Skip navigation Scroll to top
Scroll to top

Is it time to raise fuel duty?

14 January 2016

Jonathan Marriott, Chief Investment Officer

The fall in the oil price has reduced petrol prices at the pumps by nearly a third in the last two years. The government income from petrol and diesel sales has fallen as the VAT take is reduced. Alternative forms of energy are becoming less attractive; they reduce the pressure for more efficient use of energy and potentially lead to greater use of fossil fuels and the resulting environmental damage.

The fuel duty was frozen when the oil price was high in order to stop the pump prices rising. Now duty on fuel could rise with little impact on inflation and the consumer. According to the Department for Energy and Climate Change the tax take on a litre of petrol in April 2011 was 80.4p. By April 2015 this had fallen to 76.7p and will fall further as the VAT take is reduced on lower prices. A supplement of 5p per litre could be added to the fuel duty while low oil prices persist.

Accepting that the low price may be temporary, any increase in duty should be viewed as a price stabiliser, to be removed should the price rise. Being able to remove the duty would cushion the economy from the effects of a rise in the oil price at a future date. In 2014 the UK used 35million tonnes of fuel for road transportation so this could raise significant revenue for the government. While the dip in oil price may be temporary this could be used for investment in infrastructure, which would bring long-term benefits.

The government has agreed emission targets and if we are to meet these targets we will need to discourage spending on fossil fuels. Higher rather than lower prices would encourage this. When banks made unexpectedly large profits the government of the day instigated a windfall tax on profits. The energy consumer is getting an unexpected gain from lower oil prices at a time of government austerity. When income from our own oil production is falling, a rise in fuel duty would be a relatively painless way to raise revenue.

It is now widely accepted that we are causing long term damage to the environment due to excessive use of fossil fuels and the resulting emissions. In the past supply constraints have helped to keep prices high reducing consumption which encouraged greater fuel economy, but now we are using less fuel and extracting it more efficiently. If the gains in this respect are to be built upon we will need to pay more for energy not less. After all, do we not all have a responsibility to protect the environment for future generations to come?