Election Special 2: Is the UK motor industry about to be over-taxed?

image_pdf

UK motorists and road hauliers are a skeptical bunch about motoring taxes. Many suspect that the purpose of switching to higher VED is to offset reduced income from fuel duty tax because we drive less miles. Others are convinced that congestion charges and road pricing will simply be new ‘stealth’ taxes. While the slump in new car registrations is well publicised, fewer know that in 2009 10% of the UK’s HGV fleet was taken off the road or that the number rented by haulage firms fell 30% plus. The recession has already led to a large unplanned emissions reduction. 

Tax supporters argue that we’re simply misinformed: the UK citizen pays more to use their cars, while their EU counterparts pay more to own them. On balance, they say, we pay the EU average. 

What are the facts and will road pricing make matters better or worse?

According to CESIfO, a Munich based economic research institute, UK motorists are taxed lower than the EU average if they buy a fuel-efficient car between 1.6 and 2.0 litres. Their figures, from May 2009, take into account fixed cost taxes – e.g. 1st Registration Fees, Car Tax, VAT, VED and tax on insurance premiums – and operating cost taxes, such as fuel duty and VAT on fuel. In May 2009 they estimated that  a 1.6 VW Golf Petrol travelling 15,000 kms in the UK would pay €1,390 compared to an EU average of €1,617, about 16% less. If a UK motorist bought a VW Golf 2.0 TDI they’d pay €970 instead of €1,365 – a 40% discount. See the chart above – the UK figures are shown in green (diesel) and yellow (petrol).

 

As the chart above shows, trucks are less clear cut. UK Hauliers pay more than double the average taxes of their EU competitors, excluding an estimate for road tolls. Toll charges are often cited as a cost in Europe which doesn’t apply in the UK, except for the M42 Toll Road. The average charge €ct/km in France and Germany is €12 – €15ct, giving an annual levy of  €8,000 – €12,000 per year, assuming 50% of annual mileage travelled on controlled roads. However, even if you add an estimated €10,000 for tolls, UK operators still pay almost 40% more in taxes on average than their EU counterparts. 

Politics: In the manifestos of the main political parties contesting the UK 2010 General Election, there are only three areas of divergence between them for motorists and hauliers: VED, Congestion Charges and Road Pricing. All are silent about VAT. The Labour Party will maintain published levels of VED and has ruled out road pricing until after the 2015 election. They support congestion charges under various forms such as Workplace Parking Levy, Congestion Zones and Tolls. The Conservatives are silent on almost all matters, so are either content with existing charging levels and policies or are adopting a ‘wait and see’ approach. The Liberal Democrats have adopted the most controversial position. While their manifesto doesn’t comment on VED, their pre-election policy was to introduce a new series of bands with a top annual rate of £2,000 for larger cars. They support congestion charging and will introduce ‘cost neutral’ road pricing, starting with HGV’s, from 2015. 

Road Pricing for HGV

In the EU only €100BN of the €330BN of taxes collected from motorists and hauliers is used on infrastructure. In the UK the annual expenditure on roads is around £9BN, only 15% of the total revenue from vehicles. The rationale for HGV road pricing is that they create the most road damage so should pay more towards repairs. US estimates are that the rear axle of a 12ton rigid does 1,000 times more road damage than a car. Sadly for car drivers there is no corresponding political commitment by the Liberal Democrats, should they win  – or any government in the EU – that, if hauliers pay more, car drivers will pay any less. 

A second point made by road pricing supporters is that HGV’s create external costs that should be paid for by them. Examples include congestion, noise, accidents, air pollution and impacts on climate change. An extremely detailed impact study for the EU tried to estimate the marginal costs of these items in 2008. 

Many accountants might argue that the only relevant marginal costs are those that can be saved or can be shown to be extra spending. For example, whether an accident is caused by a car or a truck, is there a possibility of reducing the social costs of the health service or are there extra costs from accidents caused by trucks rather than cars? In either case probably not. Even if there were no trucks, you’d still need the medics and police. The same argument can be made for noise. Trucks make a noise. So do cars. So does the car factory a mile away from me. So do open air concerts. What will be saved by trucks becoming silent? When the airspace over Europe was closed recently, due to volcanic ash, I cannot remember anyone calculating the cost saving and telling passengers how much they’d saved because there was no aircraft noise.

But, if you live by a busy road you know that road noise is real, but if it’s a cost, who should pay it? Presumably, those who create the noise should pay those who suffer it, or should pay to have it eliminated. Road noise is generated from three main sources: the vehicle engine, its tyres and the road surface. Given that there is no EU Type Approval Standards information given to truck buyers, it seems unfair to penalise them for the vehicle engine noise. Surely the manufacturers should be made to pay. As for the road surface, by the same token, the local authorities or governments should bear this part of the cost. The operator should pay according to the residual vehicle noise made by the tyres and any delapidations, assessed at regular inspections. Wouldn’t this be easier to set up and collect than a complex road charging mechanism? 

In the same way, if we want to charge for accidents, wouldn’t it be simpler just to charge the at-fault driver for the police and medical services and ensure payment is  made through higher insurance premiums? Presumably, to be fair, governments should privatise all of the costs of healthcare: moutain climbers should pay if they fall, sailors should pay if they need a rescue, parents should pay if their child runs into a busy road and causes an accident.

As for congestion, HGV operators might argue that they are the victims, not the perpetrators, as they only contribute 6% of the road vehicles. Enterprising hauliers might even ask for some of their cash back.

Given their pro european stance, it’s possible that the Liberal Democrats intend to adopt the HGV EU ‘Eurovignette Directive’ which paved the way for charging HGV’s and ring-fencing the money for infrastructure.  Will road pricing for HGV’s work?

Depending on how it is set up, HGV road pricing – limited to recover the costs of road damage and road provision – could generate a real benefit to hauliers in the UK. If the road pricing charges were genuinely cost neutral VED and/or fuel duty would have to fall in direct proportion to the road pricing charge. If the EU Eurovignette system is introduced,  the system could give UK hauliers an advantage over Continental competitors. 

This is because most European countries operate the system through user fees or tolls, and as they introduce the new environmental charges, so Continental hauliers would see their tax levels rise, while UK hauliers would not face such a hike, except abroad. For the first time it could erode a little of the cost advantages of the low cost european hauliers. Its a small crumb of comfort.

Road Pricing for Cars

Car drivers should not feel too relieved that the current emphasis is on HGV’s: Lobby groups, parliamentary commitees and some political parties would like to increase the incentives (i.e. raise motoring taxes) to switch cars, as well as freight, from road to rail.

UK motorists pay the costs of road infrastructure between three and four times over. The argument for road pricing is – if you take into account costs of congestion, pollution, accidents, climate change and noise – they only pay 30% of the costs. On the principle of the ‘user pays’ and the ‘polluter pays’, road pricing advocates say efficient road pricing would lead to social benefits.

That is only true if the revenues from road pricing are used to resolve the problems they cause and don’t get siphoned off to other uses. For example, the revenue has to be re-routed to the people who were priced off the road or to resolving noise and pollution problems. This could be achieved, but no one is proposing to do that with the money.

Motorists and hauliers alike are acutely aware that UK roads need two types of investment. The durability of the road surfaces need to be optimised. Generally, thicker and more robust materials would reduce a major cause of congestion – road works – and reduce long run costs. In turn that would reduce road prices. Second, the width of the roads needs to be optimised. The UK might not need many more roads, but the existing ones are inadequate for the economy, even when you switch from road to rail. Again, no political party appears ready to earmark the revenue for these purposes. In the case of the Liberal Democrats they aim to spend the money on improving the railways.

The fundamental question is whether road pricing for all vehicles is a positive idea.

Pundits and commentators are fond of telling us that developed countries compete for economic success as well as global companies but they rarely say how. One way is through their tax regimes. Between 1995 and 2009, the average Corporation Tax rate fell in the EU from 35% to 23%. The reason is that governments recognise they are competing for inward direct investment as globalization develops.

Mercedes plant, Tuscaloosa, AlabamaWhile corporate tax rates are lower, the EU remains a high tax area – about 40% of all income is taken in taxes – while its only 28% in the US and Japan. Rumour has it that the US state of Alabama gave Daimler 30 years of tax breaks just to persuade it to locate its plant there.

The argument against charging for any infrastructure – roads, airports, and so on – is that while people broadly are tied to a country – by language, property, family ties and so on – money is not. Money is mobile. It will travel to any location that provides the appropriate reward in relation to risk. If a government places an extra tax burden – such as road pricing – capital will simply reduce until the average post-tax rewards it receives are the same as it could get anywhere else for a similar level of risk. That this is the case is self-evident from the covert and overt subsidies given by governments around the world to induce new inward investments. Such an approach might simply be raising your cost base, the opposite of selecting the best economic growth policy.

Clearly EU governments can make road pricing work for HGV’s. It’s an EU-wide programme. Capital can’t simply switch to another european location to avoid it. Hauliers also accept the engineering truth that they create more road damage. If the funds are primarily used for repairs, increases in durability and so on, it is probably politically sustainable. But would it work for cars as well? No government has yet been able to sustain political support for such a concept on a national scale. It’s likely that some countries would adopt and others wouldn’t, so capital flight is a real risk.

Imagine road pricing for cars is introduced. Presumably, the charges would  be lower on uncongested roads and at low demand times. Let’s imagine drivers switch away from peak times. Now you have infrastructure utilized below its optimal capacity. In other words, if the scheme is a success, the goverment might simply generate less revenue, like Londons ‘Low Emission Zone’.

Most advocates of road pricing do not support it for the efficient management of infrastructure; they emphasise its environmental benefits. But they miss the so-called ‘Green Paradox’.  

The chief goal of European environmental policy is to curb fossil energy consumption. Governments are busily promoting alternative energy, improved building insulation and more efficient cars. These programmes cost billions and marginally affect the use of fossil fuels. Current policies have minimal effect on what they really need to influence: to reduce the rate of global extraction of coal, gas and oil. 

The explanation is simple. Green policies exert a stronger downward pressure on future prices than on current ones. The owners of oil and gas fields react by pulling forward production. That is the green paradox: efforts to reduce carbon emissions in the future have the effect of accelerating climate change now. 

There are only two ways to curb the accumulation of CO2 in the atmosphere and slow down global warming: Either temporarily refrain from extracting carbon, or stuff it back into the ground after harvesting its energy.  

Burying it is easier said than done. Carbon captured from anthracite coal would occupy five times as much space underground as the coal itself; in the case of crude oil, three times the volume would be needed. The estimates are that all of the worlds disused mines and other holes in the ground are not large enough to bury 10% of it!

Politicians from user countries cannot persuade the producers – Saudis, Nigerians or Venzuelans – to reduce extraction. So, instead, they dream up political gestures to soothe climate change concerns (and firm up business for the environmental industries), even if they actually achieve very little. All the efforts of the EU so far have not reduced aggregate emissions of CO2. According to the EU Energy Commission, between 1990 and 2007 the EU27 reduced CO2 by 0.57%. The five major markets, who produce 60%+ of emissions, together fell 0.43%. 

The beneficiary of Europe’s policy is not the climate, but the rest of the world. When environmental policies exert increasing downward pressure on the world market prices for fossil fuels, and hence to reduce the capital gains on stocks kept underground, OPEC and others feel compelled to extract their stocks faster than they would have done otherwise. This is music to the ears of those companies and countries who profit from lower energy prices and raise their consumption by more than Europeans reduce their own. 

Some hope that green policies will eventually push the price of fossil fuels in the world market below the extraction costs, making extraction unprofitable. It’s hard to foresee this when prices have always been much higher than extraction costs. With current oil prices at around $85 a barrel, extraction costs in the Arabian Gulf, including exploration, amount to between $1 and $1.50 a barrel. Even the extraction of Canadian tar sands costs no more than $15 a barrel. 

Based on recent years, oil prices will steadily increase over time as resources become scarcer; simultaneously, extraction costs will rise as the good fields are exhausted. An environmental policy based upon pushing prices below production costs would need a very big hammer indeed. It’s difficult to foresee the political support for the level of road pricing or other environmental costs needed to reduce demand to such a level. 

Road pricing is not just poorly targeted, disadvantages lower income earners and will raise costs without corresponding benefits: it is also ineffective in resolving climate change issues.

There is a practical policy alternative: drop road charging and all the other ineffective programmes and make a global emissions or carbon trading system work. Specifically, include fuel producers in the carbon trading scheme.The emissions trading system would effectively put a cap on worldwide fossil fuel consumption, thereby achieving the desired slowdown in extraction rates. It is an accurate mechanism for ensuring that the ‘polluter pays’ and transforms the cash paid directly into climate change solutions. Of course, the UK government would have to come clean about fuel duty and agree that it is just general taxation with no environmental credentials at all. Still, never mind that, eh!

image_pdf