ELECTRIC VEHICLES AND ROAD-USE PRICING_Margaret Arblaster

June 2018

By Margaret Arblaster (Monash Institute of Transport Studies).

Proposition: Pricing of road-use for electric vehicles should be the same as fossil fuel-powered vehicles.

Electric car use in Australia has been slowly growing on the back of global usage trends, media interest and increased consumer awareness.

The International Energy Agency argues for fiscal incentives to encourage electric vehicle purchase, as well as complementary measures that reduce the cost of driving them. Australia’s Electric Vehicle Council has also argued for tax breaks.

Electric car users in Australia currently enjoy a number of subsidies from governments. For instance, Electric car users do not pay the 40 cent per litre fuel tax (excise) and the luxury car tax of 33 per cent commences at a higher level of car price for electric cars than for other vehicles ($75,526 versus $65,094).

Some Australian states and territories offer discounts on stamp duty and on car registration for electric cars which are not offered to fossil-fuelled cars. But when it comes to road use, should electric cars be priced in the same way as fossil-fuelled cars?

ESA-Monash Forum panellists were asked to consider this proposition:

"Pricing of road-use for electric vehicles should be the same as fossil fuel-powered vehicles."

Survey responses

A total of 25 responses on the proposition were received of which 20 provided comments. Overwhelming the majority of respondents ‘strongly agreed’ or ‘agreed’ with the proposition (60 per cent raw response and 63 per cent weighted response). A minority ‘disagreed’ or ‘strongly disagreed’ (24 per cent raw and 22 per cent weighted). Less than 5 per cent had no opinion.

A number of respondents raised points on the interpretation of the proposition. Matthew Butlin asked whether we should we be comparing the current system in Australia with ‘an ideal system’; Rana Roy noted that the proposition should be interpreted as the pricing of road use should be on the same basis and not that prices for each instance of road use should be the same.

Janine Dixon considered that with a proposition such as this though, the devil is in the detail and there are a lot of questions which flow from the proposition. “How big should the charge be – is it intended to raise sufficient revenue to maintain the entire road network or just part of it, and would any other tax (such as the fuel excise) be changed to neutralise budgetary impacts?”

Issues raised

Principles of efficient road pricing were a foundation for a number of the comments made. A theme by those that agreed with the proposition was that pricing road use should be based on efficient road-user charging principles which relate to costs of road use, including the costs of road degradation and the costs imposed on other road users, namely congestion externalities.

On this basis, Matthew Butlin suggests that externalities beyond those applying to other road users – especially greenhouse gas emissions ­– should be dealt with through other means, such as fuel pricing. Rana Roy argued that “the only reliable way of internalising the several various external costs of road use – accidents, congestion, air pollution, CO₂ emissions, etc. – is at the point of use. … It is each trip itself that needs to be taxed so as to raise it to its marginal social cost.”

Peter Abelson notes that variations in externalities and road use costs vary by type of car and are not directly related to fuel consumption (and therefore tax). Lisa Cameron noted that electric vehicles stillcontribute to road congestion “so drivers of these vehicles should contribute to covering the costs through the same pricing of road-use as for other vehicles.”

A number of commentators commented on the extent of the carbon emission reductions associated with electric cars compared to fossil fuel cars given that electric cars charge from the electricity grid (Paul Frijters and Saul Eslake). While there may be an argument for exempting electric cars from tolls leading into the city the lower carbon emissions of electric cars is not an argument for lower charges outside the cities.

Saul Eslake identifies that “there’s no obvious reason why electric vehicles should attract a lower road user charge (especially when considering that electric vehicles domiciled in most states, other than Tasmania, will be operated by electricity generated by burning fossil fuels).” Michael Knox points to a US survey which found that “any net environmental benefit from electric vehicles is vastly overstated”. Lionel Page wisely argues that “the gain in reduction of negative externalities from using electric cars should first be estimated.”

The significance of the issue in the short term was queried by some economists, such as Gigi Foster. John Freebairn makes the point that fundamental reform of road vehicle charging is required. He considers that “radical overhaul” would be “better than tinkering”.

A number of economists, including John Quiggin and Kevin Davis, note that road-user charging is not tied to funding of road infrastructure, that is "revenue is fungible". This observation supported the disagreement with the proposition by these economists.

Some economists noted that differentiation between luxury cars and other cars did not make economic sense. If the purpose of the (luxury) car tax is to tax road use, “that would be better done by taxing use not ownership.” (Uwe Dulleck.) “The luxury car tax is both distorting and inequitable: why tax luxury cars but not luxury boats, holidays, clothing?” (John Freebairn).

Arguments from economists who disagreed with proposition were largely based on the negative externalities created by fossil fuel cars (Lata Gangadharan, Gigi Foster, Kevin Davis and Lionel Page). Lionel Page argued that “provided that the manufacturing and use of electric vehicles reduces air pollution (and noise pollution) enough, taxation should reflect these smaller negative externalities and be more beneficial to electric vehicles users.”

However, he considered that a “sound policy requires a good assessment of the full environmental footprint of the use of electric vehicles, …” Kevin Davis noted the challenges associated with designing an efficient and effective tax, although there are “social benefits from electric vehicles”.

Gigi Foster argued that the fact that “fuel-powered vehicle sales still vastly outnumber sale of electric vehicles in Australia shows that the medium Australian consumer still prefers the former – so present policy settings are not creating a significant distortion in favour of electric vehicles.”

As noted by Janine Dixon: “As electric vehicles become more widespread, road-use pricing will remain a topical issue.” Janine cautions that unless the detailed issues associated with road-user charging were well-understood and addressed in the context of Australian road use, road-use charging “will be attractive in theory only”. This suggests that economists should continue to engage in public debate on the topic of road user charging.

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