehicles may end up paying some sort of road user charge. But I suspect fully electric vehicles may be rarer than we think – we’ll instead end up having hybrids that are progressively more dependent on their electric motor than on their petrol one. Do they need to pay a proportion of their travel as Road User Charge and a proportion through petrol tax? Sounds messy.
Lower traffic volume increases in the future – potentially due to higher fuel prices and/or lower economic growth – was put forward in the Ministry of Transport’s BIM as a real pressure on the ability to generate enough revenue to cover the cost of the transport programme in the future. This is highlighted in the graph below:
To the Ministry’s credit they note that high oil price scenarios are likely to mean that much of the proposed expenditure on road capacity expansion may not be necessary (due to lower increases in traffic volumes), but that greater spending on public transport would be required. Even taking the current GDP growth path as a mid-point suggests some significant problems over the next 20 years.
Getting back to the main point of this post, I think there’s a reasonably clear case that – at some point in the future – we will need to shift to a different way of raising revenue for transport purposes. While there are good arguments to be had around the amount of revenue that is required and where that revenue should be spent, we will clearly still need to maintain what we have, we will clearly need to operate a public transport system, we will still need to fix up things that don’t work, and so on. The question really becomes what replaces fuel tax, and how can we be as fair as possible in working out who pays and how much they pay.
This leads us, inevitably, to questions around road pricing. While fuel tax has many great strengths – its low administration cost, the way it is a useful incentive to improve fuel efficiency and minimise the burning of fossil fuels – one thing that fuel tax doesn’t do is vary the amount we pay by the time of day we drive and the particular routes we take.
To give an example, my impact on the roading network from driving down a suburban side-street at 10pm on a Sunday night is almost zero. Perhaps a slight degradation of the road, obviously some environmental impact, but really little else. By contrast, if I drive from Papakura to the CBD at peak times up the Southern Motorway then my impact is huge. I’m not just stuck in the traffic jam, I am the traffic jam. My extra vehicle on the road is slowing down a huge number of other people, just as I am being slowed down myself. Removing a few people from that motorway will improve travel for a vast number of people.
At an overall level, it becomes clear that a relatively small proportion of trips generate the vast bulk of motoring costs. Perhaps put more simply, every additional car travelling across the Harbour Bridge at the ‘peak of the peak’ contributes to the (supposed) “need” to spend $5 billion on another Harbour Crossing. This is the real value of the Northern Busway of course, having ‘knocked the top off’ this peak and delayed the need for spending this eye-watering amount of money. But in the longer run, people travelling across this future Harbour Crossing at peak times should be the ones paying for its construction – rather than someone driving along a suburban street at 10pm on a Sunday night.
A graph from a UK study confirms that the marginal costs imposed on the transport system come from a pretty tiny minority of trips:
What this graph highlights is that for the vast bulk of trips we are paying too much in fuel tax, compared to the impact we are having with our trip. However, for a few trips the fuel tax is nowhere near covering the impact of those trips. I’m possibly not entirely convinced the marginal cost curve should be quite this steep as the methodology used to calculate it is overly focused on congestion, but I think the general point holds. I generally use public transport during peak times and drive during off-peak times – yet find myself paying for road widening projects that will really only benefit people travelling during the peak on a select number of routes. While the subsidies for my PT trip compensate for this situation to an extent, the situation still seems a bit unfair.
Ultimately this approach to road pricing, as an eventual replacement for fuel tax that more fairly apportions cost based on the impact you’re having on the transportation network, seems the most likely way to see it actually implemented. As shown in the graph above, the vast majority of trips would be better off under this pricing scheme than they are at the moment. A few trips would be much worse off, but presumably that would act as a disincentive to travel at that time of the day on that route.
Nevertheless, this approach presents two possible problems:
- The administration cost of implementing this kind of scheme ‘properly’ – differentiating between different routes, different times of the day and then coming up with a charging mechanism.
- As we’re relying on taxing a few trips to provide the bulk of our transport revenue, if those trips disappear so does most of our revenue. I guess of course we also see many of our problems solved, but the extent to which this works probably depends on the extent to which congestion is seen as the main transport problem.
I guess this is an issue we’ll eventually have to tackle though.