Extract C: Funding the transition to low-carbon transport

Public transport infrastructure and environmental subsidies must be funded, meaning the key debate is not whether to tax transport, but which forms of travel to tax. As the passenger vehicle fleet transitions to zero-emission electric vehicles, tax revenues from standard fuel duties will decline sharply over the next decade. The Green Budget Coalition estimates that replacing this lost fiscal revenue would require a 40% increase in taxes on domestic flights. Some environmental economists argue that governments must reform aviation taxes to reflect the environmental damage of short-haul flights and encourage rail alternatives.

One policy option is a distance-based environmental levy on flights where viable rail alternatives exist. The primary objective is to internalise the external costs of high-carbon travel, ensuring passengers pay for the climate damage they cause. However, there are concerns regarding consumer responsiveness. In regions with poor rail connectivity, consumers may have few alternatives, whereas on highly competitive intercity routes, a small tax could lead to a massive shift toward rail travel. Setting the optimal tax rate is difficult when demand sensitivity varies so significantly across different routes.

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Extract C states that 'replacing this lost fiscal revenue would require a 40% increase in taxes on domestic flights'.