The Rising Costs of Driving

AA Directions Magazine-  Story by Peter King

It's said the only certain things in life are death and taxes. Looking at the increasing motoring costs scheduled by Government this year, perhaps one more thing should be added - complexity. For although the increases in taxes might be predictable, the reasons for the increases are becoming more and more difficult to understand.

Emissions Trading Scheme
 

As of July 1 2010, New Zealand has joined the handful of nations that has imposed a charge for carbon emissions in its fuel costs. Although technically it is not a tax, it will effectively behave like one until 2013.

The charge stems from the Emissions Trading Scheme, which was amended by the Government last year. The purpose of the ETS is to put a price on Greenhouse Gas emissions. In theory, by incorporating this cost for emitting carbon dioxide, people will try to reduce their vehicle emissions by reducing the amount of fuel they buy.

The ETS requires fuel providers to have a permit to release a greenhouse gas or use energy. Luckily individual motorists don't need a permit - called a unit, which represents a tonne of carbon dioxide - but oil companies need to buy enough units to cover the amount of fuel they sell to motorists.

Units are purchased from the market-place, an exchange where units allocated by the Government to foresters or firms are traded. Firms can also import units from United Nations validated carbon unit suppliers. Most of the oil companies are already involved in these international markets. From July 2010, the oil companies will need an estimated 15 million units per year. At present, however, only 8% of eligible New Zealand forests have entered the scheme, meaning just 7.3 million units are available. Fortunately, the Government has offered those companies requiring units a two-for-one deal - until 2013, the oil companies will only need half the number of units they would normally need - about 7.5 million.

The problem with all markets if there is scarcity - like a shortfall of 200,000 units - is that the price goes up. To get around that problem, the Government has stated that until 2013, instead of buying units, oil companies can simply pay cash at a fixed rate of $25 per tonne of carbon dioxide. (At time of writing the international price is more than this, but other times it is less.)

The net effect for motorists is that from July the price of petrol will go up about three cents a litre, and (because it has more energy content) the price of diesel about 3.4 cents a litre. Under the previous ETS scheme it would have been double this. The anticipated effect on fuel sales or Greenhouse Gas emissions from this tax is practically none at all. After 2013 however, fuel prices will depend on the supply and demand for international carbon units.

ACC
More cost increases for motorists this year will come from Accident Compensation Corporation charges. On July 1, the Government increased the ACC component of motor vehicle registration charges by $30. While the petrol component of the levy has not increased, as was originally proposed, the Government has clearly stated that ACC is in financial trouble and will need looking at over this year.

The issue comes down to whether or not the ACC should have total assets available now to meet all future liabilities. For example; If someone is involved in a car crash and sustains a brain injury, should the ACC have money in the bank today to cover all their estimated costs into the future?
While this is the current ACC policy, it was not the case prior to 1999. The current situation is problematic as the ACC is short $12.7 billion, of which $4.1 billion is in the motor vehicle account. From 1999 the target was to have the scheme fully-funded by 2014, but the Government has pushed that out to 2019 to reduce the cost impact. Unfortunately this is not enough to keep pace with projected cost increases and more would be needed. Most of the projected costs of ACC motor vehicle account are not for expensive future medical treatment, but for home carers and on-going compensation of today's permanently injured.

Road User Charges
Diesel vehicles will also face increased Road User Charges this year. In September the Government will give six weeks notice of its intention to raise Road User Charges, and light diesel vehicle owners will most likely be hit hardest.

The reason for the increase stems from the days when Government used to collect 18 cents a litre from petrol taxes for the Crown account. In February 2008 the Government realised that investing that money in road funding would create an imbalance between the amount contributed by petrol and diesel. This balance is set by a mathematical relationship called the cost allocation model.

Rather than reduce petrol taxes, as that money was required for transport infrastructure, the Government opted to increase Road User Charges leading to trucker protests around the country. An independent review has been and gone, but the upshot is that Road User Charges remain too low. While the AA supported a standard fuel tax for all fuels on behalf of the 237,000 diesel car and SUV users, this was opposed by Federated Farmers for its 35,000 tractor and agricultural machine users who rejected a rebate system for off-road fuel use. The result is that Road User Charges will likely increase over the next few years until parity with petrol is achieved.

Overall the cost increases we will face this year are less than they could have been. But the question remains is when, or if, those costs will come back to bite us, and the mobility and freedom we value so highly as New Zealanders comes at an ever-increasing price.