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RUC Changes Favour Polluting Vehicles.

New Zealand funds road maintenance and road building through taxation on fuel (Fuel Excise Duty) or via Road User Charges, RUC. FED is included in the cost of petrol (i.e. it is taxed at source) but not diesel. RUC is a charge based on kilometres travelled by cars powered by fuels not taxed at source.

At its heart this is a pragmatic solution that allows for our rural sectors to buy fuel for their agricultural vehicles that don't travel on our roads. Typically, these vehicles were all diesel powered and so petrol contains FED and diesel does not; the latter pays its way through RUC.

As a by-product it also helps overcome the challenge that governments face when generating revenue from other vehicles that don't pay for fuel at the pumps, an example being Battery Electric Vehicles.

The previous National government exempted BEVs from RUC as a way of encouraging take up, and stated that when the market penetration reached 2%, they would re-instate it. So far so clear.

But what would happen if you set the RUC rate incorrectly? If the rate were set at a level that disadvantage fuel efficient vehicles? Well that just happened, and BEVs now pay more duty than nearly all fuel efficient petrol cars.

Let's look at a couple of examples.

Firstly, FED is levied at $0.76 plus GST ($0.82). Logically one would expect the price of diesel to be 82 cents cheaper at the pump. This isn't the case. At the time of writing the difference was 59 cents. The petrol companies are making some extra margin.

Secondly in order to collect the same duty for 1000 kilometres travelled, a petrol powered, and a diesel-powered vehicle would need fuel economy of 13.0L per 100 kms. That would be a very inefficient car, and likely one with high emissions too.

If say the fuel economy of both vehicles were 6.0L per 100 kilometres, then the duty paid would be $406 more for the diesel-powered vehicle. Mild Hybrid technology makes 6.0L/100 kms easily achievable for a petrol vehicle. So efficient diesels haven't made sense in NZ for some time.

Thirdly taking the hybrid example further, the hybrid driver pays $492 in FED for 10,000 per year. However, a BEV driver would pay $760 in RUC (the same as a diesel driver) for the same distance, despite being zero emissions.

Lastly looking at a PHEV we can see how the dual taxation method affects the revenue generated. A PHEV also pays for fuel at the pump which includes FED; the result the RUC rate is set low. Most PHEV have a combined fuel consumption rate of around 2.0L / 100 kms (combined - for an explanation on how that is calculated see here). In this case our PHEV driver pays $692 in duty per year (more than a hybrid driver!).

FED is not a meant to be a duty that should influence vehicle efficiency or emissions, but in fact it does, because it penalises fuel efficient cars that are not powered by petrol.

However, a RUC rate at around $4.00 per $1000 kilometres would help fix the inefficiencies of the new rate. At 4.00 per 1000 kms, a 6.0L/100 km internal combustion engine car (under 2.5T GVM) would pay the same duty regardless of power source.

Part two of the solution requires an emissions component or fuel efficiency component added to the annual vehicle licence fee. That would encourage consumers to think about replacing their vehicles with more fuel efficient and less polluting ones over time, and fix the disincentives caused the by current RUC system. The taxes could start low and increase over time if the government is serious about lowering our emissions. Our large and old vehicle parc will take a long time to clean up.

Diesel cars have for a long time been penalised for being fuel efficient though, so don't expect a quick fix.


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