Brown spins the Government out of a fuel crisis

Chancellor Gordon Brown revealed himself as a politically deft operator in November. In his pre-Budget report, 1 he announced cuts in fuel and vehicle excise duty costing £2 billion - but tied them to low-sulphur fuels, scrappage allowances for dirty lorries and other environmental measures.

September's fuel protests came as a shock for Ministers. They followed a series of concessions to motorists and hauliers in the March Budget and came weeks after the announcement of a massive cash boost for road building (ENDS Report 306, pp 16-19 ). The pre-Budget statement was delivered on 8 November - five days before a deadline set by protesters demanding duty cuts.

In the event, Mr Brown pulled off a master stroke, using environmental policy to justify concessions without appearing to have caved in. One positive outcome is that media and political discussion of the crisis acquired a previously overlooked environmental dimension.

Effectively, Mr Brown announced a cut in duty on petrol of 2p/l and on diesel of 3p/l. He further pulled the protesters' teeth by proposing huge cuts in vehicle excise duty for lorries.

By applying the tax cuts to ultra low sulphur fuels, the Chancellor was able to claim they were environmentally motivated. The whole package will cost £2 billion - well under the £3.7 billion extra revenue the Exchequer may receive this year because of high oil prices.

  • Petrol and diesel: Mr Brown announced a freeze in taxation on all fuels and went on to promise that duty on ultra low sulphur petrol (ULSP) will be cut by a further 2p/l from April. The cut depends on oil companies making the fuel widely available.

    The goal is to repeat the success of ultra low sulphur diesel (ULSD). Following a similar tax break in 1998, ULSD rapidly displaced standard diesel and now makes up 100% of sales (ENDS Report 290, p 25 ).

    Mr Brown's proposal should similarly shift the petrol market over to ULSP by next spring - and drivers will effectively be paying 2p/l less for their petrol. Shell and BP both told ENDS that they will pass the cut on to customers.

    ULSP already accounts for about one-third of petrol sales, prompted by the 1p/l differential offered in this year's Budget to offset the extra cost of producing the fuel (ENDS Report 304, p 35 ).

    The new tax cut for diesel users is more transparent. To maintain the differential between petrol and diesel, the Chancellor said he would cut duty on ULSD by 3p/l. Given that all diesel sold in the UK is now ULSD, the move is a straightforward cut in duty.

    Mr Brown is also proposing to remove the 2p/l differential between lead-replacement petrol and conventional unleaded - but the fuel will be more expensive than ULSP.

    The cuts have not been matched by reductions in duty on alternative fuels such as liquefied petroleum gas and compressed natural gas. But Mr Brown is promising "major reductions" in duty on "the most promising environmentally-friendly alternative fuels", following consultation with industry in the run-up to Budget 2001.

    The Treasury estimates that the cuts in fuel duty will cost around £1.56 billion in 2001/02. The biggest single hit will be the 3p/l cut in diesel at £615 million.

    The Chancellor said nothing about the promise in his last pre-Budget report to channel the revenues from future above-inflation increases in fuel duty into a transport investment fund. Whether an alternative funding source will be found remains unclear.

  • Hauliers and farmers: While the 3p/l cut in diesel duty matches the measures promised by the Conservatives at the height of the protest, it falls well short of the 15-26p/l the protestors were demanding. But the Chancellor offered additional sweeteners.

    His proposed reforms of lorry vehicle excise duty (VED) will cut the total revenue by around £300 million a year - more than half. The current system is complex and unwieldy with over 50 standard rates. Mr Brown wants to replace these with seven broad bands which purportedly reflect environmental and track costs.

    Under the new system, the maximum VED would fall to around £1,850 per year - a whopping £7,400 less than today. The Government is ready to backdate the cuts to 2000/01 and has set aside £240 million for the purpose.

    The VED cuts were presented as being consistent with the Government's policy of shifting taxation away from vehicle ownership and onto usage. But omitted from the pre-Budget report was any reference to a recent study on the externalities of road freight carried out by the Department of the Environment, Transport and the Regions. Even haulage interests interpreted the findings as showing that lorries were only just covering their external costs through VED and fuel duty (ENDS Report 305, p 14 ) - but that was before the pre-Budget report cut both.

    Mr Brown also offered a £100 million fund to encourage hauliers to switch to cleaner vehicles - which are eligible for lower tax rates - by offering allowances for scrapping older lorries and other unspecified measures.

    In a final sop to the truckers, Mr Brown also proposed that foreign hauliers would have to pay a levy or "vignette" for using British roads. All lorries will be required to have the "Brit Disc", but the cost for British lorries will be included in VED.

    The move represents an about-turn. Earlier this year, Transport Minister Lord Whitty told a House of Commons inquiry that "the cost of administering that [vignette system] would be more than the money that came in" (ENDS Report 307, pp 28-29 ). These calculations assumed a vignette for larger lorries, while the new proposals apply to all of them.

    Either way, the effect on hauliers will be limited by the fact that only around one in a thousand lorry journeys in the UK is made by foreign vehicles. The scheme will also need EC clearance.

    The Government calculates that these measures, combined with the reduction in diesel duty, will benefit the haulage industry to the tune of £750 million a year - equivalent to an 8p/l cut in fuel duty.

    Meanwhile, farmers are being offered a complete waiver of VED on tractors and agricultural vehicles - a move which will cost £9 million.

  • Other measures: Motorists in general are being bought off by a proposal to extend the "small car" threshold for a reduced rate of VED for cars with engines under 1,200cc to include those under 1,500cc. This will bring in an additional five million cars, and will be backdated to November.

    The Chancellor also wants to reform business road user allowances. From April 2002, mileage rates will be the same for all vehicles regardless of size - benefiting smaller vehicles. Interim rates will apply from 2001.

    Mileage rates for bicycles are to be increased to 20p per mile, and a new passenger rate of 2p per mile is being introduced to encourage car sharing on business trips.

  • Environmental benefits: In presenting his proposals, the Chancellor insisted they were "tailor made to meet our environmental obligations". He argued that the cut in duty on ULSP will "significantly improve local air quality."

    However, the benefits of ULSP are not as marked as for ULSD. Lower sulphur will allow catalytic converters to work more efficiently. This should cut emissions of nitrogen oxides of nitrogen by around 5% and reduce other emissions.

    But the Government calculates that the shift to 100% ULSP will result in only a 1% drop in NOx emissions, 4% in carbon monoxide and 1% in VOCs.

    Fuel consumption can also be improved slightly by the use of ULSP, as catalysts do not need to regenerate themselves as frequently to combat sulphur poisoning. The regeneration process requires high temperatures and a rich mixture.

    However, any marginal reduction in carbon dioxide emissions that may result from better fuel efficiency is likely to be cancelled out in the short term by the additional energy required to produce the fuel. ULSP needs more intensive refining - and shifting to 100% ULSP will increase refinery CO2 emissions by 2-4%.

    Furthermore, the cut in duty may encourage drivers to use their cars more and bump up emissions that way. The Treasury has not calculated the effect of its proposals on CO2 emissions.

    The real environmental gain of ULSP is that it opens the door to fuel-efficient technologies such as direct injection engines which can reduce consumption by 20% or more. Only two manufacturers currently sell such models in the UK, and they require complex end-of-pipe emissions controls to deal with the sulphur (ENDS Report 274, pp 29-30 ).

    Widespread adoption of direct injection engines is unlikely until ULSP is available across Europe. EC fuel quality standards will require all petrol to be ULSP by 2005 (ENDS Report 281, p 48 ).

  • Alternative fuels and vehicles: Also in November, Deputy Prime Minister John Prescott announced a £69 million package to promote alternative-fuelled vehicles - the main effect of which will be to allow existing programmes to continue into future years.

    £30 million each will go to the Clean Up and Powershift programmes, run by the Energy Saving Trust, and the remaining £9 million will promote fuel cell technology and hybrid vehicles. The funding is spread over three years.

    Powershift offers grants to offset the additional cost of alternative fuelled vehicles, while the Clean Up programme is a retrofitting scheme targeted at the most polluting vehicles.

    Most of the funding is simply a confirmation that existing funding will continue. Powershift's budget this year was £10 million, and the new announcement guarantees funding at this level for another three years. Clean Up's budget for this year was only £6 million so the new funding represents an increase.

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