In our previous Road user charging: post-Vanderstock, towards decarbonisation update, we discussed how revenue which funds road infrastructure is currently collected in Australia, and how recent developments may change how this is approached in the future.

As discussed in the previous update:

• The Commonwealth's fuel excise revenue has been gradually eroding, and the increasing popularity of zero and low emissions vehicles (ZLEVs) calls into question the longevity of fuel excise as a revenue source.
• Victoria's ZLEV distance charge was struck down as unconstitutional by the High Court of Australia in October 2023 on the grounds that it constituted an excise, which may only be imposed by the Commonwealth. This decision all but rules out State-based distance charges as a means of collecting revenue.
• The High Court's decision presents an opportunity to reflect on how a system for collecting road-related revenue should be structured. A new system would ideally be less complex than the disparate array of revenue sources which are spread between the Commonwealth and each of the States/Territories, and would remain effective at collecting revenue as the transport sector decarbonises (unlike our current reliance on fuel excise).

Since that article, the House of Representatives' Standing Committee on Climate Change, Energy, Environment and Water has announced an inquiry into the transition to ZLEVs (see terms of reference - Parliament of Australia) – making now an even more important time to reflect on appropriate future road funding models. The Committee is seeking public submissions by 22 March 2024.

As explored previously, there are four key policy aims which might be used to guide the development of a new road revenue system:

• A cost to the road user which is proportionate to the cost the user imposes on the road network (where the main factors are distance driven and vehicle weight)
• Congestion reduction (recognising that it costs more to build a road network with a higher peak capacity)
• Incentivising emissions reduction
• Ease of administration (which is important both in terms of public reception and cost of collection)

In this article, we discuss some potential road funding models against this criteria.

Distance-based charges

What might this approach look like?

At its simplest, this system imposes a charge of a few cents for each kilometre driven. The distance-based charge could potentially apply only to ZLEVs, while internal combustion engine vehicles (ICE vehicles) continue to pay tax via fuel excise. Alternatively, the distance charge could apply to all vehicles regardless of their method of propulsion (essentially replacing fuel excise with a revenue collection method which is technology-agnostic).

The latter approach has had some take-up in the United States, with many states conducting small scale feasibility studies. The most advanced program is in Oregon, which launched a long-term program in 2015 and now has 2,100 vehicles enrolled. Drivers have a choice between paying an extra registration fee (which is intended to make up for the declining fuel excise revenue), or signing up to the 'OReGO' system and paying per mile. The program has different distance reporting options available, some which use GPS and others which read data from the vehicle's onboard computer.

In New Zealand, petrol is subject to fuel excise but diesel is not. Diesel-powered vehicles are required to pay a distance-based road user charge (and from 1 April 2024, so will ZLEVs). Drivers pre-pay in 1000 kilometre increments, and must display a licence which shows the odometer readings which are covered by that licence. Once the maximum distance is reached, a new licence must be purchased.

Does this approach meet policy objectives?

A distance-based system does a reasonable job at meeting most of the policy objectives.

By linking the charge to distance travelled, the amount paid is correlated with the wear and tear put on the roads; the greater the distance driven, the more wear and tear put on the roads, and the more paid in road tax. If the policy also utilised a scale of per-kilometre rates depending on vehicle weight (with heavier vehicles paying higher rates), the charge could be very closely aligned with wear and tear on roads.

A distance-based charge may have some effect at incentivising a reduction in emissions. A simple version of this policy provides a general incentive to drive less (for an ICE vehicle, meaning lower emissions) and a charge with a scale of per-kilometre rates which vary depending on the vehicle's efficiency/emissions rating would incentivise both driving less and driving a more efficient vehicle.

Congestion reduction could also be achieved with a distance-based charge. A basic flat per-kilometre rate or a scale of rates as discussed above may have some impact on congestion, to the extent that it generally encourages road users to drive less. A highly advanced version of this policy could use an onboard GPS-enabled device which takes into consideration location and time and builds that data into its pricing model to disincentivise driving in congested areas during peak traffic times.

However, a distance-based system is not easy to administer. A basic distance-based system relies either on driver-submitted odometer readings to measure distance (such as was done for the Victorian ZLEV charge), on widescale enforcement via inspection or largely on driver honour (as seen in New Zealand's distance charge).

An advanced system based on in-car GPS modules could require less input from the driver (once set up) and would allow for a far greater range of variables to be taken into account when designing a pricing model.

However, trials in Singapore have suggested that GPS data is often too unreliable in built-up urban environments to be useful, and estimates from various trial programs in the US suggest that the cost of collection for a GPS-based program would be between 5 and 18 percent of revenue collected. Collection of location data would also present privacy issues that would need to be worked through.

Alternatively, given that many modern vehicles already have GPS and internet connectivity built in, governments could mandate that data collection software be included in all new cars sold. This may be feasible for larger markets, but Australia's market is not large enough to compel automakers to adhere to unique standards. Notably, the average age of passenger vehicles in Australia is 10.6 years, so this method would also exclude a large number of cars on the road.

Plug-in hybrid electric vehicles (PHEVs) pose a unique problem to distance charge policies under which ZLEVs pay a distance based charge and ICE vehicles continue to pay fuel excise. A PHEV which predominantly uses its internal combustion engine will be paying excise on the fuel it uses as well as a distance charge. This may arise in the case of PHEVs with smaller battery packs, or where drivers do not have regular access to a charger. In these circumstances, a PHEV is effectively being double charged and will be paying more to use the roads than both fully electric vehicles and ICE vehicles. This problem would not arise under a system where all vehicles pay a distance-based charge (which replaces fuel excise).

Charge at the point of energy input

What might this approach look like?

Leaving aside the problem of application to ZLEVs, there are obvious benefits to collecting tax at the point of refuelling. Fuel consumed is roughly proportional to distance driven (and heavier vehicles, which have a greater impact on the road system, also tend to consume more fuel). Revenue can be collected and remitted by a much smaller number of fuel producers/distributors (rather than individually by each driver), simplifying administration.

One way of capturing ZLEVs would be to apply a charge to each kilowatt-hour of energy used to recharge a ZLEV. Versions of this policy have been proposed in a few US States, where road levies have been imposed on the use of public charging stations. As with ICE vehicles, total energy consumption by ZLEVs is roughly proportional to distance driven.

A potential road revenue system could see ICE vehicles continuing to pay fuel excise, while ZLEV vehicles pay a charge per unit of energy used to charge their batteries (or, in the case of hydrogen-powered vehicles, an excise on hydrogen fuel). Such a policy is not significantly different from a distance based charge, it just uses energy use as a proxy for distance driven.

Does this approach meet policy objectives?

A charge applied at the point of energy input does a similar job at meeting the policy of objectives of proportionality, congestion reduction and emissions reduction as a distance-based charge, although not quite as effectively.

A charge applied on the basis of energy used by a vehicle will roughly factor in distance and vehicle weight. However, more efficient vehicles impose a similar cost to the road network, yet would pay less under such a policy. This would incentivise efficient ICE vehicles over inefficient ones, but may also create a perverse outcome where a highly fuel efficient ICE vehicle might pay less to use roads than an electric vehicle.

The effect on congestion would be similar to a basic per-kilometre charge system, with a general incentive to drive less, but no incentive to avoid driving during peak traffic times.

A charge at the point of energy input could have an effect on emissions reduction, but it is not entirely consistent. For ICE vehicles, the amount of fuel consumed is directly proportionate to emissions. It incentivises both driving less and driving a more efficient vehicle. However, as mentioned, this policy would not necessarily incentivise switching from an ICE vehicle to a ZLEV (although this could be achieved by setting the rate applied to each kWh of electricity so that the total amount paid would be lower than what a comparable ICE vehicle would pay in fuel excise).

The main benefit of an energy-input charge over a distance-based charge is that administrability is much simpler and more cost effective for liquid and gaseous fuel sources. Fuel excise would be collected the same as it always has been. However, for electric vehicles, administration is a significant hurdle.

Implementing this system would not be too challenging in the case of public charging stations – many would already have a means of measuring energy used and collecting payment. Charging providers would simply need to calculate and collect an additional levy and remit that to the ATO similar to the way in which fuel producers do.

However, at-home charging would pose a significant hurdle for this system. It may require EV and PHEV drivers to install and use 'smart' chargers which have the ability to measure energy input and report that data to revenue authorities.

An alternative approach would be to use software built into each electric vehicle to measure and report energy consumed, but in that case, it could just as easily measure and report distance travelled, as discussed above.
It is also notable that charging infrastructure rollout is currently a significant hurdle to EV adoption, and the need for all chargers to have 'smart' capabilities would likely slow progress even further.

Flat fee

What might this approach look like?

The most basic revenue collection method would be a flat fee which gives a user unlimited access to roads. The fee could be adjusted depending on vehicle characteristics (such as weight or efficiency). This is essentially how vehicle registration works currently.

Assessment against policy considerations

This system would be very easy to administer and has a low cost of collection, but that would be the only upside when compared with other options.

There is no alignment between the way a driver uses the road and the amount paid to use the road. The fee could be set at different levels depending on vehicle weight, which would at least capture one relevant variable. But a vehicle, no matter how heavy it is, causes no wear and tear to roads while parked in a garage.

There is no incentive to reduce congestion, as there is nothing to encourage driving less.

There is also no incentive to reduce emissions. The fee could be set at different amounts depending on a vehicle's emission rating (as is done in Germany).

However, once again, even the most emitting vehicle does not produce emissions when it is not being used.

Tolls

What might this approach look like?

Toll roads provide an obvious (if often unpalatable) method of boosting road revenue. Tolls can supplement baseline road use charging for specific roads which are more costly than the average road to construct and maintain. This is not dissimilar to how they are currently used.

Assessment against policy considerations

The cost of using toll roads is aligned with road use to some extent. The more frequently toll routes are used, the more toll fees are collected.
Tolls roads could have some effect on congestion, especially if they implement peak and off-peak toll pricing (some toll roads, such as the Sydney Harbour Bridge and Tunnel, already do this).

The effect of toll roads on emissions is mixed. A high density of toll roads in an area which is susceptible to congestion could act in a similar way to a congestion charge, disincentivising the use of private vehicles in that area in favour of other means of transport. Adding a new toll route such as a bridge or tunnel could provide a more direct route between locations, reducing the distance of people's journeys and thus reducing emissions. However, tolling can have a negative impact on emissions, as drivers may take different (longer) routes to avoid having to pay to use the toll route.

Toll roads are fairly administratively simple (leaving aside the common complexity of setting up or significantly modifying toll road projects). However, the cost of collection is typically only financially viable for high-traffic routes, and there are considerable policy and political considerations (and often public opposition).

There is opportunity (including in the current Parliamentary inquiry) for regulators, industry representatives and road users to collaborate on design of a fit for purpose, flexible road user charging system. There is no such thing as a perfect system for collecting revenue to fund road infrastructure; each method has its pros and cons. Distance-based charging (that is not State-based), charge at the point of energy input and targeted tolling discussed in this article all offer some food for thought.

In the meantime, if you would like to discuss road user funding models, the Vanderstock decision or any other issues discussed in this article, please contact our team.