Two-thirds of the freight tonnage moved in the UK goes by road. Our economy and social well-being are critically dependent on the road haulage system. Most of the cost of this system is borne by lorry operators and passed on to customers. Some of the wider environmental and congestion costs, however, are imposed on the community at large. If the polluter pays principle were applied, all these external costs would be completely internalised by taxation. Environmental groups have argued for many years that lorries should be taxed at a level that achieves full internalisation. This report assesses the degree to which the external costs of road freight transport in the UK are currently being internalised by taxation.

The analysis focused on three types of cost: environmental costs (comprising climate change, air pollution, noise and accidents), congestion costs and infrastructure costs. Lorries’ contribution to the cost of providing, operating and maintaining road infrastructure is not an externality as such, but has to be calculated to determine its share of road freight taxation. It is out of the remaining taxes that the environmental and congestion costs should be recovered.

Current estimates of infrastructural, environmental and congestion costs have been obtained from official government sources and disaggregated by vehicle type and gross weight class. Two scenarios have been constructed: a ‘base-case’ using emissions data for lorries from the government’s National Atmospheric Emissions Inventory, and the other, a ‘worst-case’ scenario, based on the assumption that all trucks emit the maximum amount of pollutants permitted by EU regulations. Using mid-range estimates, the total infrastructural, environmental and congestion costs attributable to UK-registered heavy goods vehicles (HGVs) in 2006 were £7.1 billion for the base-case and £7.6 billion for the worst- case scenario.

The taxes paid by HGVs covered approximately two-thirds of these costs (in the base-case scenario). The proportion of the total cost internalised varied by vehicle class, with the lightest category of rigid vehicles covering only 55% of their allocated costs, but the heaviest rigid vehicles covering 79%. Overall, the analysis suggested that taxes on lorries would have to rise by around 50% to fully internalise infrastructural, environmental and congestion costs.

This finding requires several qualifications, however:

• If one excludes congestion costs, it appears that lorries more than cover their infrastructural and environmental costs, even in the worst-case scenario. At 40% of the total external costs, congestion exceeds the share of costs attributable to environmental impacts (36%) and infrastructure (23%).
• Britain is already much closer to full internalisation of the external costs of road freight transport than most other EU countries. Raising the taxes on road freight operators above current levels would put UK operators at an even greater competitive disadvantage within the open EU market for road haulage services.
• Hardly any of the externalities imposed by foreign-registered vehicles running on Britain’s roads are currently internalised because their operators avoid high UK fuel duties by purchased almost all their fuel in other countries.
• Taxing road freight operators more heavily to recover a higher proportion of external costs would reduce the financial resources they have available to upgrade their fleets and introduce other ‘green’ measures.

Even in the absence of any fiscal changes by government, the proportion of external costs internalised by taxation is likely to change. The gradual upgrading of the lorry fleet to higher Euro-emission standards and steady improvements in fuel efficiency will reduce air pollution costs, while increases in the social cost of carbon and in the level of traffic congestion will have a counteracting effect. It is difficult to predict what the net effect of these conflicting cost pressures will be on the future degree of internalisation.

Click here to download a copy of this report.

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