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Diesel Prices: the UK Government Should Use High Tax Revenues to Reduce Usage

Posted on: Wednesday, 4 June 2008, 15:00 CDT

The media coverage of high UK fuel costs has recently focused on the rise of diesel prices relative to petrol. The cost advantages that diesel vehicles once enjoyed are being eroded, putting pressure on the government to reduce taxes. However, instead of bringing in measures to reduce diesel prices, the government should use the increased tax revenues to encourage more efficient use of fuel.

In the debate surrounding high fuel prices, there has been a growing focus on the rise of diesel prices relative to petrol. Diesel prices have certainly been on the increase. The current average price of a liter of diesel is around 11% higher than a liter of standard unleaded, whereas one year ago diesel was actually slightly cheaper.

As a result, the distance that motorists have to travel to reach the break-even point to compensate for the higher price of a diesel vehicle is increasing. Given that a new diesel car costs on average GBP1,400 more than its petrol equivalent, it now takes 53,000 miles before reaching the break-even point, compared to 40,000 miles just one year ago. This essentially means that the average savings accrued over the lifespan of a diesel vehicle are falling and, as a result, there have been calls on the government to reduce taxes on diesel.

Given that oil prices are expected to remain high and that the world, as a whole, needs to reduce its dependence on oil, the government should utilize this period of high tax revenues to invest in encouraging people to use fuel more efficiently. There are numerous successful examples from around Europe, where governments have invested in public transport or car sharing schemes to reduce fuel consumption. Spain, for example, had transport at the core of its 2007 measures to curb energy consumption, bringing in investment for pilot projects to improve public transport.

In essence, rather than focusing on the per unit price of fuel, the UK government needs to use the increased revenues from high fuel prices to invest in changing people's behavior. Given that fossil fuels are a limited source and that fuel prices could rise further, the government needs to encourage people to use fuel more carefully by investing in public transport and encouraging car sharing schemes.

Source: Datamonitor

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