Following widespread speculation that the Chancellor will announce plans for a pay-per-mile charge for electric vehicle use in tomorrow’s UK Budget, here’s the article initially written by Transform director Colin Howden for our ‘Ideas for Investment‘ report.
The reform of transport taxation to place the ‘polluter pays principle’ at its core has for decades now been the cherished ambition of sustainable transport advocates. Road pricing has long been held as the means in which this could most effectively be accomplished. However, implementation on the ground has been rare and limited, with public acceptability often low, and political leadership generally scarce.
Successful examples of road pricing (also known as ‘road user charging’) do exist. London’s congestion charge remains the pre-eminent example, alongside similar city-based schemes in Gothenburg, Stockholm, Milan and Singapore. But this modest list demonstrates the relative paucity of cities that have taken action, and the general failure of national governments to implement country-wide pricing much beyond a few schemes for trunk road tolling for heavy goods vehicles – with one recent, notable example in the form of Iceland (see below). And while there has been a demonstrable lack of progress in making the case for road pricing based upon the altruistic aim of congestion alleviation, there has been even less success in selling the concept around the even more elevated concept of emissions reduction, let alone the Holy Grail of the internalisation of negative economic externalities!
But this gloomy outlook is leavened by the more recent realisation that the transition from Internal Combustion Engine Vehicles (i.e. petrol/diesel cars) to Electric Vehicles (i.e. electric cars) will empty national treasuries due to the latter being reliant on electricity, which is much cheaper, and, crucially, much less taxed than the fossil fuels that continue to power most of the country’s car fleet. In the UK, this will mean that the annual revenues flowing to HM Treasury of c. £35 billion per annum will dwindle and, eventually, fall to zero as ICE vehicles leave the fleet and EVs become the norm.
Westminster’s transport committee eloquently summarised the repercussions of this forecast when it concluded in its 2022 inquiry report on road pricing that “In addition to generating taxation to fund essential public services, motoring taxation plays a key role in managing congestion by regulating demand to use public roads. If the Government fail radically to reform motoring taxation, the UK faces an under-resourced and congested future.”
So while decongesting roads, cutting pollution or delivering an efficient economy have failed to drive change, a more base instinct – in short, cold hard cash – is at least beginning to focus minds.
Iceland: Our roads to the future
Iceland is pioneering a practical solution to counterbalance the loss in tax revenue as a result of the shift toward electric vehicles (EVs).
Currently, 60% of new car registrations in Iceland are electric and this transition away from traditional internal combustion engine (ICE) vehicles poses a significant threat to fuel tax income.
To address this, Iceland has introduced a straightforward, distance-based road usage fee – an innovative approach that could serve as a model for other nations facing similar challenges.
The Icelandic road user charge is designed specifically to offset the revenue gap caused by declining fuel duties as EV adoption grows. Under the new system, electric car drivers pay a small fee of 6 Icelandic Krona per kilometre driven (just under 5p per mile).
This distance-based fee is simple in design and relatively easy for drivers to comply with. Vehicle owners register on an official website, and their fees are calculated and billed monthly based on mileage. This ensures EV users hold financial responsibility for road maintenance as well as drivers of traditional fuel-powered vehicles.
Several features make Iceland’s approach effective:
- It targets the current EV-driving population, a demographic expected to expand rapidly as Iceland advances toward a fully electric vehicle fleet.
- The system is scalable and adaptable; as the proportion of EVs on Icelandic roads continues to rise, the fee structure can be adjusted to maintain consistent funding.
- The approach is straightforward – avoiding the complex restructuring of tax systems.
- It minimises political resistance as the system does not impose additional burdens on ICE vehicles in its early stage.
Iceland’s approach to road user charging offers valuable insights for Scotland as it moves toward its commitment to 100% of new car registrations being EVs by 2030. Iceland’s model, which ties road funding to vehicle mileage rather than fuel taxes, demonstrates a scalable and adaptable solution that could help Scotland address gaps in its transport budget as EV adoption accelerates.
Adopting a similar model could support Scotland’s ambitious targets by ensuring a stable revenue stream for road maintenance and investment in sustainable transport alternatives.
A mileage-based approach is equitable since all drivers contribute to infrastructure upkeep according to their usage. With Scotland aiming for a net-zero transport system and a rapid transition to EVs, implementing an Iceland-inspired road user charge could fill fiscal gaps effectively and support long-term sustainability in the Scottish Government’s finances, whilst better reflecting the impacts of disincentivising car use.
The pros and cons of road pricing
In November 2022, Edinburgh Napier University published research, commissioned by Transform Scotland, which identified which measures have been utilised outwith Scotland to manage road traffic travel demand. The report provides a detailed analysis of a number of schemes, plus an extensive bibliography. With no observable political progress in the intervening two years, the report provides a thorough and contemporary commentary of policy options for traffic demand management. But we will reproduce here in full two summary tables from the report.
Congestion Charging – Key Points
+ Universal reduction in traffic of between 12 – 33%
+ Can be seen as beneficial and supported by business – particularly where scheme benefits such as transport and environmental benefits can be demonstrated
+ Improvement in delivery times within zone
+ Reduced delay to high value trips within zone
+ Improved local environment and opportunity for better use of space
+ Increases in public transport patronage and active travel
− Effect on retail difficult to quantify accurately
− Failure to minimise operating costs of the congestion charging scheme itself can result in limited funds for transport improvements, limiting potential secondary benefits
− Success at pre-implementation referenda challenging – but may improve in time
National Road User Charging – Key Points
+ A national road user charging system is likely to be urgently required to replace vehicle excise duty/fuel duty in conjunction with vehicle electrification, irrespective of any traffic reduction targets.
+ Traffic reductions resulting from road user charging are likely to vary by road type and the urban/rural mix, with reductions of up to 10% possible
+ Business benefits from road user charging can include more efficient fleet usage and greater uptake of local shopping
+ A telematic based road user charging system could maximise the economic efficiency of the road network, through reactive congestion-based time and location charging
− If charges are implemented on certain road types only (e.g. motorways), true reductions in traffic may not materialise where local free-of-charge alternative routes exist.
− Public acceptance of road user charging is low and traditionally has been highly sensitive when changes are made (e.g. fuel duty protests)
− Equity issues are likely to be raised in association with road user charging in rural areas where public services are more sparse and public transport provision is low
The critical benefit of the road pricing approach is its traffic reduction potential, with a range of 10% to 33% seen as possible (contingent on scheme design). In the context of the Scottish Government’s commitment to reduce traffic levels by 20% no other single transport intervention has the potential to deliver this level of transformational change.
Equity implications
Road pricing schemes will vary in their distributional impacts according to specific scheme design, and so it is difficult to make sweeping generalisations about likely impacts. However, some impacts would be generally expected to result. For example, local road pricing schemes which reduce traffic levels should be expected to have an unambiguously beneficial impact for non-car owners (e.g. bus users, pedestrians and cyclists). And as non-car ownership skews towards women, young people, and those on lower incomes, the general distributional impacts will tend to be substantially progressive in impact.
Urban/rural impacts need to be considered. The 2022 Napier report concludes that “rural areas are unlikely to be the best place to target for many reasons”, citing factors such as low public acceptance, impracticality, limited public transport alternatives and potential diversion of business to other areas. So city-based road pricing schemes can be expected to have no direct impact on rural areas. Indeed, a shift from national fuel and vehicle taxation to city-based road pricing would be expected to reduce the relative tax burden for rural dwellers. However, it would be expected that locally-raised revenue would be re-invested locally, so consideration would have to be given to how investment levels could be maintained in rural areas.
Transform policy forum member Hussein Patwa has noted that “taxis are a common mode of transport for many people who need to travel within or outside the congested area, especially for those who have limited mobility, disability, or special needs”, and that road pricing “may have different equity implications for those who require using taxis out of necessity, depending on the design and implementation of the policy.” Taxis are exempt in the London congestion charge scheme, and were due to be exempt in the failed Edinburgh scheme. Hussein noted that road pricing “may make taxi travel more convenient and attractive for those who need it, as they may face shorter waiting times and faster journeys”; however, he raises the prospect that it could conceivably “create an incentive for taxi drivers to increase their prices to take advantage of the reduced traffic and higher demand”.
Public acceptability becoming more favourable
The House of Commons Transport Committee could not have been more blunt in its assessment when it said that “the history of road pricing is a history of public unpopularity. Fifteen years ago, for example, a petition against the introduction of road pricing attracted more than one million signatures. As a result, road pricing has acquired the reputation as a policy that is too unpopular to implement.”
However, the Committee’s view was perhaps rather too bleak, and, indeed, maybe rather outdated in its outlook. The Green Alliance reported in 2021 that 59% of people support reforming the tax system to make environmentally damaging behaviour more expensive with one 12% opposing. In its ‘Miles Ahead’ report (2022), the Social Market Foundation reported results of polling which found 38% support for road pricing (with 26% opposed). Meanwhile, in separate polling, the Campaign for Better Transport found 60% of respondents believed the current system of vehicle taxation needed reform (with 6% opposed), and that 49% supported moving to road pricing (with 18% opposed).
Our own ‘Tackling Traffic’ report (2022) reviewed business rather than public attitudes; key themes for this were: the need for business engagement, the reinvestment of revenues raised back into public transport, assessment of impacts, and targeting the right journeys. This was reinforced in the accompanying Edinburgh Napier University research which concluded that hypothecation of revenue and clear objectives are critical to public and business community acceptance of any schemes.
But political leadership remains absent
In his foreword to the Social Market Foundation report, the Conservative peer Lord Young bemoaned the lack of leadership, lamenting that “In 1996, when I was Secretary of State for Transport, I published a White Paper that began to grapple with the need for a better way of distributing the costs of driving, by levying charges according to miles driven. It is just a little disappointing that so little progress has been made in the last 26 years. Much of that, I am afraid to say, comes down to political caution and even timidity.”
Despite the urgings of the House of Commons transport committee, and the vast evidence base available to it, it was indeed “just a little disappointing” that – 28 years on – the incoming Labour government, in command of a vast majority at Westminster, failed dismally to bring about a more progressive approach in its October 2024 Budget. It contained precisely nothing on the reform of motoring taxation, instead retaining the previous Conservative administration’s decade-long fuel duty freeze. The Economist was withering its assessment that: “Now would have been a perfect time to revisit road taxes. Electric vehicles are spreading quickly and are not covered by fuel duties. Far easier to start taxing them now, before a vocal lobby of EV owners is in place to complain. But [the Chancellor of the Exchequer] did nothing there and, worse yet, continued her Tory predecessors’ cowardly habit of freezing fuel duty.”
Where this leaves the Scottish Government’s putative ‘Four Nations Approach’ in support of its own ambitions for its 20% traffic reduction target is entirely moot. But the holes in HM Treasury budgets will increase, and worsen, every year as the transition to an electric vehicle fleet continues, and even if the new Labour administration at Westminster continues to ignore its environmental responsibilities, the fiscal ones will become ever clearer, year after year.
So where next for the road pricing agenda in Scotland?
The Scottish Government has correctly come round to the view that it cannot meet its climate targets without reducing road traffic levels, and that we won’t see significant levels of traffic reduction until demand management is implemented. But the Scottish Ministers have so far shirked responsibility for action here, instead asserting that it is solely the responsibility of Scottish local authorities to deliver such measures, whilst simultaneously failing to provide any financial incentivisation for them to do so. So the Scottish Government’s current posture can be seen as at best an exercise in magical thinking.
So our recommendation is that the Scottish Ministers pro-actively design an equivalent of the Icelandic scheme for charging EV use that could be implemented across the UK. In parallel to this, it should investigate what legislation would be required to implement this as a Scotland-only scheme should UK Labour continue to bury its head in the sand with regards to the need for the reform of motoring taxation. Surely, after all, a SNP Government at Holyrood shouldn’t be seen to be reliant on a Labour Government at Westminster before taking decisive, independent action?
