Competition

19.  The Commission's observation that excise rates on fuel vary between Member States (see Box 1 above) and that such variations prompt tank tourism is uncontroversial. What is less clear is whether such variations lead to a "distortion of competition in the internal market", as the Commission claims. The Committee asked: in which specific market activity is competition distorted by these variations, to whose advantage does this distortion work, to whose disadvantage, and to what extent?

20.  A substantial body of work has been established on these questions by a long-standing research programme conducted by the European Conference of Ministers of Transport (ECMT). This research has been endorsed by the Commission, as well as the Transport Ministers of the member-countries of the ECMT, including all 15 EU Member States. The work is set out in two reports by the ECMT;[8] it was summarised in evidence submitted to the Committee by Professor McKinnon[9] and by the ECMT Secretariat: "The work includes a detailed quantitative analysis of the impact on competition between the haulage industries of member countries and finds no evidence that the existing differences in rates of fuel taxation distort competition in the haulage market." (p 21)

21.  There are two distinct sets of road haulage markets in relation to which tax differences and their potential to distort competition need to be considered. One is the international or cross-border road haulage market within the EU and the competition between flag-carriers from the various Member States in this market. The other is the domestic road haulage market of each of the Member States and the competition between local and foreign hauliers within each domestic market. These two sets of road haulage markets are considered in turn below.

International road haulage

22.  In regard to international road haulage, the ECMT evidence suggests that, taking into account the full range of transport taxes and charges, the marginal effective tax rates (METRs) on flag-carriers from the various EU Member States were remarkably similar for the various typical cross-border haulage trips. The evidence on one such typical scenario—Manchester to Milan—is reproduced in Box 2; a fuller range of evidence is available in the ECMT Reports of 2000 and 2003.

23.  Thus, whereas each flag-carrier may be disadvantaged by a higher-than-average rate on one or more particular tax (e.g. fuel duty, insurance tax, capital and labour taxes, et cetera), the net result is that "in competing for international hauls differences in taxation do not confer a significant competitive advantage to any of the countries examined."[ 10]

24.  The Commission's Explanatory Memorandum does not refer to the ECMT research on this point; nor does it cite any contrary evidence. In contrast, the UK Government "strongly support" the ECMT findings. According to the Economic Secretary to the Treasury, the Commission "ought to be aware of that evidence […] it shoots a hole through one of the main justifications that the Commission had for proposing the Directive in the first place." (QQ 46-47)

Box 2

Domestic road haulage

25.  In regard to domestic road haulage, there is a more significant variation in the rates of taxation faced by local and foreign operators within a given Member State. For example, UK flag-carriers face a higher METR in the Netherlands than do local Dutch operators; French flag-carriers face a lower METR in the UK than do local UK operators.[11] The evidence from the major UK industry associations—the Freight Transport Association (FTA) and the Road Haulage Association (RHA)—on the relative disadvantage faced by UK operators was consistent with the ECMT findings on this point.[12]

26.  It does not necessarily follow that this difference in tax rates had led to a distortion in competition. Witnesses noted two points in this regard. First, there is considerable, if not conclusive, evidence that variations in pre-tax costs (including the pre-tax cost of fuel but importantly capital and labour costs) tend to offset variations in taxes so that "total operating costs are fairly similar, particularly between the UK and its European neighbours" (p 29). For example, a study conducted for the Irish Government in 1999 showed little variation in total costs in the UK, Ireland, the Netherlands and Germany (see Box 3).

27.  As mentioned, this evidence is not conclusive; and pre-tax costs do change from year to year. The most recent data from the FTA suggested that, as at October 2002, the total cost of French and Dutch domestic road transport remained 14% and 9% respectively below the level of the UK—though the FTA also recognised that these variations were far less than the variation in the post-tax cost of fuel which was, in the case of both France and the Netherlands, 33% below the level of the UK (pp 24-25).

Box 3

28.  The second and more conclusive point is that these variations have not conferred any significant competitive advantage or disadvantage to any EU country in the only relevant test: a significant increase in cabotage penetration into another's market, or a significant loss of the domestic market to foreign operators. According to the Commission, cabotage penetration rates were only 0.2% (measured in tonne kms) in EU Member States in 1998.[13]

29.  The Government estimated that cabotage represented only 0.06% of the UK domestic road freight market in 2000 (p 7). Professor McKinnon noted that the Road Haulage Association disputed the accuracy of this figure. But he pointed out that even if the Government under-estimated the level of cabotage by a factor of ten, foreign operators would still account for less than 1% of the British road haulage market. "For the vast majority of British hauliers engaged solely in domestic haulage international variations in taxes had, therefore, little bearing on trading conditions."[14]

30.  Citing the evidence both on the full range of costs and on the low level of cabotage, the Government emphatically rejected the Commission's "postulated" view that "differences in diesel tax rates lead to material distortions between hauliers based in different Member States" (p 7).

Cross-Channel trade

31.  Both the FTA and the RHA drew attention to the loss of market share by UK operators in the cross-Channel road haulage trade: from a circa 50/50 split with foreign operators in 1996 to a circa 30/70 split in 2001 (pp 39-41). The industry pointed out that this fall followed the period of above-inflation annual increases in UK fuel duty. In response to this concern, the Committee asked: if current marginal effective tax rates (METRs) are more or less aligned (see paragraphs 22-23 above), what does this mean for the future prospects of UK operators?

32.  The loss in market share by UK operators has not been 'straight line', but a rise and fall from a circa 40/60 split in 1986 to a circa 50/50 split in 1996 to a circa 30/70 split in 2001 (see Box 4).

Box 4

33.  The FTA is at one with the ECMT in considering that the underlying explanation lay in the movement of the exchange rate between those within and those outside the eurozone. The extraordinary appreciation of sterling against the ecu/euro since 1996 (see Box 5) made imports to the UK relatively cheaper, as well as making it relatively cheaper for non-UK firms to transport these imports (p 27).[ 15] The correction in the exchange rate now underway should, therefore, help to restore the market share of UK operators to the circa 40/60 split of the mid-1980s—if not the circa 50/50 split of 1996 when sterling was at its trough.

Box 5

34  In contrast, the RHA cited modelling work by the Centre for Economics and Business Research (CEBR) to argue that the increase in UK fuel duty was a much more significant factor in the loss of market share than the appreciation of sterling (p 40). If the CEBR were right—and considering the evidence cited above (paragraphs 20, 22-23) that the METRs on international trips are now more or less aligned—this would suggest that the "right" market share for UK operators was less than the circa 40/60 split suggested above.

The need for minimum rates

35  The body of analysis and evidence established by the ECMT and cited above (paragraph 20) was based on the actual tax rates prevalent in the present Member States and thus presupposes the existence of minimum rates of excise duty on fuel. On this basis, the ECMT was able to conclude that "market forces"—in the form of the right to tank tourism—"tend to limit the divergence of tax structures and levels between neighbours in an open economy" and "imply no need for maximum rates of tax" (p 21).[16]

36  At the same time, by acting as a disincentive to governments to raise the level of fuel duty, the right to tank tourism reduces the need for operators to exercise this right. Hence, the problem of tank tourism is, at present, limited in scale, although the precise extent of the problem is not known. Commissioner Bolkestein pointed to the case of Luxembourg with its relatively low excise rate on fuel—€253/1000 litres—and remarkably high fuel consumption per head of resident population, which is 6 times higher than in Denmark and almost 9 times higher than in Germany (Q1). But the example serves, among other things, to imply the limited scale of the problem: Luxembourg represents 1% of the population of the EU.

37  Nonetheless, the case of Luxembourg highlights the need for appropriate minimum rates of fuel duty—especially in the context of EU enlargement. Without a floor, some Member States might set off a 'race to the bottom', whereas others would seek to protect higher rates for environmental and other reasons. The pressures on the structures and levels of tax in such a scenario could generate significant distortions to competition. The requirement for reasonable minimum rates—represented by the increase in minimum rates via the Energy Tax Directive—should serve to avoid this possibility.

Other possible distortions of competition

38  The analysis above has focused on the complaint of distortions to competition in the international and domestic road haulage markets: quantitatively, these are the markets that matter most in the debate on fuel taxation. There is, however, a separate complaint of distortions to competition in the fuel retailing market caused by tank tourism and smuggling. For example, there is a well-documented problem of smuggling fuel across the border between Northern Ireland and the Irish Republic.[17] The Retail Motor Industry Federation said that the UK Government needed to revisit the issues raised in this complaint (p 35). But the Committee did not receive any suggestion that such issues need to be addressed by EU wide-harmonisation of excise duty rates. Hence, this aspect of competition has not been considered further in this report.

39  As stated in paragraph 10 above, the Commission's case for the second part of its proposal—establishing a common minimum rate for non-commercial diesel and petrol—is based on environmental grounds, and we discuss it below under that heading (see paragraphs 50-74). But we note here evidence from the FTA that suggests that the requisite de-coupling of "commercial" from "non-commercial" fuel could create a new distortion to competition in the domestic road haulage market: no less than 44% of the goods vehicles in the UK (190,000 out of 430,000) would fall into the "non-commercial" category and would consequently be burdened with a higher rate of duty.

9   Memorandum by Professor Alan McKinnon, Logistics Research Centre, Heriot-Watt University, Edinburgh (pp 29-31), and two supporting papers, "Haulier than Thou: An Assessment of the Road Haulage Industry's Grievances", Public Service Review, October, 2001, and Factors Affecting Competitiveness in the European Road Haulage Market, report prepared for the European Conference Ministers of Transport, January 2003 (and incorporated into Efficient Transport Taxes and Charges 2003, op. cit.). Back

10   ECMT, Efficient Transport Taxes and Charges, op. cit., p 45, emphasis added. Back

11   ibid., pp 45-47. Back

12   The Memorandum submitted by the Road Haulage Association seems to suggest (p 40) that this point is in dispute; the Committee does not consider that this is so. Back

13   Commission Explanatory Memorandum, p 6. See also Alan McKinnon, Factors Affecting Competitiveness in the European Road Haulage Market, op. cit., p 18. Back

14   Alan McKinnon, "Haulier than Thou", Public Service Review, op. cit. Back

15   cf. ECMT, Efficient Transport Taxes and Charges, OECD Publications, Paris 2000, p 46. Back

16   The main exception to this rule is the geographical barrier of the Channel, which protects the relatively high rates of duty in the UK. But, as shown above (paragraph 26 and Box 3), this is largely offset by lower levels of pre-tax costs, including the pre-tax cost of fuel. Back

17   cf. National Audit Office report HM Customs and Excise: The Misuse and Smuggling of Hydrocarbon Oils Report by the Comptroller and Auditor General (HC 614, Sessions 2001-02, 15 February 2002). See also two reports by the House of Commons Northern Ireland Affairs Committee: The Impact in Northern Ireland of Cross-Border Road Fuel Price Differentials (Third Report of Session 1998-99, HC 334); and The Impact in Northern Ireland of Cross-Border Road Fuel Price Differentials: Three Years On (First Report of Session 2002-03, 20 November 2002, HC 105-I). Back