G8 Environmental Futures Forum 2000

Detailed Description of Best Practices
United Kingdom No.7

I. Title of the Best Practice

Fuel duty escalator

II. Overview of the Best Practice

A. Aim
The fuel duty escalator - an annual above inflation increase in the duties on road fuels which the UK Government has been committed to since 1993 - is primarily aimed at reducing CO
2 emissions from road transport and tackle climate change. As such, the escalator has been the most important fiscal measure introduced by the UK Government to reduce greenhouse gas emissions. It also contributes to other transport and environment objectives, such as reducing traffic growth and congestion, improving air quality, conserving finite natural resources, and internalising transport externalities.

B. Trend in UK fuel duty and price
The escalator was first introduced in 1993 at 3% in real terms. It subsequently increased to 5% in 1995, and since 1997 the UK Government has had an open-ended commitment to annual increases in fuel duty of at least 6% above inflation. As a result of the escalator, the duty on unleaded petrol and diesel has more than doubled since 1993 in nominal terms, while fuel price has also significantly increased. The charts below show the trend in real and nominal fuel duty and price, assuming the escalator continues to 2002.

Duty and price increases in nominal terms for unleaded petrol and diesel 1991-2002


Duty and price increases in real terms for unleaded petrol and diesel
1991-2002 (1997 prices)

C. The fuel price mechanism
The intention behind the fuel duty escalator is to increase the price of road fuel on a sustained basis, thereby encouraging all road users to take action to reduce their fuel consumption (leading to lower CO
2 emissions from road transport). The key behavioural responses to higher fuel prices by road users include:

  • the purchase and use of more fuel efficient vehicles and fuel saving technologies
  • the adoption of more economical driving styles
  • less vehicle use (through better journey planning or cross-modal shifts)

Vehicle manufacturers are also expected to develop and introduce new fuel saving technologies, including alternative fuel and engine technologies, in response to consumer demand for more fuel efficient vehicles.

The exact behavioural response to higher fuel prices can vary considerably, depending on individual circumstances. Private motorists have a different range of opportunities to respond to higher fuel prices compared with freight distribution companies. Short-term term responses can also be distinct from long term responses. Many motorists, for instance, may reduce their vehicle mileage in the short term in order to reduce their fuel consumption, but in the longer term they may be able to purchase more fuel efficient vehicles, allowing them to increase their mileage.

D. Estimating the environmental impact of the escalator
The UK Government has published several estimates of the carbon savings from the fuel duty escalator since its introduction in 1993. The most recent estimate was in the consultation document to the UK Climate Change Programme, published in October 1998. This estimated that the fuel duty escalator continuing at 6% between 1996 and 2002 would save between 2 and 5 million tonnes of carbon in 2010. Further information about the basis of this estimate is contained in a recent memorandum by the Department of Environment, Transport and the Regions to the House of Commons' Environment Audit Select Committee on the Government's environment appraisal of the fuel duty escalator.

E. Response to the introduction of the fuel duty escalator
The introduction of the fuel duty escalator was widely supported by transport and environment organisations, and had initially cross party support. But as the policy continues, opposition to the escalator has grown more vocal. This opposition has principally focused on three key areas:

  • its impact on the UK domestic road haulage industry The industry claims that higher fuel prices render the domestic hauliers uncompetitive, as international hauliers can import for their own use cheaper diesel from continental Europe. The UK Government has set up a Road Haulage Forum to consider the competitive pressures on the domestic haulage industry.
  • its impact on rural motorists There is widespread concern that rural motorist, particular in the remote areas of Scotland, do not have the opportunity to reduce their vehicle use, so are adversely affected by higher fuel price.
  • the lack of hypothecation of transport tax revenue for transport infrastructure investment Many motoring organisations are calling for more Government investment in public transport or road infrastructure projects, to compensate for higher transport taxation revenue as a result of the escalator.

There is also a concern about the effectiveness of the escalator as means of reducing CO2 from road transport. This is due to the impression that the escalator is yet to have any tangible impact on motoring behaviour. But the escalator is a long term measure, and major behavioural changes are only likely to start to occur after several years of the policy. Any assessment must also consider what the impact is relative to the counter-factual situation of no fuel duty escalator. This issue is discussed in the memorandum.

III. Categorizing the Best Practice

1. Classifications
( X ) Regulatory approach
( ) Practical action
( ) Social network mechanism

2. Social actions involved
( X ) Citizens
( X ) Central Government
( ) Local Government
( X ) Business

3. Sector(s)
( ) Energy
( ) Household
( X ) Transportation
( ) Industrial enterprises
( ) Other (Non-Industrial) Business
( ) Agriculture/land use/forestry
( ) Other

4. Target greenhouse gas(es)
( X ) CO2
( ) CH4
( ) N2O
( ) HFC
( ) PFC
( ) SF6
( ) Other

IV. List of Attachments

Memorandum to the House of Commons' Environment Audit Select Committee by the Department of Environment, Transport and Regions on the Government's environment appraisal of the fuel duty escalator.

V. Contact

Contact Person: Zina Etheridge
Title: Policy Advisor
Organization: Department of Environment, Transport and the Regions
Email: zina_etheridge@detr.gsi.gov.uk
Tel: +44 171 890 4899
Fax: +44 171 676 2512
Address: Great Minster House
76 Marsham Street
United Kingdom
Note: N/A




1 The fuel duty escalator (FDE) was first introduced in 1993, bringing in annual increases on fuel duty of 3% in real terms. The escalator was increased to 5% in November 1993. The July 1997 budget included a commitment to annual increases of 6% in real terms in the duty on road fuels, except road fuel gases. This policy has been reaffirmed in the two subsequent budgets. The primary stated objective behind the FDE is to reduce emissions of CO2 from the transport sector. The fuel duty escalator is also significant in revenue terms - the escalator increases announced in the last Budget alone will raise some £1.5 billion in 1999 - 2000.

2 UK policy on climate change is driven by two targets: a legally-binding greenhouse gas emission reduction target of 12.5% on 1990 levels by 2008-12 arising from the Kyoto Protocol; and a domestic goal of reducing CO2 emissions to 20% below 1990 levels by 2010. Transport has been the fastest growing major source of emissions of CO2, the most important of the gases associated with climate change. In 1997, road transport produced around 32 million tonnes of carbon (MtC) - a fifth of the total emissions from all sources. The Integrated Transport White Paper, A New Deal for Transport, confirmed that the escalator had a key role to play in the Government's strategy to tackle climate change. The Government is developing a new climate change programme to meet its targets; a draft will be published for consultation later this year.

3 When the use of fuel price as a CO2 saving measure was first considered by DETR, in the late 1980's, it was anticipated that it would act primarily as an incentive to manufacturers to produce more fuel efficient models. Increasing fuel price was one of a number of policy measures considered, including the use of regulation or voluntary agreements. On the basis of cost effectiveness, and the potential environmental impacts, increasing fuel price was considered to be the most effective option. This assessment was in accord with the views of the motor industry, and the view arrived at by a number of working groups at European level.

4 However, the escalator also has the potential to make a significant contribution to other key transport and environment objectives. These include:

  • to reduce the rate of traffic growth and congestion, in line with White Paper objectives
  • to reduce emissions of local air pollutants from road transport, to address the objectives set out in the National Air Quality Strategy and the UK's international commitments to reduce its contribution to regional and national pollution impacts like acidification and ozone
  • to encourage the prudent use of non-renewable natural resources within the transport sector, in line with the Sustainable Development Strategy
  • to help internalise transport externalities, by ensuring transport taxation at least reflects all the external costs, including environmental costs, of road transport activities

Further comments on the impacts on these areas are included, where appropriate, in response to the Committee's questions.

5 Whilst DETR have a strong interest in the FDE, matters of taxation are, of course, for the Chancellor. The Committee has noted its interest in the process of environmental appraisal of taxation measures, and in particular has asked for more information on the appraisal of the FDE. Guidelines on the environmental appraisal of policies has been issued by DETR and is set out in Policy Appraisal and the Environment (1991) and Policy Appraisal and the Environment: Policy Guidance (1998).

6 Apart from providing initial guidance as to how environmental appraisals should be carried out, DETR's role in relation to the environmental appraisal of budget measures is to provide advice to the Treasury. The Treasury use this advice to produce the environmental appraisal of the tax policy in question. DETR also regularly undertakes evaluations of the escalator's environmental impact, to inform the development of its own policies on transport and the environment. More broadly, DETR keeps all its policies under review in terms of economic and social impacts.

7 Before addressing the committee's specific questions, it is worth setting out broadly how the impacts of the fuel duty escalator are estimated.

8 The FDE has always been seen as a long term measure for two reasons. Firstly, it is intended to encourage vehicle users to reduce their fuel consumption, and thus CO2 emissions, either through the vehicle they drive (by selecting a more fuel efficient model) or the way they use their vehicle (by selecting a more fuel efficient driving style, making fewer journeys or switching to alternative modes of transport). The escalator also acts as a signal to manufacturers about likely demand for more fuel efficient vehicles. The effect of the escalator on the way people behave is cumulative. As the policy is continued, so people have both greater motivation to respond, and greater opportunities to respond in different ways. Some changes also take some time to filter through, for instance the time it takes for manufacturers to produce more fuel efficient models, and for these to feed through into the fleet. This is particularly true given the relatively small improvements in fuel economy over the past decade. Secondly, the effects of the escalator are expected to be apparent for a long time after the policy itself is discontinued, because of the long term increase in fuel prices.

9 The challenge in measuring the impact of the fuel duty escalator is in assessing how far the incentives the escalator creates translate into changes in behaviour and when these changes will occur. Modellers also need to predict how the world would have looked had the policy not been introduced, which means setting apart the effects from other policies, trends and events that have impacts on fuel efficiency and transport use.

10 To assess the impact of the fuel duty escalator we draw on a number of economic models. These models are used as they are capable of capturing the lagged impact of the fuel duty escalator on behaviour, and can also predict the situation which would have occurred had the escalator not been introduced. The two main models used by DETR are the National Road Traffic Forecasting model (NRTF) and the Vehicle Market model (VMM). These two models interact; the VMM estimates the impact of the fuel price changes on the vehicle fleet which are fed into the NRTF to forecast the overall impact of the policy on traffic levels and emissions. A brief outline of how these models work and interact is provided at annex A.

11 The other main modelling tool which has been used to produce estimates of the impact of the fuel duty escalator is the DTI energy model, last published as Energy Paper 65 (EP65), which was developed to assess the overall level of energy demand in the UK. The DTI have responsibility for operating EP65 and for the forecasts of the impact of the fuel duty escalator that it produces. Annex B gives an overview of the operation of the Energy Model. Published estimates of the impact of the fuel duty escalator have drawn on results from both the DETR and DTI models. In this way we can address many of the uncertainties which surround estimates of the impact of the policy. The DTI are also in the process of developing new energy projections which will provide estimates updated from EP65.

Specific questions

1. When has the policy of having a fuel duty escalator of 6% been appraised? When was it introduced? In subsequent budget appraisals to reconfirm its value?

1.1 The Government continually monitors the effects of all tax measures and DETR has consistently sought to evaluate the escalator's contribution to transport and environmental objectives, most recently for the development of the Integrated Transport White Paper and the consultation paper to the UK Climate Change Programme. The latter of these addressed a range of possible measure to tackle climate change. An estimate of the impact of the fuel duty escalator at 6% from 1996 - 2002 on carbon emissions was included within the latter, published in October 1998. Adopting the assumption that the escalator would continue at 6% per annum in real terms between 1996 and 2002, it was forecast that the fuel price rises over this period would save between 2 - 5 Million tonnes of carbon (MtC) per year in 2010. This estimate was derived in part from the newly developed VMM/NRTF framework.

1.2 The 1998 Financial Statement and Budget Report contained, for the first time, a table showing the environmental appraisal of Budget measures. This policy was continued in the 1999 report. The environmental appraisal table in the 1998 document included an assessment of the environmental effects of the Government's policy of annual increases in road fuel duties of at least six per cent in real terms, for both emissions of CO2 and two regulated emissions, nitrogen oxides and particulates from 1993 - 2002. The November 1998 Pre-Budget Report also contained an environmental appraisal of environmental tax measures that were either in place or under consideration.

1.3 There was no table showing the environmental appraisal of Budget measures in the 1997 Financial Statement and Budget Report. However, HM Treasury press notice, HMT 4, released on 2 July 1997 included an assessment of the effect of increasing the escalator from five to six per cent on emissions of carbon dioxide.

2. What information is currently in the public domain regarding how you calculated the expected impact of 2-5 MtC by 2010 of the escalator of 6% applied to road fuel duty?

2.1 The 2 -5 MtC estimate of the impact of the fuel duty escalator in the Climate Change Consultation paper was produced using models operated by the DETR and DTI. The upper end of the range came from applying the methodology underpinning the DTI energy model, EP65. The lower estimate was produced by DETR using the NRTF/VMM framework. This relatively wide range was included within the consultation document to acknowledge many of the uncertainties which exist in forecasting the impact of a policy such as the fuel duty escalator. The same estimate was used in the 1999 Financial Statement and Budget Report.

2.2 An overview of the methodology employed in the NRTF framework is set out in the October 1997 report, National Road Traffic Forecasts (Great Britain) 1997, with more detail being provided in 6 accompanying working papers*1.

*1 The main report is available on the Department's web site, and copies of both the main report and the 6 working papers can be obtained by writing to Brian Turner, Highways Economics and Traffic Appraisal Division, Zone 3/08, Great Minster House, 76 Marsham Street, London SW1P 4DR, Tel: 0171-890- 6234, e-mail: HETA2.detr@gtnet.gov.uk

2.3 The NRTF forecasts GB road traffic growth and speeds by vehicle type, road type and 11 different area types (10 generic urban area types and rural). The VMM forecasts of fuel efficiency are a key input to the NRTF, as are other (non-VMM) forecasts of household numbers, pump prices and GDP. Car ownership and car use (the amount the average car is driven) are forecast separately using models calibrated on past data, and then combined to provide background car traffic forecasts. These background forecasts are then fed into another part of the NRTF framework which models the way in which traffic growth affects speeds and behaviour. These background forecasts are then fed into another part of the NRTF framework which models the way in which traffic growth affects speeds and behaviour.

2.4 During the fundamental transport review which led to the 1997 Integrated Transport White Paper, an emissions model was added to the VMM/NRTF framework. The CO2 element of this model combines speed and traffic forecasts from the NRTF, with speed sensitive emission factors employed in road appraisals and stock weighted fuel efficiency forecasts from the VMM. The model can also be used to assess the impacts of variations in traffic, congestion and so forth on regulated emissions.

2.5 Energy Paper 65 (EP65) was published in 1995. Working papers on EP 65, which explained the methodology and data (including the equations used) were provided by DTI upon request.*2 DTI has not yet published anything formally on the methodology underlying new model projections which are currently under development.

*2 These papers can be obtained from Martin Wall at DTI on 0171 215 2702

3. What was the baseline environmental position without implementation of the 6% fuel duty escalator calculated to be?

3.1 The difficulties with calculating a baseline from which to assess the environmental position without the FDE have already been noted in passing. Essentially, the calculation of such a baseline is another forecasting tool, with associated uncertainties. The NRTF, due to its relatively recent inception, and the nature of the model, has a baseline year of 1996 (three years after the escalator was first introduced, but prior to the introduction of the rate of 6% for the escalator). EP65 has a base year of 1995.

3.2 Despite their complexity, each of these models can only be viewed as a simplification of the real world, and they may not pick up all the detailed behavioural responses associated with the escalator. However, both models can be used to produce forecasts based on an assumption that the escalator had not been extended beyond 1996.

3.3 The VMM/NRTF estimate of the impact of the fuel duty escalator in 2010 is based on a comparison of a 2011*3 road traffic CO2 forecast which includes 6% per annum real increases between 1996 and 2002, and one under which fuel duty is held (in real terms) at 1996 levels. All other assumptions are the identical to those employed in the published 1997 National Road Traffic Forecasts*4, which pre-date the White Paper and other policy developments, such as the voluntary agreement reached between the EU and the European car manufacturers on the fuel efficiency of new cars, and the VED and company car tax reforms announced in the 1999 Budget. The headline road traffic CO2 forecasts (in MtC produced by end users*5) under these two scenarios are set out in the table below. This shows how the forecast impact on CO2 grows over time, increasing beyond the 2.2 MtC saving estimated for 2011 to 3 MtC by 2016.

*3 The NRTF forecasts traffic at 5 year intervals from a 1996 base.
*4 With the exception of a small change in the assumed long run elasticity of background car use with respect to fuel costs, which was increased to -0.18, from the -0.13 used in the published 1997 forecasts. This adjustment reflected internal research focusing on the responsiveness of car use to fuel cost increases over a shorter period than that used in the original 1997 forecasts.
*5 End user emissions include an allowance for those emitted as part of the fuel refining process as well as those produced by vehicles on the road.

Table 1: Headline VMM/NRTF road traffic end user CO2 emissions forecasts under no real fuel duty increases beyond 1996 and 6% per annum real increases to 2002.

1996 2001 2006 2011 2016
No real fuel duty increases
beyond 1996
34.6 36.0 37.4 38.7 40.6
6% per annum increases
to 2002
34.6 35.0 35.9 36.5 37.6
Saving as a result of fuel
duty increases to 2002
0.0 0.1 1.5 2.2 3.0

3.4 A similar process can be undertaken in the DTI's energy model. Applying the elasticity of - 0.41, used in the DTI model (see paragraphs 5.1 to 5.5 for an explanation of the elasticities used in the different models) to the baseline projections for fuel demand gives a saving of 5 MtC in 2010.

4. What business as usual assumptions were included in the calculation of the environmental position?
-fuel prices
-vehicle ownership
-demand for fuel
-other policy measures likely to affect travel choices

4.1 The NRTF forecasts GB road traffic growth and speeds by vehicle type, road type and 11 different area types (10 generic urban area types and rural). VMM forecasts of fuel efficiency are a key input to the NRTF, as are forecasts of household numbers, pump prices and GDP. Car ownership and car use (the amount the average car is driven) are forecast separately using models calibrated on past data, and then combined to provide background car traffic forecasts.

4.2 We explained in response to question 2 what information is fed into the NRTF/VMM framework to forecast road traffic growth. These background car traffic forecasts are combined with single model forecasts of HGV, Van and Bus & Coach traffic forecasts (calibrated on past data) and applied to a statistical representation of the road network pro-rata to past growth. These combined background forecasts are then fed into a congestion response model, calibrated against stated preference survey research, which forecasts the way in which speeds will change as traffic grows and aims to model road users' responses. The responses allowed for in the model include route switching, time switching (eg to avoid the most congested peak hour) and a mileage suppression factor, which aims to allow for the combined effect of decisions to make shorter journeys, switch modes or not to travel at all.

4.3 Fuel price input is provided for the NRTF and the Energy model by DTI, linking the price of road fuel to a range of assumptions about the price of oil. Increases in fuel prices affect the VMM/NRTF CO2 forecasts in two main ways:

  • The background forecasts of car use*6, HGV and Van traffic are sensitive to trends in fuel cost (ie the cost of fuel per km driven). Fuel cost forecasts are provided by the VMM, which models the net impact of fuel duty increases and the fuel efficiency improvements they are expected to generate on average fuel costs per km. Over time the impact of a given increase in pump price feeds through into a lower impact on car fuel costs and therefore to a reduced impact on car use and thus background car traffic*7.
  • In terms of the final impact on road traffic CO2, however, the lower impact over time of a given pump price increase on traffic is more than compensated for by the direct impact of improved fuel efficiency on emissions per km driven. Overall, therefore, the impact of a given increase in fuel duty on CO2 emissions under the VMM/NRTF model rises significantly over time (see table 2 below).

*6 Under the current version of the NRTF car ownership is not sensitive to increases in motoring costs. This aspect of the model, along with others is under review (see para [ ] below).
*7 Under the current version of the VMM HGV fuel efficiency trends are not sensitive to fuel prices; the model assumes a constant rate of improvement. This means that the forecast impact of fuel duty increases on background HGV traffic does not reduce over time.

4.4 The VMM/NRTF CO2 forecasts also reflect the potentially important linkage between speeds and emissions. This means that in congested areas fuel duty increases produce an additional CO2 benefit as a result of a reduction in the amount of stop-start driving (because of a reduction in traffic levels).

4.5 We have set out in response to question 3 the aggregate data used to inform the Energy model. Like the data used in the NRTF/VMM framework, the DTI model uses assumptions on car ownership based on trends in income and the number of households. Car ownership is assumed to reach saturation at the point where it reaches the current level of ownership in the USA.

4.6 The versions of both the NRTF and the DTI model that have been used to provide the forecasts of the environmental impacts of the fuel duty escalator used to date are based on pre-integrated transport white paper policies. The new version of the NRTF will be able to take on board a wider range of policy assumptions, and the projections arising from the new energy model will take account of a number of measures introduced since 1995 (when EP65 was published), including an assumption that the FDE will continue at 6% until 2002.

5. What elasticities of demand for fuel have been used in the calculation of the expected impact of the fuel duty escalator?
- upon what research have these elasticities been based?

5.1 The key NRTF long run 1996*8 background traffic elasticities with respect to fuel costs (pence per km driven) are set out below. These elasticities are calibrated on historic data. Because they are fuel cost elasticities (rather than more conventional fuel price elasticities) they are applied to increases in the cost of fuel per km driven, which in the long run tends to be significantly less than the increase in pump price per litre, as a result of the impact of pump price increases on fuel efficiency*9.

Long run fuel cost elasticity
Car Use (average km per car) -0.18
HGV traffic -0.085
Van Traffic -0.012

*8 The elasticity of car use with respect to fuel price used in the NRTF increases pro-rata with fuel costs. This means that as fuel costs increase, subsequent fuel cost increases have a greater proportionate impact on car use. The elasticities provided above are those which apply to increases above 1996 fuel costs. This sensitivity of the elasticity to the absolute level of fuel costs needs to be born in mind when comparing these elasticities with others to be found in the literature.
*9 This means for example, that although fuel duty increases between 1996 and 2002 are expected to increase real pump prices in 2011 to some 30% above 1996 levels, the increase in fuel costs per car km is less than 10%.

5.2 The final traffic elasticities (ie those which reflect the change in traffic after the effects of congestion have been taken into account) will be slightly lower than those above and will vary between area types and over time*10.

*10 The difference between background and final traffic elasticities reflects the way in which the NRTF allows for the impact of growing congestion on behaviour. Under the NRTF, as traffic grows and travel conditions worsen a small (but increasing) proportion of traffic is suppressed. If background traffic growth is reduced for some reason (eg as a result of an increase in fuel costs) then traffic conditions improve and some of the traffic which would otherwise be suppressed returns. This means that in congested areas (eg in the centres of large urban areas during the peak) fuel duty increases have a slightly lower impact on final (ie post congestion effects) traffic than on background traffic.

5.3 The overall responsiveness of the VMM/NRTF CO2 forecasts to increases in pump prices, taking into account the efficiency, traffic congestion, and speed effects in the two models can also be expressed as an elasticity. This allows for broad brush comparisons to be made of the strength of response to fuel duty increases in this framework with alternative models, such as EP65; although should be recognised that the VMM/NRTF elasticities relate to a specific policy scenario in a particular year. Table 2 below sets out the in-year elasticities of total road transport CO2 emissions as a result of the total increases in fuel duty under the application of 6% per annum real increases between 1996 and 2002.

Table 2: In year CO2 elasticity with respect to pump price increases implicit in the VMM/NRTF as a result of 6% pa real fuel duty increases between 1996 and 2002

1996 2001 2006 2011 2016
Implicit in year road traffic CO2
elasticity with respect to
real pump price increases
0 -0.13 -0.17 -0.25 -0.32

5.4 The model used to produce the projections published in Energy Paper 65 used an estimate of long run elasticity of fuel demand with respect to changes in pump price of -0.41. That is, a 10% rise in fuel prices implies a 4.1% fall in fuel consumption in the long run. The elasticity of CO2 emissions will be close to that for total fuel consumption*11. Work is underway to update the energy projections reported in EP 65, including work to examine the elasticities in the model. Elasticities are estimated by looking at historic trends in fuel prices and consumption. Once estimated, the elasticity is applied to projections of future fuel prices, including duty rises, giving a projection of the reduction in fuel consumption, and so allowing future carbon dioxide emissions to be estimated.

*11 Minor differences can arise as a result of changes in fuel mix.

6. To what variables are the estimates of the impact sensitive and what sensitivity appraisal was carried out?

6.1 There are a wide range of variables that have the potential to affect estimates of the impacts of the fuel duty escalator - from the price of crude oil, through changes in the nature and growth rate of the economy to shifts in the type of vehicles on the road (which are in turn affected by other government policies). It is simply not possible to build into a model all the variables that may have an impact. We concentrate instead on trying to focus on those variables that have the greatest impact. We appreciate that the modelling carried out to date has not always taken into account all of those, but we are refining our approach further to address this.

6.2 Although the VMM/NRTF model addresses what are likely to be the key impacts of increases in fuel duty, the framework is still being developed and important gaps remain. These include:-

  1. The potential impact of pump prices on the forecast rate of increase in car ownership. As noted above, under the current version of the model increases in fuel costs only affect car use and not the total number of vehicles in the fleet. This reflected the results of external research commissioned in the run up to the 1997 forecasts. This research is currently being revisited, using more recent data. If this latest work supports the inclusion of an ownership response within the model, this would serve to increase the forecast savings in road traffic CO2 emissions.

  2. Long run changes in travel behaviour. The UK has only limited experience of sustained increases in fuel prices. This means that there is a risk that models, such as the NRTF's car use forecasting model, which are calibrated on historic UK data, may fail to reflect the whole long run impact of policies, such as the FDE, which result in sustained increases in fuel prices. An investigation of the issues surrounding the estimation of the long run impact of transport price changes is planned as part of the revisions the Department will be making to the 1997 NRTF.

  3. Improvements in HGV fuel efficiency. As noted in footnote 6, the current VMM model assumes a constant rate of improvement over time in fuel consumption per HGV km. Although this assumption is based on past trends, it is likely that it serves to understate the potential of fuel price increases to influence haulier decisions (eg in relation to driver training and vehicle purchase). This assumption is therefore being reviewed as part of a wider project to improve the VMM's ability to model trends in the commercial vehicle fleet.

  4. The implications of fuel duty increases for other forms of taxation. At present the forecast impact of an increase in pump prices under the VMM/NRTF framework is the same whether the increase occurs as a result of a rise in world oil prices or an increase in fuel duty. While it is perhaps unlikely that there will be significant differences, it needs to be recognised that transport tax rates are not set in isolation, but as part of wider tax strategy. We have therefore identified the need to examine the implications of tax changes on transport behaviour in the round to ensure that our current simplifying assumption does not distort the model's forecasts of the impact of fuel duty increases.

  5. The impact of rising incomes on road users' responses to fuel price increases. Under the NRTF, rising incomes do not affect the way in which road users respond to increases in fuel costs. (For example, although the long run elasticity of car use with respect to fuel cost rises as real fuel costs increase, it is constant with respect to income.) As incomes rise so do the non-fuel components of transport costs (eg as real wages and values of time increase). This means that under the current model changes in fuel costs have the same impact on behaviour over time, even though these costs account for a lower proportion of the total transport costs faced by users.

6.3 All the above aspects of the current framework are being reviewed as part of a rolling programme of work to revise the 1997 NRTF*12. The net effect of the reviews on the impact of fuel duty increases forecast by the VMM/NRTF cannot be predicted, for although work under (i), (ii) and (iii) above could point to a higher impact than currently forecast, work under (v) and possibly (iv) may point the other way. More generally, DETR is working on improving the way the whole packages of measures interact, and at predicting impacts of such packages.

*12 In addition to improving the Department's ability to forecast the impact of fuel duty increases and other measures on road traffic CO2, this programme of work is directed at meeting the commitment made in the White Paper to revise the 1997 NRTF to reflect the impact of the New Deal on road traffic growth. This project involves fundamental changes to the way in which the Department forecasts road traffic growth. As a result, no target date has yet been set for publication.

6.4 No sensitivity analysis in its formal sense has been carried out, because of the very large number of variables that apply, and because of the difficulty in selecting those variables on which it would be most appropriate to carry out a sensitivity analysis. However, we believe that the use of two different models, constructed in different ways and using a variety of inputs (albeit naturally with some in common), leading to a range of forecasts, in itself provides a check on the sensitivity of the modelling. This use of two models gives the range of 2-5 MtC saved in 2010 as a result of the application of the escalator at 6% from 1996 to 2002.

7. Whose responsibility is it to undertake ex-post appraisal of the impact of the fuel duty rates? Is there a responsibility to report the outcome of these ex post appraisal? When? And in what form?

7.1 As noted above, Government guidance on environmental appraisal is contained in 'Policy Appraisal and the Environment', published by DETR. The guidance makes clear that arrangements for effective monitoring and evaluation are a key component of the environmental appraisal process. The Government expects to publish an environmental appraisal of its environmental tax measures on an annual basis.

7.2 DETR, HMT and DTI have a common interest in assessing the impacts of the road fuel duty escalator. Estimates of the environmental impacts of the fuel duty escalator are kept under review and, as the models are refined by introducing new inputs and new evidence is available with which to verify them, estimates of the impact of the escalator are refined.

7.3 However, as we have already noted, the escalator is a long term policy, and its impacts are cumulative. Whilst our modelling is being refined to estimate the impacts more accurately, it is too early to be able to say definitively what the impacts have been. By 2010, we should have a much more accurate picture of events, as by that point much of the impact of the escalator will have been felt with corresponding changes in behaviour feeding through to environmental impacts. However, the precise impacts of the escalator will still be difficult to isolate, partly because of the difficulties of disentangling these impacts from those of other measures which are pushing in the same direction (eg measures to promote the use of public transport), and partly because the counterfactual case - ie the situation without the escalator - will also have to be forecast.

8. What data have been collected for the purposes of monitoring the impact of fuel duty rates? How frequently have they been collected? Where have they been reported? Has the Department been able to distinguish between fuel use reductions and fuel efficiency gains by other means? Has the Department collected data on possible unintended consequences of the policy, for example any difference in impact on social groups, in particular poorer motorists? Or any increase in import of fuel for own use?

What data have been collected for the purposes of monitoring the impact of fuel duty rates? How frequently have they been collected? Where have they been reported?

8.1 Data from a wide range of sources is collected and published by the Government, which can be used for the purposes of monitoring the environmental impact of the escalator. This data includes annual trends in:

  • fuel consumption from road transport (Digest of United Kingdom Energy Statistics)
  • traffic growth (Transport Statistics Great Britain)
  • household motoring patterns (National Travel Survey)
  • average fuel efficiency of new cars (Transport Statistics Great Britain)
  • average fuel consumption of lorries (Continuing Survey of Road Goods Transport)

8.2 These statistical trends can play an important role in helping to verify the models developed to forecast the impact of the escalator. But reliable annual figures are often not available until a significant period after the year in question (in the case of the National Travel Survey, this can be up to two years). There are also many other factors besides higher fuel prices which can influence these trends, for instance, the introduction of higher vehicle specifications and more stringent safety requirements can reduce the average fuel efficiency of new cars. Furthermore, as noted earlier, any assessment of the escalator's impact from statistical trends also requires the identification of the counterfactual situation where there is no escalator, itself often requiring the development of models.

Has the Department been able to distinguish between fuel use reductions and fuel efficiency gains by other means?

8.3 The modelling framework adopted by DETR has been set up in such a way that it is capable of distinguishing between fuel use changes which arise through changes in technology and those which come from changes in the use of vehicles. The VMM is used to predict how technology will change over time, and results from this model are fed into the NRTF which predicts how overall levels of traffic will change in response to the fuel price and efficiency changes.

8.4 Whilst the modelling framework is set up in a way that the individual effect of different influences on fuel use can be determined, this is an area of the models which is under continual review. We expect to shortly begin research which will improve our understanding of the relationship between policy changes and the technological efficiency of new cars.

Has the Department collected data on possible unintended consequences of the policy, for example any difference in impact on social groups, in particular poorer motorists? Or any increase in import of fuel for own use?

8.5 The Department always keeps under review policies that impact significantly on the areas of transport, environment and other policy areas for which it is responsible, including any unintended consequences. The approach taken by DETR builds on that used by its predecessor departments - the Departments of Environment and Transport. Having a unified department, including a focus on the regions, ensures that a wide range of impacts can be taken into consideration. DETR has therefore increasingly sought to evaluate the distributional impacts of its policies on social and economic groups, as well as the environment, in order to inform its policies. The full impacts of the escalator will be taken account of in developing the Climate Change programme, following on from the consultation exercise carried out earlier this year. We are also looking at the links between transport and social exclusion in general, and at the mobility needs of elderly and disabled people in particular, to help us build up a clearer picture on which to base future policy decisions.

8.6 When considering the impact of different measures, the Department will take account of all the environmental impacts (e.g. air quality), not just climate change impacts.

8.6 However, any one Budget consists of numerous individual measures, and considering the effects of the Budget on different parts of society requires the consideration of the Budget package as a whole. The 1999 Budget, for instance, also included an extra £20 million for the rural transport fund, and a reduced rate of Vehicle Excise Duty of Åí100 for owners of cars up to 1,100 cc. In addition, any such assessment of a transport taxation policy must also take into account the impacts of other non-transport tax policies, such as changes to direct taxation. A full assessment of taxation measures can therefore only properly be carried out by Treasury.

8.7 Customs and Excise hold policy responsibility for the issue of import of fuel from other states, and the data on this. Any such review would therefore need to be conducted by them.

9. How has actual environmental performance compared with business as usual estimates?

9.1 Because of the long term nature of the escalator, providing an accurate comparison of the actual environmental performance of the escalator with business as usual estimates would be very difficult. There have also been many factors affecting fuel consumption over the period of the escalator's operation, such as requirements for greater safety measures, which complicate the picture. Both the models employed by the Government are intended to provide long term forecasts, and do not take into account all the variables that change over the short term - for instance both assume a constant rate of economic growth, ignoring business cycles which can have a considerable impact on traffic growth, fuel consumption, and vehicle ownership in any one year. There is a particular problem with using the VMM/NRTF to carry out such a comparison as its base year is 1996. Consequently only two years at most of actual data would be available for purposes of comparison.

9.2 There is, though, increasing evidence available on the actual impacts of the escalator. This suggests that fuel consumption from the road transport sector has gone down as a result of the escalator. According to the latest Continuing Survey of Road Goods Transport, for instance, there has been a marked improvement in the average fuel consumption of lorries since the escalator was introduced in 1993, with the average mpg for articulated lorries over 33 tonnes increasing by 13% between 1993 and 1998. Anecdotal evidence from DETR's Energy Efficiency Best Practice Programme also indicates that more fleets are beginning to introduce more fuel saving measures, as a result of higher fuel prices.

10. How accurate have underlying assumptions proved so far - on fuel prices, vehicle ownership, other policy measures etc?

10.1 As we have noted above, the fuel duty escalator is intended as a long term policy measure. The differences it makes in the short term are assumed to be relatively minor and are very difficult to capture. The models designed to forecast the impacts of the escalator are also designed to capture long term trends and do not take account of short term, cyclical changes such as peaks and troughs in GDP. In addition, as noted above, the NRTF was only instigated in 1997. Consequently, where forecasts and estimates are included in the modelling, it is too soon to say how accurate they are. Where actual data is fed into the models, or used to validate estimates, the models are updated as new data emerges.

11. What conclusions have been drawn on the actual impact of the fuel duty escalator and the accuracy of the elasticities used in the original appraisal

11.1 The FDE is a key element in meeting the Government's climate change targets. As noted in answer to question 9, there is increasing evidence that the escalator is reducing emissions from road transport. The FDE is, however, a long term policy and determining the effects of increases in fuel duty will only be possible in the longer term.

11.2 As noted in question 5, the elasticity estimates used in calculating the effect of the FDE are well within the range to be found in the academic literature. The Government continues to keep under review the effects of increases in road fuel duties, and the estimates of the elasticities used in the models.

11.3 DTI, the Treasury, Customs and Excise and DETR will, however, continue to work closely to refine estimates of the environmental impacts of the escalator, to inform the Government's policies. The responses to questions 5 and 6 explain what work is being done to refine the NRTF/VMM framework, including the work on the assumptions on elasticity. The DTI energy model used to produce projections has been substantially examined and evaluated since EP65 was published. The energy projections are currently being revised, and the work on the transport section of the model has been reviewed by independent academic consultants.

Annex A

1. This short note provides some information on the Vehicle Market Model (VMM) and the National Road Traffic Forecast model (NRTF) which together have been used by DETR to provide an estimate of the impact of the Fuel Duty Escalator.

Vehicle Market Model

2. The Vehicle Market Model (VMM) was developed for the Department of the Environment, Transport and the Regions (DETR) in order to investigate the effects of different policy levers on the fuel consumed nationally by road vehicles. The VMM is a disaggregated model of the vehicle fleet. It was developed initially at the University of Leeds in association with the University of Liverpool. The model has recently been revised by Napier University in association with the University of Leeds to incorporate new features.

3. The VMM covers a number of different vehicle types. These are: for cars, (9 engine sizes, 2 fuel types and 2 types of ownership); for light vans (2 vehicle types and 2 fuel types); for heavy goods vehicles (HGV) (6 vehicle types); and buses and coaches (4 body types and 5 service sectors). The car fleet and HGV fleet are additionally disaggregated by 16 ages of vehicle, with each vehicle retaining the same fuel consumption efficiency throughout its lifetime. For cars, fuel consumption data is based on the published official UK lists for new vehicles; for other vehicles it is based on available 'on-road' data.

4. Base-year (1996) kilometrage for all vehicles are compatible with published statistics. The model takes information on car ownership levels from the NRTF model. An independent prediction of the level of scrappage of different classes of vehicle in any given year is made. From these two pieces of information the model calculates the level of new cars sales. A sub model then distributes these sales across the different vehicle categories. Changes in kilometrage for cars are influenced by a set of elasticities relating to the price of fuel as well as the price of a number of different modes of public transport. The model is dynamic, so each year's forecasts depends on the forecast in the previous year.

5. The main use of the VMM in this context is to provide a forecast the fuel consumption of the vehicle fleet. Within the model this is influenced by a number of factors. These include:

  • a prediction of the rate at which new technologies will be adopted into vehicle design. This element is based on an off-model analysis of the impact of fuel price increases on the date at which a range of identified new fuel saving technologies become cost-effective. This is based on a study undertaken for the Department by ITS Leeds;
  • internal forecasts of the impact of prices and income on purchasing decisions. Other things being equal, higher prices result in a switch towards smaller and more fuel efficient models, whilst an increase in average incomes has the opposite effect;
  • forecast fleet turnover which determines the rate at which changes in sales weighted efficiency translate into changes in the average efficiency of the fleet.

6. The VMM provides a forecast of the fuel efficiency of the vehicle fleet under different fuel duty scenarios. This information is then used as an input into the NRTF model which is described below. This model then predicts the impact of the fuel duty change on vehicle kilometres, vehicle speeds and ultimately CO2 emissions.

National Road Traffic Forecasts model

7. The NRTF model provides the Government's official forecast of the rate of growth in road traffic over time. A six-year program of research and development led up to the 1997 National Road Traffic Forecasts.

8. The models take a number of different assumption on GDP, fuel prices and vehicle efficiency, licence holding, population growth, number of households by type and by area, industrial output and imports by sector to derive forecasts of the level of car ownership and use, and the level of HGV, LGV, and Bus and Coach traffic.

9. The NRTF is disaggregated by eleven different area types, nine types of roads, and over nineteen time periods within the week. The database was built up from traffic census and roadside interview data and the National Travel Survey.

10. As well as producing a background forecast of the level of traffic, the NRTF includes an additional element which adjusts this background level of traffic according to the supply of the existing road network. Increasing the level of traffic increases journey times which, operating through response elasticities, leads to route switching, time switching and mileage suppression. When capacity is reached, any further background growth is cut off. The model uses speed-flow relationships for each road/area type. This allows for the impact of changes in traffic levels on speeds and on journey times. This can then feed back through the cost of driving to the final post 'fitted on' levels of traffic.

11. Taking information on stock weighted fuel efficiency of the fleet over time from the VMM, the NRTF model is then used to produce a traffic forecast under the increases in fuel duty. Comparing this model run to the baseline forecast level of traffic, the change in CO2 emissions which is expected to occur as a result of the Fuel Duty Escalator can be estimated. This is a slightly different approach to predicting the impact of the fuel rises using EP65. In that model, fuel use is predicted directly though the use of fuel price elasticity which is derived from an econometric time series model.

Annex B

1. This provides a short background note on the DTI energy model.

General Background on DTI Model

Energy Scenarios

2. The energy scenarios published by DTI are based on a set of interlocking economic models of final user energy sectors and the electricity supply industry. On the basis of assumptions about fossil fuel prices, economic growth and other relevant factors the models can be used to investigate possible scenarios for UK energy prices, demand and supply. The scenarios are based on assumptions which cover a wide range of possible outcomes.

The Energy Demand Model

3. The final user energy demand model consists of approximately 130 econometric equations. Of these 130 equations around 60 are fossil fuel share equations, 20 are stock equations and the remaining 50 are energy demand equations. Energy demand is disaggregated into 13 sectors - services, domestic, iron & steel, agriculture, transport and 8 industrial subsectors.

4. Each of the final user sectors consists of a suite of econometric equations that attempt to explain past energy demand as a function of other variables such as prices and income or output levels, based on the historic relationship between these variables and historic trends in efficiency. Where reliable information exists, stock information has been incorporated into the equations (e.g. the stock of cars). To the extent that Government policies, particularly in the area of energy efficiency, have affected these trends the models incorporate these effects and, by implication, the equations assume a continuation of the recent level of Government support for energy efficiency.

5. The power station model is a linear programme (LP). The LP is given a choice of plants - existing, those under construction and future possible types, from which it can choose to meet current and future electricity demand.

6. With a given level of electricity demand, the LP chooses in a least cost fashion, the means of meeting demand. This generally involves utilising the cheapest existing plants as much as possible and building the cheapest form of new plant. This solution is subject to any constraints placed upon plant performance or emissions abatement either at individual plants or at, say, the national level.

Energy Paper 68 (EP68)

7. The last version of the energy model to be published was Energy Paper 65 (EP65), in 1995. New projections arising from the latest outputs of the Energy Model will be published as EP 68. It is anticipated that this paper will be published soon.

Detailed Description of Best Practices - United Kingdom No.7

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