Fuel duty

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 By 2000, the leaded rate was withdrawn when its sale was banned.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. Finally, in April 2011 it was cut to its current level of 57.95p.

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 should serve as a maximum, however, because the impact on local air quality and congestion is very weakly correlated with fuel combustion.[1] 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.

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?

  1. Cut the rate by 5p a litre.
  2. Guarantee no rate rises until inflation brings the rate down to 37p in 2016 prices.

International Energy Agency data shows the UK had the highest rate of fuel taxes among 35 countries[2]

Country

Fuel duty (local)

Fuel duty (USD)

Fuel duty (% of UK)

Australia

0.392

0.295

33

Austria

0.482

0.535

60

Belgium

0.619

0.687

77

Canada

0.338

0.264

30

Chile

317.00

0.484

55

Czech Republic

12.840

0.522

59

Denmark

4.137

0.615

69

Estonia

0.423

0.469

53

Finland

0.681

0.756

85

France

0.624

0.693

78

Germany

0.655

0.727

82

Greece

0.670

0.744

84

Hungary

120.000

0.430

48

Iceland

69.860

0.530

60

Ireland

0.588

0.653

74

Israel

3.056

0.786

89

Italy

0.728

0.808

91

Japan

56.300

0.465

52

Korea

781.890

0.691

78

Latvia

0.411

0.457

51

Luxembourg

0.462

0.513

58

Mexico

0.000

0.000

0

Netherlands

0.744

0.859

97

New Zealand

0.671

0.468

53

Norway

5.820

0.722

81

Poland

1.669

0.443

50

Portugal

0.618

0.686

77

Slovak Republic

0.515

0.572

64

Slovenia

0.545

0.605

68

Spain

0.462

0.513

58

Sweden

5.575

0.661

75

Switzerland

0.735

0.764

86

Turkey

2.177

0.799

90

United Kingdom

0.580

0.887

100

United States

0.143

0.143

16

 



[1] See Meakin in Booth et al, Taxation, Government Spending & Economic Growth, IEA, 2016, https://iea.org.uk/publications/taxation-government-spending-economic-growth-in-brief/

[2] OECD, Tax Administration 2015 - Comparative Information on OECD and Other Advanced and Emerging Economies, 2015, Table 4.A4.6, http://www.oecd.org/ctp/consumption/Table-4.A4.6-Taxation-of-premium-unleaded-(94-96%20RON)-gasoline-(per%20litre)-2015.xls