Road fuel cost and sustainability - a point of view

Since the beginning of 2021, the price of petrol has increased by 50% (from £1.15 per litre to £1.73). Diesel has increased 58% (from £1.19 per litre to £1.90). Some of the rise is due to Russia’s invasion of Ukraine (about 7% in the case of petrol and 24% in the case of diesel) and the rest is due to other factors including the recovery of economic activity after COVID.

Britain consumes around 41bn litres of road fuel a year. The government states that road transport represented 27% of UK CO2 emissions. Yet the government also makes a lot of money off this activity. It collects VAT at 20% on the base cost of fuel, a levy at £0.575 per litre (temporarily reduced at the moment by £0.05) and then VAT (a tax on a tax) on the levy. In 2021 this represented about £33bn in government revenue between VAT and the Fuel Levy (nearly 3% of national revenues), starting in 2021 as 65% of the cost of filling your tank and currently, 45% with the recent relief granted.

So big business, for oil companies and for the government. The windfall for government since the albeit low start in January 2021 is around £15bn. It currently makes around £680m per week from road fuel-related taxes. Petrol stations invoice around £800m per week although their margins are small. Most goes to the oil companies who have enjoyed a stunning windfall post-COVID and the Ukraine war. And you the consumer are paying the cost.

What is the sustainable angle?

Firstly, it is that road transport is very expensive, subject to external pricing shocks and is a horrible generator of CO2 emissions. Secondly, government benefits hugely from the oil business that is producing so many greenhouse gas emissions and those taxes go to the general tax pot – what is given back for environmental services is tiny. The Autumn Statement of 27th October 2021, following the Net Zero Strategy, committed £620m over the next three years for zero-emission vehicle grants. Put another way, every week the tax taken from road transport is £681m, so the government’s current annual commitment to supporting the acquisition of Electric Vehicles is 2.12 days of its annual road fuel-related revenues. And the government last week announced that it was ending all subsidies on private electrical vehicles so that the UK is now the only major European country without a private vehicle grant scheme.

Conclusions for business

I would suggest the following:

  • One of the biggest drivers of supply chain cost increase is the increase in the variable cost of fuel. The huge increase since the beginning of 2021 has to be passed on to clients and customers for every product produced or sold. Every business should sensibly be looking to reduce its liquid fuels exposure if it has not done so already;
  • Reduction of your business’s transport emissions is probably among the first three items you should consider in calculating your route to zero. Direct transport costs are Scope 1 emissions that are reasonably easy to calculate. Scope 3 emissions include your supply chains and distribution networks and are more complex to calculate, but there are tools available to help you. Understanding your emissions is vital in starting to move your business towards net-zero. Reducing emissions from transport can also however be a route to financial savings with benefits to your bottom line, customer savings and improvements to reputation and brand image;
  • The fuel levy and its associated VAT costs are a tax – although nominally in the name of reducing road miles but really just a common or garden tax. What is returned in the form of better roads and improved emissions figures is significantly lower than the government tax take. About £11bn is spent annually on roads by government. Businesses should be lobbying for a material reduction in the fuel levy and/or a ringfencing of revenues raised from the roads to deliver sustainable transport benefits. Government could be supporting electrification of transport on a materially more significant basis given its huge revenues from carbon fuel use;
  • Businesses should move all personal and business travel to electric vehicles as the savings are substantial. The annual cost of peak domestic electrical rates for a car doing 10,000 miles per year at 25 watts per mile is around £700 per annum. At current prices of £1.90 per gallon of diesel, at 50mpg, the annual fuel cost is £1,448 (at government average national fuel consumption levels it is £3,824). Even without incentives, the savings from moving to electric are substantial.

In September, there will be a Kent IoD members’ event on the current state of the commercial vehicle section of electric vehicles with presentations by local and national experts, and vehicle providers for membership education in converting commercial fleets to electric.

Author: Michael Bax, IoD Kent Ambassador for Sustainability

This is a guest blog which contains the views of the author and does not necessarily represent the views of the IoD.

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