Green Alliance: Transport tax reform could raise £23bn by 2030

Green Alliance has today published a new analysis suggesting the government could raise £23bn by 2030 by reforming taxes on transport and making the sector pay its fair share for the greenhouse gas emissions it produces. 

According to modelling by WPI Economics commissioned by the think tank, Chancellor Rachel Reeves could generate £17bn for the public purse through a comprehensive road pricing scheme where drivers are charged for road use, with frequent drivers paying more.

Moreover, the analysis claims the Chancellor could raise a further £4bn to help plug the "black hole" in the public finances by introducing a tax on aviation jet fuel, echoing recent suggestions from Transport & Environment UK that £5.9bn could have been collected in 2023 by taxing jet fuel at the same rate as the fuel duty paid by British drivers.

Green Alliance said transport tax reform could help tackle the £22bn 'black hole' that is set to dominate the upcoming Autumn Budget and provide an incentive for increased investment in clean technologies and public transport networks by ensuring the transport sector pays its "fair share" for the emissions it produces. A switch to a road-pricing regime could also help to mitigate against the sharp fall in fuel duty revenues that is expected in the coming years as more drivers switch to electric vehicles (EVs). 

Previous Green Alliance research has shown the transport sector has the biggest 'policy gap' of any industry and as such is off track to meet its emissions reduction goals under the Fifth Carbon Budget that runs through to 2032.

The report highlights how fuel duty raised £25bn between 2022 and 2023, but the effective rate has fallen in real terms with the government have frozen the fuel duty rate since 2011. There are also signs that booming demand for EVs - which last month accounted for 22 per cent of new car sales - is contributing to a fall in fuel duty revenues.

Green Alliance warned the Treasury is on track to face an "acute" revenue gap by 2035, when all new cars and vans sold will be required by law to have zero emissions at the tailpipe under the Zero Emissions Vehicle Mandate.

Meanwhile, the analysis argues that aviation remains under-taxed compared to other forms of transport, given it remains exempt from fuel duty and VAT. Green Alliance said the two charges applied to commercial aviation - Air Passenger Duty and the Emissions Trading Scheme for certain destinations - will contribute just 0.2 and 0.1 per cent of national income respectively during the current fiscal period compared to a 0.9 per cent contribution from fuel duty. 

"Rachel Reeves is asking government departments to balance the books at a time when they also need to shift gear on meeting our legally binding climate commitments," said Johann Beckford, senior policy advisor at Green Alliance. "But there's a solution: to fix the tax system so more polluting forms of transport pay their fair share of tax, and so it promotes greener ways to get around.

"We currently tax fuel for cars, so why not for aviation and shipping?  In the long term, taxing people according to the distance they drive can be a fairer option, encouraging people to choose cleaner vehicles and alternatives to jumping in the car." 

Reports have suggested Labour could increase fuel duty in the upcoming Budget, but it has repeatedly downplayed speculation it could introduce road-pricing. 

In response to the Green Alliance's calls for transport tax reform, a government spokesperson said there were no plans afoot to introduce road pricing.

"We have no plans to introduce road pricing," they said. "We are committed to supporting our automotive sector as we transition to electric vehicles in order to meet our legally binding climate targets."

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