In an age of zero fuel duty, how do we pay for our roads?
Across the world, countries are coming to terms with the new economic challenge of an all-electric car market: namely, how to replace the billions traditionally generated through taxation of petrol and diesel.
In 2023-24, fuel duty contributed £24.7bn to the UK government’s coffers, to be spent on public services and projects, including road maintenance. The 20% VAT rate fuel contributes billions more.
The UK depends on this revenue source for around 3% of its taxation revenue – a higher exposure than many other countries such as the US (c.1%) or Australia (c.2%). Much of this taxation revenue goes to pay for other government priorities such as education, hospitals and social care, rather than road maintenance.
Over the next 15 years, as the take-up of electric vehicles (EVs) increases, that income will steadily diminish. The UK has set the date of 2035 for all new cars to be zero-emission (at tailpipe), and forecasts predict that major reductions in fuel duty and associated VAT will be seen in the late 2020s, and will accelerate through the 2030s.
Which leaves the question: how will the UK – and similar economies – plug the considerable shortfall in revenue, and fund the maintenance and renewal of its road network?
There are many factors at play in trying to achieve a new, fair, equitable form of taxation to recover the revenues lost in the transition to a net zero fleet. Taxing drivers for electricity and other clean fuels such as hydrogen, either at the point of sale or through a mileage-based method, could unintentionally slow the uptake of low-emission vehicles. On the other hand, managing demand for private road travel through taxation has the potential to encourage a modal switch to public transport (but only where it’s affordable and convenient).
So, what are the options? Drawing on the experience of our global network of specialists in delivering solutions to emerging transport challenges, we are able to offer a heads-up on the most viable emerging road user taxation schemes around the world.
Taxing by the mile
Taxation by the distance driven is a relatively simple, easy-to-understand and effective system of raising duty from electric and hybrid vehicle use that broadly replicates traditional taxation methods. Iceland and the Netherlands are among those countries that are pursuing mileage-based taxation, but it has drawbacks from a policy perspective. It fails to target congestion at specific times or locations on the network and also does little to encourage modal shift, unless set at a very high level.
- Iceland: To offset a steep drop-off in fuel duty receipts (41% over six years), Iceland needed an alternative system as a matter of urgency. The ‘odometer-based’ scheme, based on annual mileage readings took just 2-3 years to introduce. The scheme covers the country’s relatively modest fleet of around 50,000 EVs. By the end of January 2024, 97% of EV owners had reported their mileage over the previous 12 months, and 95% paid their tax before the due date. Iceland may be an outlier in terms of its high levels of public compliance and other countries may experience a greater challenge in this respect.
- The Netherlands: The previous Dutch coalition government agreed in 2023 to the introduction of a ‘Pay by Use’ (Betalen naar Gebruik) odometer-based system, the design of which has been supported by Arup. Under the scheme, which would have started in 2030, all cars and vans would have paid an annual tax based on their total mileage – regardless of where and when they are driven – in contrast to the scheme currently being delivered in the Netherlands for HGVs (which is time- and distance-based).
Strategic network tolls
Charging for the use of strategic network roads has long been a source of funding for maintaining and improving those roads, sometimes generating surplus revenue that can be used to fund other transport interventions.
Although many countries have in-depth tolling capability on their motorways – India is currently rolling out a satellite-based system across its 130,000km network – the most mature tolling environment is Europe. Most European countries operate satellite-based tolling systems for freight traffic, where tolls can be based on a range of factors including location, distance travelled, time of day and vehicle emission class.
The existing systems are all based on the same model. Freight vehicles carry onboard units equipped with satellite technology that communicates driven distances to tolling service providers. Those providers then charge the vehicle owners and submit payments to the relevant authorities, who operate roadside recognition and communication technology to ensure compliance. The systems are highly efficient due to the high volumes of traffic and long, linear motorways.
Some states have introduced or are planning to introduce tolling regimes with charging tariffs that favour and encourage low-carbon vehicles. The Dutch HGV Charge is already supporting wider net-zero ambitions within the freight sector, such as subsidies for e-trucks. Arup is currently assisting in the realisation and introduction of the scheme ahead of its go-live in 2026, following involvement in the development of the HGVC law and the design of the integral system, the procurement of the observation service and the procurement of the Main Service Provider.
Some states have introduced or are planning to introduce tolling regimes with charging tariffs that favour and encourage low-carbon vehicles. The Dutch HGV Charge is already supporting wider net-zero ambitions within the freight sector, such as subsidies for e-trucks. Arup is currently assisting in the realisation and introduction of the scheme ahead of its go-live in 2026, following involvement in the development of the HGVC law and the design of the integral system, the procurement of the observation service and the procurement of the Main Service Provider.
Until now, recovering losses in fuel tax has not been a focus of these schemes. In countries such as the Netherlands, though, extending the freight toll scheme to the secondary road network could, in theory, help meet shortfalls in road tax. The trade-off is that low freight volumes on dense secondary networks makes this option expensive to enforce. In Germany some regional authorities are considering implementing their own form of satellite-based tolling alongside the national LKW-Maut scheme run by the federal government. And Switzerland has been developing its concept for securing the long-term financing of transport through a distance-based levy that charges passenger cars according to their unladen weight and engine power, and the use of satellite-based distance measurement.
Establishing a satellite-based strategic network tolling system in the UK could benefit from the presence of a mature market of tolling service providers on the country’s doorstep, as well as proven international standards and the familiarity of freight operators with road-user charging. And, over time, it could be extended to lighter vehicles.
Urban network tolls
Road-user charging in urban and rural settings throws up more challenges: networks are complex, traffic patterns are different and tall buildings affect the satellite signal. Even so, Singapore is moving from a gantry-based system to satellite-based tolling, and cities such as Melbourne, Brussels, Vancouver and Jakarta are also considering it.
Typically, existing city tolling charging regimes, such as those operating in London, Birmingham, Bristol and Stockholm, are focused on air quality and modal shift, and charge vehicles a daily fee based on their type and emissions. Their operating costs tend to be far higher than strategic network systems.
Currently, revenue from these schemes tends to be recycled into local initiatives or hypothecated into transport investment. In the UK, though, zone-based urban network charging could form part of an overall replacement road-user taxation policy, alongside a distance-based solution for strategic roads. Much of the infrastructure is already in place in some cities, in the form of air quality zones. Central government could facilitate the introduction and set overall integration standards, while toll charges and coverages to fit local conditions.
Will the tech companies disrupt?
Disruption is nigh, though, from big tech. Google and others are enabling travellers to purchase mobility across a range of modes using a single user account. ‘Transport wallets’ plug into existing transport provider systems to gather fare options across different modes and offer users an easy way to make choices and purchases. In the future, these may link into tolling schemes. There is already a well-established body of tolling payment service providers – the likes of Shell, Yunex and parking providers – who currently operate payment services to customers.
While the role of tech companies is developing, there’s an opportunity for governments to consider applying road-user charging through this kind of app, reducing the roll-out costs and making the experience more traveller-friendly. However, a host of equity, competition, transparency, security and compliance issues stands between any service provider and the chance to offer road-user charging services.
The concept of the single user account will be key to the spread of road-charging systems – a single, easy-to-use gateway for the driver to all the systems they are likely to use, regardless of operator or service provider. Right now, there is nothing to connect the UK’s various road-user charging schemes, from airports to river crossings to clean air zones. For British drivers, the transparent single-user account is a must-have for the future.
