Climate and transport strategies at risk in fall-out from fuel crisis

Government policies on climate change and transport hung in the balance at the end of September as the fall-out from the road fuel crisis began to appear. Many environmentalists have blamed a lack of political leadership for the backlash over fuel duty, but privately they have been taken aback by the scale of public support for protests across Europe. The crisis coincides with preparations for party election manifestos (see box ) — promising a repeal of the climate change levy under the Tories, and a new "environmental productivity strategy" under Labour.

Gordon Brown is feeling misunderstood. The Chancellor is charged with failing to listen to motorists and hauliers — when the evidence shows that he and fellow Ministers have been running scared of them for some time.

Last November, Mr Brown caved in to demands from hauliers for an end to the fuel duty "escalator", introduced by the Conservatives in 1993 in the name of environmental protection.

Ministers had been unnerved by hauliers' demonstrations over diesel duty, increases in which had been larger than those on petrol, and the Government was also feeling exposed to the "anti-motorist" charge levelled by the Opposition. Another factor was that oil prices had already more than doubled during 1999.

Mr Brown went on to peg fuel duty to inflation in his March Budget. He also announced a hefty cut in vehicle excise duty (VED) for some 40-tonne lorries and gave the go-ahead for 44-tonners at an even lower rate. Other VED rates were frozen for the third year running (ENDS Report 302, pp 19-21 ).

The scale of the roads u-turn was confirmed in July when, alongside commitments on public transport, Ministers announced a renaissance in road building as part of their ten-year, £180 billion transport plan. The plan also presented a more cautious line on congestion charging, anticipating schemes in only eight urban centres outside London by 2010 (ENDS Report 306, pp 16-19 ).

Among the consequences is that the official target to reduce CO2 by 20% from 1990 levels by 2010 has been pushed further out of reach. In March, the Government claimed in its draft climate change strategy that current policies will take the UK very close to the target — but its projections appeared seriously overblown (ENDS Report 303, pp 25-28 ). And policy shifts since then have led to a downward revision of projected emission savings in the transport sector to only 1.6 million tonnes of carbon (mtC) by 2010, compared with the 3.3mtC anticipated in the draft strategy.

Government in retreat
Ironically, it may have been the scent of a Government in retreat which ensured that protests over fuel prices mushroomed into a major political crisis for the Labour Party in September. Elsewhere in Europe, the protests have generally had less impact on governments' standing.

Internationally, the trigger for the fuel protests was the oil market. If it is sustained, the world's fourth oil shock in 30 years threatens to hit economic growth and boost inflation. On a more positive note, experience from the 1970s suggests that a high oil price will also reignite interest in fuel efficiency and alternative energy sources.

From a trough of around $10 a barrel in late 1998, the price of crude had shot to $25 by March 2000 and touched $35 in mid-September. The price had dropped a little by late September, but the trend over the next few months will depend on the severity of the winter, the speed at which OPEC countries increase output, and the inclination of Saddam Hussein to exploit the situation.

Reliance on oil
The crisis serves as a reminder of the world's continued reliance on fossil fuel, although many economic commentators maintain that the impact in OECD countries will be less dramatic than in the 1970s and 80s, thanks to the rise of the service sector and an increase in GDP per barrel of oil.

Nevertheless, according to the International Energy Agency, world oil consumption has grown by 28% since 1985. The onset of this growth coincided with the crash in the price of crude — from $27 a barrel in 1985 to $13 in 1986. By contrast, oil consumption fell by 14% during the six years up to 1985, a period when prices averaged around $30.

Allowing for inflation, oil prices are still well below their 1979-85 levels (see figure

). They would need to increase to more than $50 before matching their average inflation-adjusted level during that period. OPEC leaders will probably allow prices to subside below $30 once they have achieved their goal — spelled out repeatedly in international talks on climate change over the last couple of years — of forcing western governments to take less of the fuel price cake in taxes.

Another thing exposed by the crisis is the extent to which European governments are reliant on fuel tax. In response to hauliers' protests, EC Finance Ministers agreed a statement warning against cuts in duty. Nevertheless, France, Belgium, the Netherlands and Italy have all implemented emergency tax cuts or duty rebates for hauliers.

An argument against cutting duty is that the net result may be to encourage an increase in the long-term price of crude oil —giving a bigger slice of the cake to OPEC and the oil industry and less to governments.

Set against this is the fact that, in the UK, hefty duty increases through the 1990s came at a time when crude oil was cheap. Mr Brown and the former Chancellor Kenneth Clarke would have been more cautious had oil prices been higher.

Now that the oil market is sending its own price signals to motorists, there is a case — both economically and environmentally — for some soft pedalling on fuel duty. But, whoever wins the next election, a significant cut in fuel duty is unlikely because it would cost too much. The duty will raise over £23 billion this year.

The best even the Conservatives could come up with in the immediate aftermath of the fuel crisis was a proposal to cut duty by 3p per litre. The effect would be to reduce taxation from around 72% of the pump price today to around 70.5%.

What about the environment?
A remarkable feature of the endless column-inches and air time devoted to the fuel crisis is the near absence of discussion on environmental issues. The fuel duty escalator was, after all, supposed to be an environmental measure.

Jonathon Porritt, chairman of the Government's Sustainable Development Commission, lays the blame at the doors of Tony Blair and Gordon Brown — both of whom have avoided referring to climate or transport policy to defend the high rates of duty.

"They have tried to take the leadership on climate change but have not tried to explain what this involves to ordinary consumers," Mr Porritt told the Daily Telegraph. "What we see is a failure to explain the necessity of these policies."

Chris Hewett of the Institute of Public Policy Research agrees that the Government has not deployed all the arguments it might. "The perception is that the Government is using the environment as the excuse for a revenue-raising tax," he wrote in The Guardian. "Gordon Brown needs to demonstrate why this is not the case."

Mr Hewett noted that the long-term aim of fuel tax increases was to improve engine efficiency. "You only have to look across the Atlantic to see that cheap fuel encourages higher fuel use and a culture of gas guzzling and car dependence."

He believes that the Chancellor should explain how money from fuel duty increases is being spent. The climate change levy is easier to defend because most of the £1 billion raised will be channelled back to business in national insurance cuts. Mr Brown could have linked his decision in 1997 to increase the fuel duty escalator from 5% to 6% to the new 10p starting rate for income tax, Mr Hewett suggested.

Friends of the Earth has leapt to the defence of high fuel duty. It jumped on figures from the Society of Motor Manufacturers and Traders (SMMT) showing a 17% increase in sales of "supermini" cars in the first half of the year and corresponding reductions in sales of larger cars.

"Drivers are responding to the high petrol prices by buying cars that are more efficient and less polluting," FoE's Roger Higman said. "Cutting petrol duties now would only undermine this trend."

Indeed, upward pressure on fuel prices will be essential if the voluntary agreements recently signed by European, Japanese and Korean car manufacturers to improve the average fuel efficiency of the cars they sell by 25% by 2008 are to succeed.

Finding a way out
"I know people want cheaper petrol," Deputy Prime Minister John Prescott told the Labour Party conference in Brighton, two weeks after the height of the crisis. "We hear them — but we also hear people when they say they want cleaner air and a better environment."

However, Mr Prescott stands alone among cabinet Ministers in seeking to draw a link between fuel taxation and environmental objectives. Mr Brown told the conference that the duty increases had been needed to plug the public accounts deficit inherited from the Conservatives. Mr Blair spoke of a need to invest in hospitals and schools.

The Chancellor has also avoided any hint that he might cut fuel duty. "This national debate on tax is too important to be diverted by those who shout the loudest and push the hardest," he told the conference, in a reference to hauliers and farmers.

Nevertheless, the scale of the crisis is such that there are likely to be further concessions to the road and motoring lobbies. Ministers are in discussions with hauliers' leaders. And the Confederation of British Industry — warning that fuel prices in Britain were an "unacceptable burden on costs" — has formed an action group to review road-use taxation and report to the Chancellor by November. The group involves the Road Haulage Association, the SMMT, the National Farmers Union and the TUC.

One option which hauliers had already been pressing on the Treasury before the fuel crisis would be to extend the fuel duty rebate scheme beyond bus operators. The loss of revenue — not to mention environmental credentials — would probably be too great if the Chancellor offered hauliers the same rebate as bus operators, but he may opt to offer them a smaller rebate. The danger with such a policy is that it would become politically difficult subsequently to realign hauliers' duty with that of other road users.

Another option would be to offer modest reductions in diesel duty but not on petrol. The Government has already positioned itself to do this by saying that it would review diesel duty once engine technology had reduced the air quality impacts of diesel engines.

However, the idea of tax cuts was rejected by the House of Commons Transport Sub-Committee in its recent report on the haulage industry. The Committee said it was important that hauliers should pay their full environmental costs, and found no evidence to support the industry's claim that overseas operators pose a serious competitive threat. Instead, MPs found, the difficulties faced by the sector are largely due to over-capacity, ease of entry by cowboy operators and poor enforcement of legal standards (ENDS Report 307, pp 28-29 ).

Taking a longer-term view, Professor David Begg, chairman of the Government's Commission for Integrated Transport, suggests that cuts in fuel duty could be balanced by the introduction of congestion charges on motorways and trunk roads. Such a change, introduced through a ten-year plan, would help drivers in rural areas.

"We have to dissuade people from driving thoughtlessly and until now that has been done through high fuel taxes that have not significantly changed behaviour," Professor Begg argues. Investing in public transport is only part of the answer: "The second part of the equation must be traffic restraint."

Policy implications
If fuel tax is unpopular, however, congestion charges or parking levies could be electoral suicide. Policy-makers hope that local authorities could win support for such charges on the basis that the revenue raised will be channelled into local transport. The necessary powers are already available in London and, for the rest of Britain, are set out in Bills now before Westminster and Holyrood.

However, the proposals are already meeting resistance in Scotland (see p 34 ), and the recent fuel crisis is likely to make local politicians think again before pressing ahead in England.

One consequence of the crisis, therefore, is that the Government can no longer assume that local transport investment funded through road charges will be widely available. Throw in the loss of Mr Prescott's ring-fenced transport fund — pledged last November to be linked to future fuel duty increases — and the effect is to blow a hole in Government transport strategy.

The fall-out from the crisis could reach beyond transport policy by making it more difficult to implement environmental taxes of any kind. Tom Burke, environmental policy adviser to the previous Government, claims that the strategy of shifting the tax burden from "goods" such as labour to "bads" such as pollution now lies in ruins.

Writing in New Statesman in September, he asked why "environmentalists ever believed that a modern democracy would be able to pursue a policy of relentless consumption tax increases, whose burdens fall hardest on those least able to bear them."

Mr Burke suggested that the preoccupation with the green tax agenda had distracted environmentalists from other policy tools — such as regulation, emissions trading, negotiated agreements and public spending.

"OPEC has accomplished something that no western government could have come close to doing with taxes," Mr Burke said. "It has nearly quadrupled the price of energy in less than a year."

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