Opinion

One of the more controversial proposals to come from Treasurer Jim Chalmers’ Economic Reform Roundtable was a road user tax applying only to drivers of electric vehicles. Economist Professor John Quiggin shares his take on how the move will affect Australia’s goal of net zero emissions by 2050 and why all road users should pay the charge

The announcement by Treasurer Jim Chalmers of a road user charge, to be levied only on drivers of electric vehicles, marks the abandonment of Australia’s best chance to achieve net zero by 2050.  Passenger cars and light commercial vehicles account for more than 10 per cent of Australia’s total emissions, a share that has been increasing over time.  

As the Department of Climate Change, Energy, Environment and Water notes, Australia currently lags far behind other countries in the adoption of electric vehicles, which current account for only 10 per cent of new vehicle sales. The announcement, which emerged from the Treasurer’s recent Economic Reform Roundtable (August 9–21), of an EV-specific charge – likely to rise over time – ensures that this share is unlikely to increase in the next few years.

And by the 2030s it will be too late. Cars sold in the 2030s will still be on the road in 2050. If, as now seems certain, most of them are American-style pickup trucks, fuelled by petrol or diesel, then transport emissions are going to rise, not fall. The effective exemption of these vehicles from the government’s fuel efficiency target will exacerbate the effects of the EV charge.

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.

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, 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. But when burned, it generates 2.3 kg of CO₂. That’s because when the fuel is combusted, 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 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 per litre, compared to the current excise of 51 cents per litre.

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

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 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.

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.

Sadly, the chance for an economically and environmentally rational road pricing scheme has been missed and is unlikely to come again.