Fuel duty
What is it?
Fuel duty is an excise duty on hydrocarbon oils, biofuels and road fuel gases such as liquid petroleum gas.
Petrol duty was introduced in 1908 at 3d (old pence, equivalent to 1.3 new pence) per gallon. Between 1978 and 1980 diesel was charged a higher rate than leaded petrol, and then again between 1982 and 1994 it attracted a higher rate than unleaded. After 1994 the diesel and unleaded rates were aligned. Between 1982 and 2000 a lower rate (by as much as 18 per cent) applied to diesel than leaded petrol. In 1988 the rate for unleaded was introduced at lower level than leaded petrol, to encourage motorists to switch. By 2000, the leaded rate was withdrawn when its sale was banned. Unleaded and diesel rates were aligned in 2001 and have remained so ever since.
In December 2008, fuel duty rose from 50.35p to 52.35p a litre. In April 2009, it rose again to 54.19p. In September it was increased yet again to 56.19p and then to 57.19p in April 2010. After the election, the coalition government increased it once more to 58.19p in October and then 58.95p in January 2011. In April 2011 it was cut to 57.95p and remained at this level for 11 years. In March 2022, there was a temporary reduction of 5 pence to 52.95p. This is due to expire in March 2023.[1]
What’s the problem with it?
It’s far too high and it’s economically damaging. There is some justification for fuel duty in principle. The degradation of local air quality and the contribution to climate change are both reasonable arguments for some level of particular tax on motoring fuel and all fuel, respectively. The problem is that these arguments only support a level of fuel duty much lower than the current rate.
Department for Business, Energy and Industrial Strategy assumptions for short-term traded carbon values in the emissions trading scheme reflect the cost of reducing carbon emissions elsewhere. Applying these to the emissions factor for petrol implies a carbon tax per litre of 1p in 2015, rising to 18p in 2030 (both at 2016 prices), when a single global carbon price is scheduled. Combined local and national road spending could justify another 19p. This 37p total (44p in 2022-23 prices) should serve as a maximum, however, because the impact on local air quality and congestion is very weakly correlated with fuel combustion.[2] Road pricing (including congestion charges) deal with congestion while local emissions regulations (such as low emissions zones) are much less blunt tools than a national (or even local) fuel duty. The UK has the eighth highest fuel duty on petrol and the joint highest fuel duty on diesel compared with EU members states.[3]
In addition to the economic damage all taxes inflict on the economy, fuel duty above the 37p a litre level indicated above has two specific problems. First, it distorts economic patterns of consumption and production. Secondly, it prevents workers from accessing potential jobs. This restricts economies of scale, reduces competitiveness and hinders industrial specialisation, resulting in lower income levels.
What should be done?
- Make the temporary rate cut of 5p a litre permanent.
- Guarantee no rate rises until inflation brings the rate down to 44p (in 2022-23 prices).
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[1] HM Treasury, Spring Statement 2022: Fuel Duty Factsheet, 23 March 2022, www.gov.uk/government/publications/temporary-cut-to-fuel-duty/spring-statement-2022-fuel-duty-factsheet, (accessed 8 November 2022).
[2] See Meakin in Booth et al, Taxation, Government Spending & Economic Growth, IEA, 2016.
[3] TaxPayers’ Alliance, Briefing – Fuel duty in Europe, October 2022.