politics transport

Transport innovation of the week: distance-based road taxes

The Wolfson Economics Prize is run by Policy Exchange and seeks to encourage innovative ideas in economics. It has run three times in the past, each time with a specific question. This year’s was on transport, with entries invited in response to this question: ‘How can we pay for better, safer, more reliable roads in a way that is fair to road users and good for the economy and the environment?’

The winner was Gergely Raccuja with a rather straightforward proposition: scrap Fuel Duty and Vehicle Excise Duty, and replace them with a charge per mile, calculated and paid annually.

Motorists in Britain pay two main taxes. First, you have your vehicle tax. This has been around since 1888 and was originally to pay for road construction. Today it’s lumped in with general taxes, but the general principle is that you pay a share into the roads budget for the right to drive a car. Since 2001 there have been different tax bands for cars that produce more CO2, but it’s a flat fee based on the car, not on how much you drive it.

Then there’s a second tax on fuel. It’s very high compared to most other developed countries, currently 58p a litre. With VAT on top of that, road users pay more in tax than they do for the fuel itself. This is deeply resented, and chancellors like to score cheap headlines by putting in a freeze or a cut in duty right at the end of their budget speeches. The tax is supposed to be an instrument of transport policy, and was supposed to pay for and encourage public transport. But it brings in so much money – £28 billion a year to the treasury – that the government is now quite dependent on it. They are particularly scared that if we move towards electric cars, that source of funding will dwindle away. Nobody wants to raise fuel duty to make up for more efficient cars, or start slapping taxes on electric cars either, so it’s a growing problem.

Hence Wolfson’s question, and Raccuja’s proposed solution. There are several benefits to a pay per mile system.

  • First, it’s simpler to administrate than the two existing taxes, and hopefully cheaper. Since insurance companies already collect mileage information, they could calculate and collect the tax every year as we renew our insurance. Mileage would be cross-checked for accurate reporting as part of the MOT.
  • Secondly, it’s fairer. As a bill for using the roads, it’s a charge that is transparent and intuitive. You’ll know exactly what you’re paying, and it will be proportionate to your actual driving habits.
  • The treasury wouldn’t need to lose out either, depending on how high you set the charges.
  • Most importantly for my own purposes, it would be a greener way to pay for roads. The charge you pay would depend on the environmental impact of your car. It includes CO2 and other pollutants, unlike the current duty which only looks at carbon. Raccuja also includes the weight of the car as a factor, so that heavier cars that cause more wear and tear to roads would pay a higher share. The greater the environmental impact of your car, the more you’ll pay.

What’s particularly useful is that there’s a very straightforward relationship between how much you drive and what you pay in tax. That incentivises people to drive less, in a much better way than my own speculative ideas around insurance.

One possible downside is that it would lower the cost of owning a vehicle, which might mean more cars on the roads. It would make it cheaper to keep a second car that doesn’t get used as much, because you’d only be paying for the distance you actually drive in it, rather than paying vehicle duty just for it to sit there. Fewer people might choose to live without a car. That’s one less positive effect, potentially, but overall the effect would be positive.

Is it going to happen? The Wolfson Prize is quite high profile, so it will have been noticed. The Telegraph reports that officials have already discussed it, maybe rolling it into those plans to phase out fossil fuels. Other places are discussing distance based taxation too, including the US states of Oregon, Nevada and Minnesota.


  1. There is a lot to be said for this, not least, it is simple and not intrusive. At the other end of the spectrum there was the proposed Cambridge congestion charging scheme, where motorists would have paid more when traffic was congested. This was a refined concept in which motorist would have paid to travel in the busy direction but not on the same road in the quiet direction. It failed on technical grounds which probably no longer apply; it was also more intrusive. It would probably be technically feasible now using GPS tracking and the mobile phone network.

    The disadvantage of charging solely by distance is that it penalises people in rural areas, but fails to recognise that urban road space is more valuable than rural road space. It might be combined with cordon road pricing schemes such as the London one, but these place an unfair burden at people just outside the cordon.

      1. It’s is mainly unfair for rural communities because our public transport is worse than poor, so it would be impossible ( and dangerous with ambulance cuts) to not own a car. And I’m saying this when our family doesn’t use our car for work. Buses follow the main road through the villages, leaving elderly unable to walk home if they live up or down a bank. Bus to the city goes 3 times per week! Bus to a smaller nearby town requires minimum of one change.
        Public transport and cycling paths need improving to make the road use tax fair across the country.

  2. I like this. Previously I supported abolishion of road tax and just taxing fuel, as heavier and more powerful cars use more of it. However, you cannot tax electric vehicles that way. I do not agree with your downside – that it might encourage more people to have a second car. Why does that matter, as they can only drive one car at the time?

    1. I was thinking of households rather than individuals owning a second car, where people might go out in multiple cars where one of them could have taken the bus. But I didn’t make that very clear…

  3. I am not so sure. What we need is not always a better road system (excpet in the sense of better maintaining road surfaces or necessary adjustments to infratsructure to accomodate new developments, etc.), but fewer motor vehicles on the road at any one time. If this actually disincentivises reduced rates of motor vehicle usage, it is worse than useless from an environmental point of view and that of non-drivers.

    Less motor vehicles would mean less need to build more or wider roads to accomodate the congestion that results, and probably less wear on existing road surfaces.

    1. I don’t know if it means more cars on the road. It’s my one concern, but I’m not sure how much of an effect it would have. In theory, I agree that focusing on reducing car numbers is the most effective solution. In reality, I know that politicians are terrified of upsetting the motoring lobby and the media, and that this is a strong politically feasible solution. I’ll take that, even if we could go much further in an ideal world.

  4. I think the pay per distance will put less car on the road even though it may encourage people to own more than one car. This is good for the environment and public transportation.

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