The Economics of Road Transport

Growth of road traffic

Billion vehicle kilometres
1950 53
2006 506
2008 514
mainly cars and taxis which increased 16 fold
Fuel protest Sept 2000

Cost per litre unleaded Jan 99 62p

July 2000 85p +40%

Causes of price increases in fuel

1. Oil price -- Jan 99 $10 Jul 00 $33 See Chart 1
2. Depreciation of Pound v $ 1 = 1.67 Jul 00 1 = 1.40.
3. Increases in fuel duty
Government reaction to Fuel protest
Reduced duty on ultra low sulphur petrol and diesel and froze the
value for 3 years and made VED Environmentally sensitive.
Taxes on fuel / motoring
Ownership
1. VAT on purchase
2 VED based on cc or CO2 emissions - Cat A 0 Cat M 405
3 Company car tax on benefit now based on CO2 emissions
Use
Fuel duty plus Vat see table Fuel tax
Real v money increases
Excise duty unit tax Vat ad valorem tax see graph on incidence of unit
duty.
Incidence of tax
1

Britain not a high tax country when all motoring taxes considered. See
Table
Need for taxation
Private v Social costs of motoring
Private costs
Short v long run costs running costs variable total costs fixed +
variable
Money illusion? Costs of motoring underestimated See
2010 AA studies car 20k to 30k mileage 10k per annum
Running costs
Fixed costs
TOTAL

25p a mile
51
77p Over 4years 30k

Social costs
Pollution co2, lead, smoke
Congestion cars in queue up to 40 times more pollution
than in free-flowing traffic.

Fuel is too cheap

A.Economic arguments
1.Real falls in costs of motoring
In response to a parliamentary question in February 2010 the then Transport Minister Sadiq Khan
answered that the total cost of motoring had fallen in real terms since 1980 and 1997 respectively, while
the cost of public transport had risen:
"Between 1980 and 2009 the real cost of motoring, including the purchase of a vehicle, declined by 17
per cent, bus and coach fares increased by 54 per cent and rail fares increased by 50 per cent in real
terms. These figures are based on the transport components of the Retail Prices Index.
"Between 1997 and 2009 the real cost of motoring, including the purchase of a vehicle, declined by 14
per cent., bus and coach fares increased by 24 per cent. and rail fares increased by 13 per cent in real
terms."

2. Oil a scarce resource

3. Source of revenue for Chancellor 6p per litre = 1p on income tax.

B Environmental arguments

Kyoto agreement global warming

Co2 soot black smoke related to mileage and speed
Congestion raises pollution levels costs 23bn in
economic terms delays.
Social Arguments
Fairness - see IFS chart on distributional effects of rise in

petrol price/
Policy measures Price mechanism is effective in changing behaviour Leaded/unleaded petrol different levels of petrol tax
Londons congestion charge was 5 now 8 and plans to charge high
emission vehicles 25. Toyota prius exempt.
Suggestions
Restore fuel duty escalator Duty at 48.35 in 2006 less than it was in
money terms in 2000 48.82. The Labour government said that it would
increase by 1% in real terms every year until 2013. Hardly enough given
that the Govt has black hole of about 175billion a year in its finances.
Suggest that duty goes up by 20p per litre raises 4.4 billion even
allowing for reductions in journeys. Given a price elasticity of about -0.3,
this would reduce road traffic by about 6%.
Abolish VED +replace with 10p per litre tax on fuel. Low mileage
motorists better off
Education campaign about real costs of motoring part of written driving
test leaflets for existing drivers when renewing car tax.
Replicate London congestion charge in other cities
Charge for new roads or new lanes (m6) on existing roads (California
experiment)
Nationwide road-user charging satellite tracking devices. Singapore
system. Norwich Union pay as you drive car insurance. Linked to age of
driver, and time of day 6p per mile 6am to 11pm and 1 a mile after 11.
withdrawn in 2008 due to lack of take-up.
3

Tax on downtown parking complementary good

The first scheme

Nottingham City Council has now confirmed its Department for Transport approved plans to
introduce a levy of 253 p.a. per workplace parking space in 2012 this will rise to around
350 p.a. by 2015. Penalties for 'exceeding' the number of declared parking spaces, enforced by
random checks, will be heavy.

School Run 20% of congestion in mornings due to school run. Free

transport for all pupils. In Sept 2008, Welsh Assembly Government
extending free transport to primary school pupils living more than 2 miles
from school rather than 3.