Tue Aug 12

Motorists should pay their way, whatever vehicle they drive

Written by John Quiggin, Professor, School of Economics, The University of Queensland

A new road charge is looming ^[1] for electric vehicle drivers, amid reports Treasurer Jim Chalmers is accelerating the policy as part of a broader tax-reform push.

At a forum in Sydney this week, state and federal Treasury officials are reportedly meeting ^[2] with industry figures and others to progress design of the policy, ahead of next week’s economic reform summit ^[3].

Much discussion in favour of the charge assumes drivers of electric and hybrid vehicles don’t “pay their way”, because they are not subject to the fuel excise tax.

This view is based on an economic misconception: that fuel taxes are justified by the need to pay for the construction and maintenance of roads.

This is incorrect. In a properly functioning economic system, fuel taxes should be considered a charge on motorists for the harmful pollution their vehicles generate.

That leaves the problem of paying for roads. To that end, a road-user charge should be applied to all motorists – regardless of the vehicle they drive – so no-one gets a free ride.

A traffic jam on highway surrounded by bush.

A road-user charge should be applied to all motorists. NSW government

What is the fuel excise?

The fuel excise in Australia is currently about 51 cents a litre ^[4] and is rolled into the cost of fuel at the bowser.

Some, such as the Australian Automobile Association claim revenue from the excise ^[5] pays for roads. But it actually goes into the federal government’s general revenue.

The primary economic function of the fuel tax is that of a charge on motorists for the harmful pollution their vehicles generate.

A man in a black cap and top walks through petrol station.

Fuel excise is rolled into the cost of fuel at the bowser. FLAVIO BRANCALEONE/AAP

Paying the cost of pollution

Vehicles with internal combustion engines – that is, those that run on petrol or diesel – create several types of pollution.

The first is carbon dioxide emissions, which contribute to human-caused climate change. Others include local air pollution from particulates and exhaust pollution as well as noise pollution.

In economic terms, these effects are known as “negative externalities”. They arise when one party makes another party worse off ^[6], but doesn’t pay the costs of doing so.

How big are the costs to society imposed by polluting vehicles? Estimates vary widely. But they are almost certainly as large as, or larger than, the revenue generated from fuel excise.

Let’s tease that out.

A litre of petrol weighs about 0.74 kg ^[7]. But when burned, it generates 2.3 kg of CO₂ ^[8]. That’s because when the fuel is combusted ^[9], the carbon combines with heavier oxygen atoms.

Before the re-election of United States President Donald Trump, the nation’s Environmental Protection Agency estimated the social cost of carbon dioxide ^[10] emissions at about US$190 (A$292) per metric tonne.

So in Australian terms, that means CO₂ emissions from burning petrol costs about 67 cents a litre, more than the current excise of 51 cents per litre.

Even using a more conservative estimate of US$80 a metric tonne ^[11], CO₂ emissions generate costs of around 28 cents a litre, more than half the fuel excise.

A spotlight on health impacts

Motor vehicles are a major cause of air pollution. Air pollution is causally linked ^[12] to six diseases:

coronary heart disease
chronic obstructive pulmonary disease (COPD)
stroke
type 2 diabetes
lung cancer
lower respiratory infections.

Estimates of the deaths associated with air pollution in Australia range from 3,200 ^[13] to more than 4,200 ^[14] a year.

Even the lower end of that range is far more than the roughly 1,200 lives lost in car crashes ^[15] annually.

University of Melbourne analysis ^[16] in 2023 landed at an even higher figure. It suggested vehicle emissions alone may be responsible for more than 11,000 premature deaths in adults in Australia a year.

Putting a dollar value on life and health is difficult – but necessary for good policy making.

The usual approach is to examine the “statistical” reduction in deaths for a given policy measure. For example, a policy measure that eliminates a hazard faced by 1,000 people, reducing death risk by 1 percentage point, would save ten statistical lives.

The Australian government ascribes a value of $5.7 million ^[17] per (statistical) life lost or saved. So, hypothetically, a saving of 2,000 lives a year would yield a benefit of more than $10 billion.

This is more than half the revenue collected in fuel excise each year.

A woman wearing a mask walks out of a hospital.

Putting a dollar value on life and health is difficult – but necessary for good policy making. DIEGO FEDELE/AAP

The best road forward

Given the harms caused by traditional vehicles, society should welcome the decline in fuel excise revenue caused by the transition to EVs – in the same way we should welcome declining revenue from cigarette taxes.

If we assume fuel excise pays for pollution costs, then who is paying for roads?

The cost of roads goes far beyond construction and maintenance. The capital and land allocated to roads represents a huge investment, on which the public, as a whole, receives zero return.

Vehicle registration fees make only a modest contribution to road costs. That’s why all motorists should pay a road-user charge. Such a system will soon be introduced ^[18] in Aotearoa New Zealand.

The payment should be based on a combination of vehicle mass and distance travelled. That’s because damage to roads is overwhelmingly caused by heavy vehicles ^[19].

Then comes the question of Australia’s emissions reduction. The switch to electric vehicles in Australia is going much too slowly. A road user charge targeting only electric and hybrid vehicles would be a grave mistake, slowing the uptake further.