1 ÓCentre for Economics and Business Research THE ECONOMIC CONSEQUENCES OF RAISING FUEL DUTY BY 23% A Cebr report for FairFuelUK December 2022

2 ÓCentre for Economics and Business Research Contents 1. Introduction and summary 4 1.1. Introduction 4 1.2. Summary 4 2. Background 6 2.1. Introduction 6 2.2. Distributional impact of a rise in fuel duty 9 2.3. Economic consequences of a rise in fuel duty 9 2.4. The impact of the freeze in fuel prices 10 3. Extent to which duty changes are passed through 11 3.1. Introduction 11 3.2. The theory 11 3.3. Empirical evidence 12 3.4. OBR assumptions 12 3.5. Conclusions 12 4. Distributional impact of a 23% rise in fuel duty 13 4.1. Introduction 13 4.2. The scale of the increase 13 4.3. Impact by income level 13 4.4. To what extent can vehicle users cut their usage? 15 4.5. Affordability of electric vehicles 16 4.6. Ability to use public transport or walk 17 4.7. Disability 18 4.8. Impact by region 18 4.9. Impact on vans and other light goods vehicles drivers 19 4.10. Impact on HGVs 22

3 ÓCentre for Economics and Business Research 5. Economic Impact 23 5.1. Introduction 23 5.2. Cebr modelling 23 5.3. Impact on CPI using CPI weights 23 5.4. NIESR 24 5.5. Treasury model using DGM 24 5.6. Conclusions 25 6. Long term impact 27 6.1. Introduction 27 6.2. The OBR view 27 6.3. Cebr modelling 28 6.4. Conclusions 28

4 ÓCentre for Economics and Business Research 1. Introduction and summary 1.1. Introduction This is a report on the economic impact of the proposed March 2023 rise on the rates of fuel duty for petrol and diesel. The study is based on an earlier study carried out by Cebr in November 20201 looking at the impact of raising fuel duty by 2p. Where appropriate and possible the data used in the earlier study has been fully updated. There are three elements to the study. First it looks at the extent to which fuel duty changes are passed through to the consumer. Then it looks the distributional impact of such changes. Finally it considers the overall economic impact and the effects on GDP, employment and unemployment and on net revenue raised. 1.2. Summary The key points of the study are: · Any rise in fuel duty would generate much less net revenue than OBR expects because of reduced usage, shifting to other areas of economic activity that are less highly taxed and because of losses of tax revenue from the negative impact on the economy. · Our calculations suggest that a 12p rise in fuel duty would generate £1,500-2,800 millions of annual revenue initially falling to about a quarter of that within 20 years. · A 23% rise in fuel duty would create economic damage, cutting GDP eventually by about 1% and reducing employment by about 31,000 jobs. · It would add 2.3% to the CPI. · Despite the recent freeze and the 5p cut in fuel duty March, UK diesel taxes are the highest in any major European economy while UK petrol prices are amongst the highest. · A rise in fuel duty would hit the poorest motorists most. Motorists in the poorest 10% of the population spend proportionately more than twice as much on fuel as the richer groups. · Increasingly the use of road fuel in London is falling as car usage falls. As a result, a rise in fuel duty is very much a tax imposed by London on the regions. Londoners spend only about a third as much on fuel as the rest of the UK. · The impact of any rise in fuel duty will be cumulative. Essential vehicle users, especially LGV and HGV drivers, have already been hit recently by closed roads, closed lanes, speed restrictions, increased traffic jams and increased charges and enforcement penalties as a result of recent government actions. The effects of a rise in fuel duty will be hitting sectors that already feel that they have faced an excessive increase in the burdens on them that result from government policy. The annual cost of a 23% rise in fuel duty to a van driver is £221-970. · With growth in the online sector, vans are critical to the economy. The increase in the burdens on van drivers, like those on other road users, has already started to impact on their willingness to service clients. If this continues a critical link in the service chain could break. 1 The Economic Consequences of Raising Fuel Duty by 2p - A Cebr report for FairFuelUK and the RHA November 2020

5 ÓCentre for Economics and Business Research · The HGV sector is in a fragile situation. The average age of drivers is 55 with 13% over 60 and only 2% below 25. Profit margins are estimated at 1% only. The number of owner operators has been falling away. It is conceivable that a rise in duty could be the straw that breaks the camel’s back of this essential service. The annual cost of a 23% rise in fuel duty to an HGV user is £3,193 to £6,704. · Cebr research has shown that the policy of freezing fuel duty, in place since 2011, has been highly successful, reducing the CPI by 6.7% compared with where it would have been by 2018 and boosting household expenditure by £24 billion. With a policy that has proved successful, it would be bizarre to change it.

6 ÓCentre for Economics and Business Research 2. Background 2.1. Introduction In their November 2022 OBR Economic and Fiscal Outlook, the OBR (Office for Budget Responsibility) points out that it has taken into account ‘the planned 23 per cent increase in the fuel duty rate in late-March 2023, which adds £5.7 billon to receipts next year. This would be a record cash increase, and the first time any Government has raised fuel duty rates in cash terms since 1 January 2011. It is expected to raise the price of petrol and diesel by around 12 pence a litre’2. This report examines the distributional and economic impact of this proposed rise. Excise duty is charged on most hydrocarbon oils in the UK. The two main categories of road fuel – ultra-low sulphur petrol and ultra-low sulphur diesel – are charged duty at 52.95p per litre with an additional 20% VAT charged on top. According to the RAC Foundation, when VAT is included, the total fuel tax represented 49.3% of the final pump price for petrol, and 45.0% of the final pump price for diesel (during the week beginning Nov 21 2022)3. Fuel duties alone are forecast to raise £26.2 billions in 2021/22 4 . This excludes the 20% VAT that is charged on the duty which raises this by a further fifth. The Institute for Fiscal Studies looked at the Government’s options for taxing motoring in their Green Budget, published in October 2019 5 ; as part of this, the authors considered the distributional impact of fuel duties, finding that duties paid on households’ fuel purchases (both duty and VAT) ‘are, on average, roughly proportional to household spending, accounting for between 2% and 3% of the non-housing budget for all income groups’. The report added: ‘Among car owners, fuel duties take up a larger share of poorer households’ budgets. But since lower-income households are much less likely to own a car in the first place (in 2015 only half of those in the lowest income decile owned a car, compared with over 90% in the highest income decile), the average budget share across all households is broadly constant over the income distribution (though slightly lower for the poorest tenth and the richest tenth). ‘That said, “the burden of fuel duties varies widely within income groups”: ‘Right across the income distribution, around 4–5% of households find fuel duties (and VAT on the duties) consuming more than a tenth of their budget, and it is for these people that rates of fuel duties are a particularly sensitive issue … 2https://obr.uk/docs/dlm_uploads/CCS0822661240-002_SECURE_OBR_EFO_November_2022_WEB_ACCESSIBLE.pdf 3https://www.racfoundation.org/data/taxation-as-percentage-of-pump-price-data-page 4 https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/fuel-duties/ 5 https://www.ifs.org.uk/uploads/Green-Budget-2019-Chapter-9-A-roadmap-for-motoring-taxation-2.pdf

7 ÓCentre for Economics and Business Research ‘A 2015 YouGov survey (YouGov / Times Red Box Survey, March 2015) found that just over half of respondents thought fuel duties were unfair; only inheritance tax received a more unfavourable response. It is particularly striking when contrasted with tobacco duties, which are highly regressive and which many economists would bracket with fuel duties as ‘corrective taxes’ designed to discourage harmful behaviour, but which were considered the fairest of the taxes listed. ‘Evidently the harms that motoring causes do not make people think of fuel duties as a legitimate ‘sin tax’ like alcohol or tobacco duties. One reason for this may be that many people feel they have little option but to drive – it may be their only way to get to work, for example – and resent being penalised for something they can do nothing about.’ The IFS in this commentary makes the elementary economic mistake of justifying additional taxes on motoring through the impact of motoring on congestion. Congestion is actually to use an economic technicality a ‘club effect’, a cost imposed by members of a group on the other members of the group. The standard economics for correcting the externality of a club effect is to impose taxes at the margin but repay them to the other members of the club through some other form of redistribution, not to charge them and use them to finance other items of public expenditure. Otherwise, the more the members of the ‘club’ are inconvenienced the more tax they should pay which is clearly absurd. As was made clear in the November 2022 Autumn Statement, the UK government’s fiscal position is being hit by both a shortage of revenue and by escalating government spending. The projected deficit for 2022/23 is £177 billion; that for 2023/24 £140 billion (including the estimated £5.7 billions yielded by the projected 23% rise in fuel duties). Both are extraordinarily large and would probably not be financeable were other governments not also following lax fiscal policies. But at the same time, despite the 5p reduction, UK motorists face relatively high fuel duties compared with most other countries. The latest data in Table 1 shows that petrol taxes are well above the European average and higher than in comparable countries like France, Germany and Italy. Diesel taxes in the UK remain the highest in Europe.

8 ÓCentre for Economics and Business Research Table 1 Comparison of Petrol and Diesel Taxes in the UK and the EU Source Tax Foundation 6 Temporary tax rates after early 2022 reductions Petrol Tax Diesel Tax Petrol Tax Diesel Tax Per Litre in EUR Per Gallon in USD Rank Per Litre in EUR Per Gallon in USD Rank Per Litre in EUR Per Litre in EUR Austria € 0.48 $2.16 20 € 0.40 $1.78 18 Belgium € 0.60 $2.68 12 € 0.60 $2.68 3 € 0.46 € 0.46 Bulgaria € 0.36 $1.62 25 € 0.33 $1.48 25 Croatia € 0.52 $2.30 15 € 0.41 $1.83 16 € 0.41 € 0.35 Cyprus € 0.43 $1.92 23 € 0.40 $1.79 17 € 0.36 € 0.33 Czech Republic € 0.51 $2.27 18 € 0.39 $1.76 19 € 0.45 € 0.33 Denmark € 0.64 $2.87 10 € 0.44 $1.95 12 Estonia € 0.56 $2.52 13 € 0.37 $1.66 21 Finland € 0.72 $3.24 3 € 0.50 $2.24 8 France (after Nov 16) € 0.68 $3.06 5 € 0.59 $2.66 4 €0.58 €0.49 Germany € 0.67 $3.00 7 € 0.49 $2.19 9 € 0.36 € 0.33 Greece € 0.70 $3.13 4 € 0.41 $1.83 15 Hungary** € 0.34 $1.50 28 € 0.31 $1.38 28 Ireland € 0.64 $2.85 11 € 0.54 $2.39 5 € 0.47 € 0.41 Italy € 0.73 $3.26 2 € 0.62 $2.76 2 € 0.48 € 0.37 Latvia € 0.51 $2.28 17 € 0.41 $1.85 14 Lithuania € 0.47 $2.09 21 € 0.37 $1.66 21 Luxembourg € 0.53 $2.36 14 € 0.42 $1.86 13 € 0.46 € 0.35 Malta*** € 0.36 $1.61 27 € 0.33 $1.48 27 € 0.36 € 0.33 Netherlands € 0.82 $3.69 1 € 0.53 $2.36 6 Poland € 0.36 $1.61 26 € 0.33 $1.48 26 Portugal € 0.67 $2.99 9 € 0.51 $2.30 7 Romania € 0.38 $1.71 24 € 0.35 $1.57 24 Slovakia € 0.51 $2.30 16 € 0.37 $1.65 23 Slovenia € 0.45 $1.99 22 € 0.46 $2.08 11 € 0.37 € 0.34 Spain € 0.50 $2.25 19 € 0.38 $1.70 20 6 https://taxfoundation.org/gas-taxes-in-europe-2022/

9 ÓCentre for Economics and Business Research Sweden**** € 0.67 $3.00 6 € 0.47 $2.12 10 € 0.53 € 0.33 United Kingdom € 0.67 $3.00 7 € 0.67 $3.00 1 € 0.62 € 0.62 Average € 0.55 $2.47 € 0.44 $1.98 Minimum Rate € 0.36 $1.61 € 0.33 $1.48 Notes: The excise duties apply to petroleum and diesel with a sulphur content of < 10 mg/kg, RON 95 (gas), bioethanol content, and, if applicable, includecarbon taxes and surcharges. The excise duties were converted into USD using the average 2021 USD-EUR exchange rate (0.846); see IRS, “Yearly Average Currency Exchange Rates,” https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates. * These countries are not part of the EU ** Hungary’s excise duty decreases to EUR 0.35 per litre for gas and EUR 0.34 per litre for diesel if the world market price of crude oil is at or below $50 USD/barrel. *** Malta’s temporary rate decrease is in effect for all of 2022. **** The listed excise duties were taken from the rates applied to environmental class 1 gas and diesel. Source: European Commission, “Taxes in Europe Database,”https://ec.europa.eu/taxation_customs/tedb/splSearchForm.html; and HMRevenue and Customs, “UK Trade Tariff: excise duties, reliefs, drawbacks, and allowances,”https://www.gov.uk/government/publications/uk-trade-tariff-excise-duties-reliefs-drawbacks-andallowances/uk-trade-tariff-excise-duties-reliefs-drawbacks-and-allowances. Latest data for Italian and French tax cuts included Fair Fuel UK campaigns for a fair deal for motorists and against the stigmatisation of motorists. Fair Fuel are campaigning to prevent HM Treasury from balancing its books by imposing further taxes on motorists. In this report Cebr researches the economic and distributional implications of a 23% rise in fuel duty which would raise the duty on fuel (including VAT) by 14.6p. The research covers two points: the distributional impact and the economic impact. Relevant to both parts of the research is the extent to which a rise in fuel duty is likely to be passed through to consumers. So this issue is examined first. 2.2. Distributional impact of a rise in fuel duty Task one – what is the impact of a rise in fuel duty on companies and households? The research investigates the distributional consequences of a 23% rise in fuel duty on households by income decile and by regions. The research also looks at the consequences for van drivers and for HGV drivers The research also considers the extent to which different groups can avoid the consequences of the rise in duty through 1) buying vehicles with reduced fuel consumption such as electric or hybrid vehicles; and 2) adjusting their driving patterns 2.3. Economic consequences of a rise in fuel duty Task two investigates the economic consequences of a rise in duty

10 ÓCentre for Economics and Business Research The second aspect of the work investigates the economic impact of a rise in fuel duty. This looks at the impact on borrowing, on tax revenues, on the CPI, on GDP and on jobs. Cebr and other models are used to make estimates of these consequences. The second element of this part of the research estimates the longevity of any revenue effects. Revenues from fuel duties are expected to decline over time. The research shows how any revenue benefits from raising fuel duty are likely to be only temporary. 2.4. The impact of the freeze in fuel prices It is worth noting in this context that the freeze in fuel duties since 2011 has been highly successful. Cebr research has indicated that by 2018 this had reduced consumer prices by 6.7% and has boosted household expenditure by £24 billion. Arguably it would be bizarre, when a policy has proved so successful, to change it 7 . 7 The impact of the fuel duty freeze on UK prices A Cebr report for FairFuel UK September 2018

11 ÓCentre for Economics and Business Research 3. Extent to which duty changes are passed through 3.1. Introduction This section examines the extent to which a rise in duty might be passed through to consumers. It takes account of the CMA (Competition and Markets Authority) examination of the impact of the cut in fuel duty announced in the March 2022 budget on the price of fuel8 and on data on the extent to which the rise in the underlying price of oil has been passed through. 3.2. The theory The standard theoretical relationship between a tax and its incidence is shown In Figure 19. It shows that the burden of the tax in theory should be shared between the consumer and the producer with the precise incidence determined by the elasticities of supply and demand. Figure 1 Theoretical incidence of a $3 tax imposed on oil from a standard economics textbook 8 https://www.gov.uk/government/publications/road-fuel-review/road-fuel-review 9 https://pressbooks.bccampus.ca/uvicecon103/chapter/4-6-taxes/

12 ÓCentre for Economics and Business Research In this worked example, a $3 tax puts up the price by only $1, with $2 of the tax absorbed by the producer. In practice this 33% passthrough looks far too low as is shown by the empirical evidence below. 3.3. Empirical evidence A recent very detailed study in Finland has looked at this issue in some detail and provided some general confirmation of the theoretical position, showing that (as expected theoretically) the scale of the passthrough varies with the likely price elasticity of consumers. The results of the study showed quite wide variation in the extent of passthrough from 77% in rural areas that were more price sensitive with lower incomes and 91% in urban areas with assumed richer and less price sensitive consumers10. The total passthrough is estimated at 80%. In Australia, the earlier 25.3 cents per litre fuel duty cut was reinstated on 29 September 2022 and the impact on retail fuel prices observed by the Australian Competition and Consumer Commission. Their conclusion was that the full duty reinstatement was passed through on average, though the price of diesel rose by slightly more than the rise in duty and the price of petrol by slightly less11. The research also indicated that the earlier cut in duty had been fully passed through after the appropriate lag (about 6 weeks). The CMA report referred to above, looking at the extent to which the 5p cut in duty announced in the March 2022 Budget looks in considerable detail at the supply chain impacts. The CMA concludes that the cut in duty announced in the Budget had not been fully passed through. It focussed particularly on the increased margins in refining. It also observed that changes in both duties and crude oil prices seemed to be passed through only after a lag. 3.4. OBR assumptions The OBR (Office for Budget Responsibility) have estimated that their assumed 23% increase in duty should lead to a fuel price increase of 12p a litre. Since, if the 23% increase were passed on in full this would imply a rise of 14.6p a litre, this gives an implied passthrough of 82%. 3.5. Conclusions Since the OBR’s implied passthrough estimates seem consistent with both the CMA’s analysis and the results of other empirical research, we conclude that we are happy to use the 82% estimate. 10 The heterogeneous incidence of fuel carbon taxes: Evidence from station-level data, Jarkko Harju, Tuomas Kosonen, Marita Laukkanen and Kimmo Palanne Journal of Environmental Economics and Management Volume 112, March 2022, 102607 11 https://www.accc.gov.au/consumers/petrol-and-fuel/monitoring-fuel-prices-following-the-excise-cut-and-restoration

13 ÓCentre for Economics and Business Research 4. Distributional impact of a 23% rise in fuel duty 4.1. Introduction This section analyses the distributional impact of a 23% rise in fuel duty looking first at the impact of different income groups, then at the impact on van users and finally at the impact on HGV users. 4.2. The scale of the increase There is Family Spending Data for 2020/21 but this data, especially for transport, is badly affected by the lockdowns resulting from Covid. The analysis is therefore based on family spending data for 2019/2012, the most recent data available that is (largely) not distorted by lockdown effects, except where otherwise stated. The average price of petrol and diesel per litre during the 2019/20 period were respectively 125.9p and 131.5p13. As pointed out in the previous section we have assumed that 82% of the increase in duty (including VAT) is passed on in the retail price after a lag of 6 weeks. This implies an increase in the retail price of both petrol and diesel of 12p per litre. 4.3. Impact by income level The impact is not spread evenly between households. This is because households at different income levels spend different proportions of their incomes on fuel. Table 2 shows that the share of gross expenditure spent on fuel rises with income decile until the middle-income groups and then falls back. But this is misleading – many in the lower income groups do not buy fuel. To understand the impact of fuel price rises on different income groups it is worth looking specifically at those in each group who have access to cars. There is official data for this, though the most recent data is for 201814. Using this data it is possible to estimate the proportion of expenditure spent on fuel for those who have access to a vehicle and who therefore have to buy fuel, Table 2 also shows that the proportion of their gross income spent on fuel peaks at 7.2% for the lowest income decile and falls to 3.3% for 12 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/ april2019tomarch2020 Downloaded 29 November 2022 13https://www.gov.uk/government/statistics/weekly-road-fuel-prices 13 October2020, Downloaded 29 November 2022 14 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/datasets/percentageofhouseholds withcarsbyincomegrouptenureandhouseholdcompositionuktablea47

14 ÓCentre for Economics and Business Research the highest income decline. In other words, the poorest 10% who use vehicles spend more than twice as much of their income on fuel as the richest 10%. This means that a rise in fuel duty is regressive. Table 2 Proportions of expenditure on fuels by income decile Proportion of total spend for those who have access to vehicles Proportion of total spend for all including those with no access to vehicles Lowest ten per cent 7.2% 2.5% Second decile group 5.9% 3.2% Third decile group 4.9% 3.5% Fourth decile group 5.0% 4.0% Fifth decile group 4.8% 4.0% Sixth decile group 4.7% 4.0% Seventh decile group 4.6% 4.2% Eighth decile group 4.9% 4.6% Ninth decile group 4.3% 4.0% Highest ten per cent 3.3% 3.1% Source Family Spending Survey ONS 2019/20: Family spending workbook 1: detailed expenditure and trends We have calculated the impact on family budgets of a 12p rise in fuel duty by income decile. This is shown in Table 3. The amount rises from £171.97 a year for the poorest group to £461.86 for the eighth income decile. Interestingly the richest income decile spend less on fuel than the two immediately lower income deciles. Table 3 Impact of a 12p rise in fuel prices on family budgets by income decile assuming 2019/20 patterns of fuel usage £ per week £ per year Lowest ten per cent 3.31 171.97 Second decile group 5.10 265.32 Third decile group 6.71 348.85 Fourth decile group 7.56 393.07 Fifth decile group 7.84 407.81 Sixth decile group 8.03 417.64 Seventh decile group 8.60 447.12 Eighth decile group 8.88 461.86 Ninth decile group 8.88 461.86 Highest ten per cent 8.79 456.94 Source Cebr calculations based on Error! Reference source not found..

15 ÓCentre for Economics and Business Research 4.4. To what extent can vehicle users cut their usage? Based on ONS survey15 there is some data on recent trends in fuel usage following the price rises during 2022. The estimated 48% price rise appears to have led to a reduction in consumption per transaction of 11% and possibly some further additional reduction in transactions as well. Figure 2 Date from ONS survey This would imply a price elasticity of around a quarter which is relatively low and which suggests that much of the less essential travel that can be cut has already been cut as a result of the squeeze in living standards. This is supported by the responses to the ONS survey shown in Figure 3. 15 https://www.ons.gov.uk/economy/economicoutputandproductivity/output/articles/behaviouralimpactsofrisingautomotivefuelpricesonco nsumerfueldemandukjuly2021toaugust2022/2022-09-02

16 ÓCentre for Economics and Business Research Figure 3 Proportion responding that they have cut down on non-essential vehicle travel 4.5. Affordability of electric vehicles A typical counter to those facing increases in tax on fuel is to say that they should use electric vehicles. We therefore look below at the affordability of electric vehicles. Table 4 shows the annual spending in 2019/20 on both purchase of vehicles and on fuel by income decile for those who have at least one car available. The spending rises from £1917 per annum for the poorest group to £5563per annum for the richest group. We have investigated the cheapest annual leasing cost for an electric car on the EDF website which is £3,416 for a Renault Zoe. We have colour coded the table. Those highlighted in yellow means can afford an electric vehicle, those highlighted in green can afford with a squeeze. Those not highlighted at all would find it more or less impossible to afford an electric vehicle even if they had an adequate credit rating. So, access to an electric vehicle is a pipe dream for half of the population and only available with some difficulty for a further 30%.

17 ÓCentre for Economics and Business Research Table 4 Annual spending on purchase of cars and spending on fuel £ by income decline Figures only relate to households with cars. Source Family Spending ONS adjusted for proportion with access to a vehicle Lowest ten per cent 1917 Second decile group 1608 Third decile group 1853 Fourth decile group 2002 Fifth decile group 2356 Sixth decile group 3622 Seventh decile group 3143 Eighth decile group 3690 Ninth decile group 4520 Highest ten per cent 5563 4.6. Ability to use public transport or walk Another suggestion often made is that public transport or walking is an acceptable alternative to car usage. The government produces statistics that show who has access to what facility within various different travel times. The data comes from the government’s travel time research16 and is shown in Error! Reference source not found.. For the majority of those living in urban areas, most services are accessible by walking and public transport. But even for them 30.8% do not have access to any major employer (>5,000 jobs) and 60.2% do not have access to a hospital within 30 minutes. The position for the 9.5 million people who live in rural areas (9,529,700 or 17.0% of the population live in rural areas)17is completely different. The bulk of people living there do not have easy access to services by public transport or walking. The data shows that 82.6% lack access to major employers within 30 minutes, 36.1% lack access to secondary schools, 52.2% lack access to further education, 94.1% lack access to hospitals and 47.2% lack access to a town centre without using a car. It is not realistic to suggest that they do not use cars. So, for a wide group of people public transport or walking is not an option. 16 DfT Journey Time Statistics: www.gov.uk/government/collections/journey-time-statistics data-tables(files JTS0102, JTS0202, JTS0302) 17 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/912408/Rural_population__August_ 2020.pdf

18 ÓCentre for Economics and Business Research Figure 4 Accessibility of various services 2019 4.7. Disability There is a final group who need door to door transport. Government data estimates that there are 6.5 million people in the UK who suffer from disability related to mobility18. Of these, the data says that 49.1% were of working age in 2011/12. For these 6.5 million people, public transport is of less value and is not so easily substituted for transport door to door in one’s own vehicle. 4.8. Impact by region Table 5 Proportion of total household expenditure on road fuel and lubricants by region 2019/20 19 Northern Ireland 6.2% Wales 4.7% East Midlands 4.4% West Midlands 4.3% North East 4.3% Eastern 4.1% South West 4.1% Yorks and Humber 4.1% North West 3.9% Scotland 3.8% South East 3.6% London 2.2% We have also analysed spending on motor fuels by region. From Table 5 it is very clear that there is a clear distinction between household spending on fuel in London and elsewhere. Londoners spend 2.2% of their expenditure on motor fuels. In all other regions spending on motor fuels is at least 50% higher as a percentage of spending than in London. In Northern Ireland, Wales and the East Midlands spending 20is more than double the percentage in London. To put this another way, more than 90% of all household spending on fuel duty is outside London. 18 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/321594/disability-prevalence.pdf 19 Source Family Expenditure Survey 20 Source: Department for Transport statistics Energy and environment Table ENV0101 (TSGB0301) Petroleum consumption by transport mode and fuel type: United Kingdom, 1990-2020 and regional GDP data. Fuel usage valued at average 2019 price. Key services Area type3 Journey time Places with 100499 jobs Places with 5004999 jobs Places with 5000 or more jobs Primary school Secondary school Further Education GP Hospital Food store Town Centres Urban Within 15 minutes 94.1 82.9 18.7 95.3 47.7 37.0 77.8 5.2 97.2 38.2 Within 30 minutes 100.0 99.9 69.2 100.0 98.4 91.9 99.8 39.8 100.0 95.1 Within 45 minutes 100.0 100.0 91.1 100.0 100.0 99.1 100.0 75.7 100.0 99.8 Within 60 minutes 100.0 100.0 97.2 100.0 100.0 99.9 100.0 92.2 100.0 100.0 Rural Within 15 minutes 52.7 44.8 1.1 72.7 14.6 8.4 35.9 0.2 61.1 10.3 Within 30 minutes 85.6 85.3 17.4 94.6 63.9 47.8 80.9 5.9 88.8 52.8 Within 45 minutes 93.7 94.1 47.2 97.8 87.5 78.5 91.7 24.2 94.2 83.0 Within 60 minutes 96.4 96.5 67.5 99.1 92.8 88.8 94.6 49.2 96.2 90.7 Centre of employment

19 ÓCentre for Economics and Business Research We have also carried out another analysis using the national environmental accounts. This allocates fuel usage by region. The weakness of this analysis is that it only looks at usage within the region rather than usage resulting from the region. So, for example, food purchased in London from elsewhere in the UK is treated as if its fuel content was only that generated by fuel usage within London itself. However it also provides a useful indicator of why London is atypical in fuel usage. The key point is that the value of road fuel consumed IN London is only 0.8% of GDP compared with the national average of 2.7% of GDP and between 3 and 4% of GDP% in all other regions except the South East. It is not entirely surprising that decision makers in London fail fully to appreciate the importance of fuel usage in other parts of the country. Table 6 Fuel usage as % of GDP 2019 based on environmental accounts Wales 4.0% Scotland 3.0% North East 3.5% North West 3.1% Yorkshire and the Humber 3.7% East Midlands 3.8% West Midlands 3.5% East of England 3.4% South East 2.7% South West 3.3% Northern Ireland 3.7% London 0.8% UK 2.7% 4.9. Impact on vans and other light goods vehicles drivers Vans are the fastest growing form of traffic on UK roads according to a survey sponsored by Renault Vans in the Daily Telegraph: ‘ For the past four years, light commercial vehicle (LCV) traffic has increased by 4.1pc on average per annum – the most of all traffic types over the period – and last year each van travelled 12,811 miles on average, which works out at close to 60pc more than the average car (8,082 miles)’ 21 . Pre pandemic the Department of Transport showed that this had risen further to 13,474 22 in 2019. A survey by Mercedes Benz has indicated further changes during the coronavirus pandemic: ‘The coronavirus pandemic has seen a significant increase in working hours for van drivers. On average, drivers report they are working almost 20 hours more per month. Despite the added pressure, most drivers say that they feel appreciated by colleagues, employers and the public. In a recent survey conducted by Mercedes-Benz Business Barometer, 82% of van drivers and operators feel that their efforts have been appreciated by customers during the crisis, with 27% receiving a thank you message on social media and 21% receiving applause while out on delivery. 21 https://www.telegraph.co.uk/connect/small-business/operations-and-logistics/renault/how-many-miles-do-vans-clock-up/ 22 DfT National Road Traffic Survey September 2020

20 ÓCentre for Economics and Business Research Asked what their greatest concern is, almost 50% responded that time away from home is top of the list. In fact, missing family and time away from home was a greater concern than mental wellbeing (38%) and physical health (36%). Mercedes-Benz Vans UK managing director Steve Bridge commented: ‘‘It is important that we continue to support this vital sector with kindness, because without them, quite simply the country would not be running in the same way.” The results of the Mercedes-Benz survey contrast sharply with those from a survey by CameraMatics at the outset of the crisis. In April, CameraMatics asked both truck and van drivers if they felt appreciated and 50.4% responded that they did not. The survey had followed a period of peak stress for the nation’s drivers, with a staggering two billion pounds worth of extra groceries purchased in the UK in the four weeks to 21 March 2020. This month’s more positive responses could be due to drivers and the public becoming accustomed to the crisis and more confident with safety and hygiene measures. Van drivers have experienced a period of unusually low traffic on the roads and have more chance of finding customers at home to take receipt of deliveries. While the volume of work was high, lower traffic levels and friendlier interaction with customers are likely to have been temporary improvements for drivers. Post-lockdown, van drivers face a fresh challenge as the public is urged to walk or cycle to work and traffic-disrupting work on cycle lanes in urban areas gets underway’23. The demographics of van usage Even in 2008-10 70% of van drivers were manual workers, a proportion that has probably increased with the growth of the online economy and the consequent rise in delivery services. Figure 5 shows some older data on the socio-economic background of van drivers about a decade ago. Figure 5 Socio economic background of van drivers 23 https://www.sparshattgroup.com/news/the-impact-of-covid-19-on-van-drivers

21 ÓCentre for Economics and Business Research This is supported by more recent data (2017) from the Admiral Insurance survey. This shows that for men (fewer than 5% of vans are registered to women according to the Guardian24), the top five roles25 for van drivers are: · Builder · Carpenter · Company director · Electrician · Painter and decorator These other trades are also popular among Admiral Van Insurance customers: · Joiners · Plumbers · Gardeners · Firefighters · Tree surgeons The changing face of the van driver26 in the UK as a result of online activity (and presumably given a boost by the pandemic) makes them critical to the operation of the economy. A Cebr study for Ford to celebrate the 50th anniversary of the Transit Van showed that van-dependent businesses contributed a total of €584 billion to the major economies of France, Germany, and the U.K. in 2014 – an increase of 16 per cent compared with 2010, and an amount approaching the overall economy of Switzerland. Because vans are predominantly used for conveying goods or tools there is very little scope to replace them. We have done two calculations of the cost of a 12p increase in fuel duty for van drivers. The first assumes the DfT van usage of 13,500 miles a year, which might be typical for a builder who uses the van to get to a job and then to collect items during the day, the cost a 12p hike in fuel duty is £221 per annum. For a van used full time – say a 3.5 tonnes van doing 40,000 miles per annum which is the sort of usage for the likes of DPD, DHL, Parcelforce – the annual cost of a 12p rise in duty would be £970. The most basic plug in hybrid Ford Transit costs £ £47,814 27 according to the Green Car Guide, roughly twice that of an ICE fuelled equivalent so given the limited electric only range hybrid or electric vans probably are not yet economic in most applications. 24 https://www.theguardian.com/money/2017/apr/15/white-van-nation-drivers-behind-on-demand-economy 25 https://www.admiral.com/magazine/guides/van/who-drives-britains-vans 26 Economics of Commercial Van Usage Across Europe, a new report compiled by the Centre for Economics and Business Research (CEBR). 27 https://www.greencarguide.co.uk/car-reviews-and-road-tests/ford-transit-custom-plug-in-hybrid-review/

22 ÓCentre for Economics and Business Research Although the estimated impact on costs of between £221 and £970 may appear small, they have to be considered in context. Many van drivers have had to face a sharp increase recently in the range of restrictions on them from road closures, lane closures, 20 mph speed limits, increased congestion charges and associated enforcement penalties. On top of this, these measures have created unnecessary traffic jams which have further penalised the sector. Many van drivers are now refusing to work in major cities as a result of these measures and imposing an additional tax on them at this time, when the industry already feels hard done by as a result of the penalties already imposed on it would provoke maximum resentment. 4.10. Impact on HGVs We have made two calculations for the impact of a 12p fuel duty increase on HGVs. The first uses the data from Transport Statistics of Great Britain where the average usage emerges from dividing total usage by number of vehicles. This gives an average mileage of 42,900 miles per annum. At a typical mpg of 8.3, this would imply a cost of a 12p rise in fuel duty of £3,193 per annum. But real-life usage is much higher – the average in the official data is obviously reduced by vehicles that are not really in use. The Road Haulage Association has suggested a typical usage for an articulated vehicle of 85,000 miles a year. With that level of usage, the cost of a 2p rise will be £6,704 per annum. If the external environment were stable, the effects of such taxes would be incremental. But it is not. As with LGVs, the sector has been plagued with road closures, lane closures, additional speed limits, increased enforcement penalties, increased congestion charges and the traffic jams resulting from this action. The situation in the HGV road haulage industry is not stable. Traditionally about half the fleet of HGVs are owner operators, but the number has been falling at about 2% per annum. The average age of an HGV driver is 55; but over-60s represent 13% of all drivers while only 2% are under 25s. The market is highly competitive and the estimated margin in 2018 was only 1%. Because of the introduction of the Driver Certificate of Professional Competence in 2014, the cost of training to be an HGV driver has gone up sharply. So this is an essential industry which is in crisis, with its problems substantially exacerbated by recent actions by various tiers of government. Its labour force is ageing and there is likely to be a major shortage of drivers within 10 years. Owner operators are giving up. In the circumstances, a further government-imposed tax might have a cumulative impact well in excess of the effect of a normal tax rise. At the same time the industry is an essential link in the modern logistics chain, made of even more vital importance in keeping the country alive during the Covid problems. It would be dangerous to disrupt the industry further.

23 ÓCentre for Economics and Business Research 5. Economic Impact 5.1. Introduction This section looks at Cebr and other modelling to estimate the impact of a 12p rise in fuel duty on the economy looking at GDP, employment, inflation and on tax recovery – the proportion of the tax levied that is actually raised. 5.2. Cebr modelling Cebr in September 2018 estimated the impact of the freeze in fuel duty28. The report calculated by how much prices were lower than they might have been had fuel duty risen by 24%. ‘Using the counterfactual fuel duty increases, resulting in 24% higher fuel prices in 2018, the cumulative nominal impact on inflation measures is as follows: o CPI – 6.66% (overall transmission of 27.7%) o PPI Output – 5.22% (overall transmission of 21.7%) o PPI Input – 20.33% (overall transmission 84.7%) o SPPI Road Freights – 5.14% (overall transmission of 21.4%) This can be used to scale the impact on inflation of a 12p rise in fuel duty. The amounts will obviously be lower since the increase is 2.1% compared with 24%. The estimated effects are shown below: o CPI – 3.24% (overall transmission of 27.7%) o PPI Output – 2.76% (overall transmission of 21.7%) o PPI Input – 10.18% (overall transmission 84.7%) o SPPI Road Freights – 2.70% (overall transmission of 21.4%) Cebr also reported for FairFuelUK in 2012 looking at the economic impact at that time29. The report concluded: The figure shows that for a 1 penny reduction in fuel duty, the expected increase in GDP is 0.35 per cent…By way of comparison, a 1 pence reduction would generate 161 thousand new jobs with little net impact on the fiscal position. 5.3. Impact on CPI using CPI weights The CPI weight for 2022 for road fuels (petrol, diesel and lubricants) is 31 parts per thousand30. A 12p rise in the retail price would raise fuel prices by 7.3%. This would raise the CPI by 2.3%. This number is lower than the 3.24% calculation above and reflects the higher prices of other items 28 The impact of the fuel duty freeze on UK prices A Cebr report for FairFuelUK September 2018 29 The impact on the UK economy of a reduction in fuel duty Cebr report for FairFuelUK 2012 30 https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflationupdatingweightsannexatablesw1tow3

24 ÓCentre for Economics and Business Research (especially food and energy) which scales down the impact of fuel and the reduced purchases of fuel since Cebr’s earlier research was carried out. 5.4. NIESR The National Institute for Economic and Social Research (NIESR) has also looked closely at the impact of changing fuel duty31 though this was about ten years ago. The results of its simulations are shown in Figure 6. A 3p cut in duty is modelled to boost GDP by 0.11%, employment by 36,000 and to cut government revenue net by £186 billion. Figure 6 National Institute modelling of 3p cut in fuel duty 5.5. Treasury model using DGM32 This section explains how the Treasury’s CGE model has been used to simulate the effects of the reductions in the rate of fuel duty. It summarises the results in terms of increased economic activity (output, investment, wages, and consumption) and the extent to which this leads to the costs of the tax reduction being recovered. The report from which the calculations are made assumes a 20% reduction in fuel duty. Table 7 below summarises the results, which are expressed as percentage increases against the baseline except for the tax recovery rate which is in terms of the percentage of the static cost that is recovered. 31 Discussion paper 398, September 2012 The Impact of Fuel Duty on the Macroeconomy by Aurelie Delannoy, Dawn Holland and Iana Liadze 32 This is taken from the paper from the Treasury and HMRC which describes the impact of a 20% reduction in fuel duty. HMRC and HM Treasury Analysis of the dynamic effects of fuel duty reductions Publication date: April 2014

25 ÓCentre for Economics and Business Research Table 7 Impact of 20% cut in Fuel Duty modelled using the Treasury Dynamic General EquilibriumModel % Difference in GDP level compared to baseline 0.4% Difference in investment level compared to baseline 2.0% Difference in consumption level compared to baseline 0.3% Tax recovery rate 49% Model description A CGE model is a large-scale numerical model that simulates the core economic interactions of different agents in the economy. It uses data on the structure of the economy, along with a set of equations based on economic theory, to calculate the effects that a policy change will have on the economy. Modelling policy changes in the CGE model is a complex activity, and providing robust analysis requires an in-depth understanding of how the model works. It also requires a number of steps to be completed – checking data and model calibration, coding the logic for policy scenarios of interest, and carrying out comprehensive sensitivity analysis to check robustness of simulation results with respect to changes in model assumptions and data. HMRC’s CGE model is a single-country dynamic model. It is typically aggregated to 15 industries, 15 sectors and 15 household groups, although this can vary according to modelling requirements. The model is dynamic, so it can track the evolution of the economy over time as it reacts to policy changes, capturing the intertemporal aspect of agents’ decision making. For example, if businesses are expecting a tax reduction in three years’ time, this will influence their decisions about investment today. There are a number of assumptions, grounded in economic theory, about various other interactions in the economy. Information on the CGE model assumptions can be found in the HMRC CGE Model Documentation33. 5.6. Conclusions Taking all these modelling results together, it is clear that a 12p rise in fuel duty will raise much less revenue than the OBR assumes. The OBR’s gross revenue calculation suggests that if behaviour were not affected it would raise £5,700 million. In practice, the highest estimate from any of the model results presented here for revenue raising is from the Treasury CGE model which suggests the actual revenue that might be raised is half this. The estimates based on scaled results from other models 33https://www.gov.uk/government/publications/computable-general-equilibrium-cge-modelling

26 ÓCentre for Economics and Business Research range from a revenue loss from the early Cebr research to a net gain of about £1,200 million from the NIESR research. Looking at all the studies we think that the annual revenue that might be gained in the short term will be £1,500-£2,800 million. There is likely to be a negative economic effect though the studies disagree about the scale of this. Scaling from the early Cebr research indicated a negative GDP impact of 2.1%, which may be on the high side, while the Similarly, the early Cebr jobs calculations are higher than the others; the implied jobs impact of the Treasury modelling is around 4,000 jobs lost as a result of the increase. Looking at all the studies our assessment is that a 12p rise will reduce GDP by about £2,400 million (approximately 1%) and reduce employment by about 31,000 jobs.

27 ÓCentre for Economics and Business Research 6. Long term impact 6.1. Introduction The government has indicated that in its forthcoming energy white paper it will accept the recommendation that the ban on sales of fossil fuel driven vehicles be advanced from 2040 to 2030. Revenues raised from fuel duties will therefore diminish. This section looks at Cebr and OBR estimates to see how rapidly fuel duty revenue will evaporate. 6.2. The OBR view In its fiscal risks report in 2017 the OBR stated: Fuel duty is forecast to raise £27.5 billion (1.4 per cent of GDP) in 2017-18 … In both scenarios, receipts continue to fall as a share of GDP beyond 2021-22. By 2030, in our less fuel-efficient scenario they fall to 1.12 per cent of GDP; in the more fuel-efficient scenario they fall to 1.00 per cent of GDP. If the Government meets the Committee on Climate Change recommendation of near-zero emissions from transport by 2050, then fuel duty receipts would tend towards zero on current policy settings34 Figure 7 OBR’s prediction of long-term trends in fuel duty revenue as a proportion of GDP (Source IFS Green Budget Options for Motoring Taxation) Figure 7 charts the 2017 OBR forecast. 34 OBR, Fiscal Risks Report, Cm 9459, July 2017 para 5.8, 5.16

28 ÓCentre for Economics and Business Research In the 2019 Fiscal Risks Report the OBR went further35. The Government’s 2017 decision to ban the sale of petrol and diesel cars by 2040 would, under a continuation of the current tax system, ultimately reduce receipts to zero. The OBR has not as yet placed a timing on this prediction and of course, if the decision to accelerate the ban to 2030 is implemented, the elimination of fuel duty receipts will also be accelerated. 6.3. Cebr modelling Cebr has also modelled the gradual disappearance of fuel duty revenues. In ‘The Future of Road Transport - How to abolish Traffic Jams’36Cebr modelled the future of fuel duties. Cebr predicted, without taking account of government policy to accelerate the phasing out of fossil fuel based sales that: ‘By 2037 overall tax revenue from roads from the current tax system is forecast to decline to £20.3bn (in current monetary terms) compared with £38.4bn in 2015. The relentless economic and political imperatives to improve fuel efficiency, in conjunction with non-fossil fuel conversion, will drive down revenue from conventional sources.’ More recent Cebr modelling investigating the impact of the potential 2030 ban on ICE engined vehicles37 shows the real value of fuel duty revenues declining by 53% by 2040 and by 86% by 2050 if the proposed 2030-40 bans on new sales of ICE engined vehicles goes ahead. 6.4. Conclusions By 2040, fuel duty receipts will probably be less than a fifth of current levels, updating the projections above to take account of the likely ban on sales of fossil fuel based vehicles. The current fiscal crisis is long term and will need up to 50 years of revenue raising and expenditure constraint. Given that any revenue gains from higher fuel duties will be only temporary and will evaporate over time, it seems unnecessary to take the political and economic damage from raising fuel duty in return for very little long-term revenue. The balance of advantages seems adverse. This means that even the relatively small short term revenue gains from a 12p rise in the rate of fuel duty, estimated at £1,500-2,800 millions from the analysis in the previous section, would dwindle to £200-400 millions only (at 2019 levels of activity and prices) within 30 years. As the fiscal crisis is a long term crisis, this indicates that a rise in fuel duty has only a minor role to play in sorting the nation’s fiscal position. 35 OBR, Fiscal Risks Report, CP 131, July 2019 para 4.30, 4.29 36 https://cebr.com/reports/the-future-of-road-transport-abolishing-traffic-jams/ 37 https://fairfueluk.com/CEBR-2030-BAN/