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We need to talk about transport taxes

This post is by Johann Beckford, policy adviser, and Alice Watson, political adviser, at Green Alliance.

Isn’t it perverse that when a nurse fills up their small petrol car to drive to work, they pay more tax on the fuel they use than a CEO who flies halfway round the world in a private jet.

As a society, we agree tax should be  part of the cost of driving. After all, it causes carbon emissions, air pollution, noise, depletes natural resources, congestion and is dangerous to pedestrians and cyclists. Then again, it can facilitate vital cultural, economic and social exchanges that we all value.

But, when it comes to other polluting transport sectors like aviation and shipping, our tax system is not even close to accounting for the factors (the negative externalities) which determine the costs we should place on them.

The Treasury has no plan to deal with falling transport taxes
Transport doesn’t pay anywhere near its fair share for the emissions it produces. It is the single highest emitting sector across the economy and there is a significant gap between its stated decarbonisation targets and the confirmed policies needed to meet them. In 2019-20, transport taxes raised £53 billion (VAT included), or 7.2 percent of total government tax revenue. The highest contributor was fuel duty on petrol and diesel, which raised £28 billion; this sum is equivalent to almost the entire 2021-22 budget for the Department for Transport. But the rise in electric vehicles will undermine that revenue in the coming decades, leaving a gaping hole in the government’s finances and the Treasury doesn’t seem to have a plan to deal with it.

Transport taxes are also unfair. Fuel duty and vehicle excise duty are regressive, so the poorest spend proportionally more of their income on them than wealthier people.

Over recent months, with the consultancy WPI Economics, we’ve modelled reforms to transport taxes which simultaneously tackle the revenue challenge, ensure a much fairer system and align taxes with climate goals.

A fairer tax package for transport would also help cut emissions
We looked at a range of road, aviation and shipping taxes, and their impacts on emissions, revenues and household budgets. From this analysis we created a ‘fair share’ package encompassing road pricing, emissions based vehicle purchase taxes, a kerosene tax and shipping fuel levy.

According to our modelling, the fair share package we propose could raise another £37 billion in 2035, on top of a projected £60 billion raised from current transport taxes (calculated in 2022 prices). This gives the government options either to reduce taxes elsewhere or increase public spending.

This tax package could have a big impact on the UK’s annual greenhouse gas emissions, potentially cutting them by an average of 10.6 million tonnes of carbon dioxide a year between 2025 and 2035, equivalent to roughly half of the annual greenhouse gas emissions of Northern Ireland.

While taxes on polluting travel, from driving to flying, would go up, our reforms would be more progressive than the current system. It would mean richer households paying proportionally more than poorer households, with the charges phased in between 2025 and 2035 to allow people to adjust.

With a general election looming it’s no surprise that nobody is championing transport tax reform across the political benches. Politicians might be afraid to be perceived as preventing ‘hard working families’ from enjoying a summer holiday, putting up barriers for people driving to work or as anti-industry as airports recover from the effects of the pandemic. And a small but high profile group of voices, including Net Zero Watch and the Global Warming Policy Foundation, make politicians nervous of advocating change, with their push back on climate policies. Although in the minority, they have stirred up public backlash on transport policies like the expansion of London’s Ultra Low Emission Zone (ULEZ).

It’s a question of when, not if, reform comes
But some politicians are brave enough to grasp the nettle. Following up its road pricing inquiry, in February 2022, the Transport Select Committee published a the government to “act now to avoid £35 billion fiscal black hole”. It warned that, without exploring new forms of road taxation, tens of billions of tax revenue could be lost. The committee’s chair at the time, Huw Merriman MP, noted the situation was “urgent”. The government waited a year to respond, disappointingly saying it wouldn’t be considering the recommendations or exploring them.

With the overall tax burden at its highest since the Second World War and the cost of living crisis squeezing household budgets, there’s an opportunity for reforms to improve the function and fairness of an important part of the tax system long term. Negative rhetoric and a lack of government ambition will prevent those on lower incomes getting early access to cheaper, cleaner electric vehicles, better public transport and will limit the uptake of cycling and walking.

It’s a question of when, not if, transport taxes will be reformed. The longer we wait, the more government finances will diminish. And we shouldn’t prolong the unfairness . Tax is a hugely under used tool in encouraging behaviour change for a greener future. Now is the time to start talking about it.

Written by

Green Alliance is a charity and independent think tank focused on ambitious leadership and increased political support for environmental solutions in the UK. This blog provides space for commentary and analysis around environmental politics and policy issues as they affect the UK. The views of external contributors do not necessarily represent those of Green Alliance.

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