Policy instruments (4) - Transport Policy and Planning in Great Britain - page 240

tax, but in a way which contributed to environmental objectives, encouraging
more energy efficient vehicle design, vehicle purchase and vehicle use.

As an instrument of environmental policy the effectiveness of fuel duty is limited
because of the relatively low elasticity of travel demand to fuel prices. (A 10% increase
in price only reduces car mileage by 2%.) In addition any reduction in emissions
through higher fuel prices are quickly offset by increases in demand due to other
factors (Banister 2005).
In practice the effect of the fuel duty escalator was offset in its first few years by a
decline in oil prices so that the overall pump price increased little (see Figure 15.1). It
also meant that the principle of the escalator became established without generating
great political opposition. Unfortunately the reverse occurred at the end of the 1990s
when oil prices leapt by over 50% in a single year. Together with increases in fuel duty
and VAT this raised the cash price at the pump by 14% (from 70p to 80p per litre) at
which point the taxes on vehicle use in the UK were the second highest in Europe. This
prompted the protests reported in Chapter 8 which led not merely to a postponement
of planned increases in duty but to a fundamental change in policy. After the 3p per
litre cut in fuel duty in 2001 it was increased only once in the subsequent six years (by
1.3p to 47.1p in 2003). In effect the escalator was put into reverse.
In his 2007 Budget statement Gordon Brown announced that fuel duty would be
increased by at least the rate of inflation for the next three years, although by 2009/10
this would mean that duty was still 11% less in real terms than in 1999. (In revenue
terms the Government enjoys some compensation from the higher VAT receipts
through increased oil prices.) As in previous years however one might expect these
plans to be reviewed in the event of exceptional changes in world oil prices and/or
the state of the economy, and 12 months later his successor Alistair Darling in fact
deferred the proposed 2p increase for six months.
In relation to VED an important change was introduced in 2001 whereby the flat-
rate annual fee was replaced by a banded scale linked to CO 2 emissions for all cars
registered subsequently (and to engine size for those registered previously). Minor
differences were also made for diesel engined cars (higher) and alternative fuels
(lower). The initial range of fees was however very narrow (£90 to £160) and criticised
on the basis that it would have no impact on the behaviour of car purchasers. Some
acknowledgement of this was reflected in subsequent changes to differentiate further
between the more polluting vehicles. In the 2007 Budget the fee for the most polluting

100

90

80

70

60

VAT
Duty
Fuel

50

40

30

20

10

0

Figure 15.1 Petrol price and its components 1992-2006 (2006 prices)