OECD and ITF - Tax Revenue Implications of Decarbonising Road Transport

Excise duties on fuel used in road transport represent a significant share of tax revenue in several countries. Under current policy settings, this tax revenue base will shrink as the fuel-efficiency of internal combustion engines improves and the electrification of the transport sector progresses, driven by policy commitments or the declining costs of electric vehicles. Eroding tax bases lead to declining revenues, which puts stress on government budgets in the long run. Policymakers need to anticipate the potential decline of fuel tax revenues and decide whether and how to respond.

Tax Revenue Implications of Decarbonising Road Transport: Scenarios for Slovenia analyses the revenue implications of potential reductions of fuel consumption in road transport, and investigates potential policy responses assuming that the objective is to maintain total tax revenue associated with road transport. The potential to raise tax revenue fairly and efficiently depends on tax design features beyond revenue stability, such as external cost management, administrative costs as well as fairness and equity concerns. These considerations are discussed in the report.

In the Republic of Slovenia, 14.6% of total tax revenue collected at the central government level in 2016 came from excise duties and carbon taxes levied on diesel and gasoline used in road transport. The report provides an in-depth assessment of the Slovenian transport tax system, focusing on the three main tax bases in the sector: vehicles, fuel use and road use. It explores revenue impacts under current policy settings and for different scenarios on the take-up of new vehicle technologies. Against this background, it then analyses different tax policy reforms with a 2050 horizon. The tax reforms include changes to fuel and carbon taxes, vehicle taxes and distance-based charges, and consider the potential behavioural responses to tax reform. Together, the scenarios describe potential revenue erosion in road transport and orders of magnitude of alternative tax policy response to compensate for it.

The analysis is based on a model developed for the purpose of this study and which links tax revenues to potential developments of tax bases in the long run. The model combines detailed micro- and administrative data with scenarios of technology take-up. While the evolution of technologies and vehicle fleets is uncertain, the report applies scenario analysis to provide a plausible narrative about potential tax base developments, with no predictive intent. The model is flexible and applicable to a broad set of countries with varying tax policy questions. It is also capable of handling data sources of different granularity.

Key findings:

Under current policies, tax revenues from diesel and gasoline use in private cars is likely to decline substantially in the coming decades in Slovenia.

• Under the assumption that fuel-efficiency improves in line with European standards until 2030 and that alternative fuel technologies account for roughly 60% of new car purchases in 2050, total tax revenues from fuel used in passenger cars in Slovenia would drop by 56% between 2017 and 2050 if demand for cars and car use develops as expected.

• The picture for trucks is different, with a less pronounced drop in fossil fuel use over the 2050 horizon, due to a slower expected take-up of alternative technologies. Furthermore, Slovenias current toll system for trucks provides an effective means to raise revenue independently of fuel use.