The call for reform in the pricing of the use of roads has a long history (see Smeed 1964), with proposals to introduce various changes in the current pricing model, which has been defined historically by a series of fixed charges such as annual registration fees and an excise on fuel. The exception has been a number of cordon-based congestion charging schemes as in London, Stockholm, Gothenburg, Milan, Singapore, and Manhattan. Progress in Australia (and in most countries) has been frustrated by outright rejection from all political parties, especially at the State level. However, the political winds of change appear to be finally in favour of considering the current charging arrangements for road users, driven not by efficiency or even equity arguments, but rather the risk in the future of reduced fuel excise as more cars on the road are electric and hybrid.

The 2024 electric vehicle distance-based charge introduced in Victoria to recognise that such vehicles do not pay fuel excise taxes led to a high court challenge in which the outcome deemed it unconstitutional for a State to introduce such a charge which is the responsibility of the Federal government (through legislation amendment). This loss of fuel excise as a tax (not a charge) has whetted the appetite of the Federal Government to place road user charging on a round table agenda in August 2025. Road user charging (RUC) is now elevated as a topic right into the political sphere where any change will require such support, and it opens up an opportunity to not only consider the fuel excise issue per se but the broader agenda on road pricing reform.

For the first time, there is a political appetite to do something even if it is driven by a loss of fuel excise revenue which has never been earmarked back to roads but is a backbone revenue source for many Federal government initiatives. In this note, we consider a number of ways in which we can satisfy the political appetite while achieving much broader efficiency and equity objectives (in due course). It is important that we establish various ways to maintain a politically acceptable revenue stream from use of the roads and then branch out so see how we can align this with broader objectives to internalise the suite of externalities such as congestion, emissions, and local air pollution. The key is to please the political machine first and then work out future options.

The story begins with the current rate of fuel excise in Australia. In August 2025, the Australian fuel excise rate for petrol and diesel is 51.6 cents per litre, a rise from the previous 50.8 cents per litre, following a routine CPI-linked indexation that took effect from 4 August 2025. To meaningfully identify the contribution to this tax on users, we can start with the overall average car fuel efficiency and the average price of petrol in August 2025. We recognise, however, that some cars use diesel and that averages can be misleading; however, they do provide a framing for the start in seeing the likely magnitudes of price reform if the interest initially, at least, is returning the loss of fuel excise to the levels predicted if the car fleet remains 100 percent internal combustion engine (ICE0. We focus on passenger cars (new and used) and recognise that light commercial and heavy vehicles need to be given the same treatment but with different unit metrics.

The idea is not new and is motivated by a claimed concern over a loss of fuel excise from ICE vehicles. In Australia, the take up of electric passenger cars (ECs) is slow and small, but in the future the concern is real since fuel excise is a significant revenue stream used as Government sees fit (it is not earmarked back to roads). The interest in implementing a distance-based usage charge for all vehicles is now problematic at the State level given the high court decision that this can only be introduced by the Federal Govt according to the Australian Constitution. There may, however, still be scope for local incentives at a state level, Recent data from early 2024 and late 2024 indicates that the average new passenger car fuel efficiency was around 6.9 L/100km in 2023, with the entire passenger car fleet close to 10 L/100km. The average price of petrol in Australia during August 2025 has been reported at approximately 174.8 cents per litre for the last four weeks, and 162.9 cents per litre over the last 12 months, according to the Australian Institute of Petroleum (AIP). If we eliminated the fuel excise tax for all passenger cars (based on 10 litres/100k) but mindful of a primary goal to retain fuel excise revenue (as a pure taxing model) a distance-based charge (DBC) would need to be introduced on all kilometres at 5.16c/km (calculated as 0.29519*((10*174.8)/100)), where 0.29519 represents the proportion of the average fuel price that is fuel excise tax. This is on the basis of ensuring that all passenger cars (ICE, pure electric, hybrid) which include utes, contribute to the use of the roads, regardless of whether the agreed rate represents an efficient and fair price.

This formula, in general terms, is as follows: DBC rate equivalent to fuel excise tax= (excise in cents per litre/fuel price at the pump in cents per litre)*((fuel efficiency of vehicle *pump price of fuel)/100). Clearly, while the unit rate is valid for each kilometre, the overall annual revenue will decrease as the kilometres associated with ICEs decrease as they are replaced by EC and hybrid car kilometres. Interestingly, Hensher et al, (2025) report replacing a petrol/diesel car with an electric (hybrid or fully electric) car is likely to increase overall car use despite the environmental gains from electric cars¹. Government may not like the removal of fuel excise on ICE vehicles; however, leaving this for ECs can provide a starting unit rate to represent the equivalent fair charge for electric cars and the component of kilometres that use the battery cycle in hybrid cars. This is a useful calculation which sets an initial baseline for comparative tax rate equality across all passenger cars.

As vehicles switch out of the ICE environment, users can be advised of the new DBC they will have to pay, which could be an annual payment based on annual kilometre aligned with the DBC rate that ICE cars pay (a model proposed in NZ). For example, if the annual kilometres is 11,000, then using the 5.16/km figure, the annual excise tax for a pure electric car would be $576.6, paid at the same time as the cars registration is renewed. While we do not have an estimate of the proportion of kilometres of hybrid cars on the electric cycle, which could be half of the full electric cost excise tax given it varies significantly, the formula can be used to adjust the annual excise down for the electric cycle. This sum can be varied as a result on any other objectives such as a desire to encourage the purchase of electric cars, but that is a political decision shrouded by the revenue objective.

Without this uncomplicated starting position, there is doubt as to whether the political machine will be interested. Importantly, although a DBC can vary by vehicle fuel efficiency and fuel type, it is important to start with a simple metric like the fixed 51.6 c per litre regardless of location etc. Some issues to consider as we progress the new political opportunity to bring the pricing of our roads in line with revenue preservation (and growth), efficient use, and fairness are set out below. 5.16c/km for all passenger cars assumes no future change in annual VKM of cars, a rate that enables recovery of foregone fuel excise, and this is currently what every car user pays regardless of where they travel. If the DBC is simply used to replace fuel excise, then it achieves that single objective and applies to all ICE, electric and hybrid cars. It can, however, be used to differentiate traffic settings in terms of congestion, and one might want a different rate depending on average speed, varying by peak and off peak, and metro/regional/rural, as well as the emissions variation within ICEs (e.g., diesel-ethanol blends). Whatever rule and unit metric is adopted, this should make no one worse off in terms of what they pay out today, but it can open up an opportunity to vary the rate to delivery of other gaols such as reducing congestion (travel time savings), emissions and local air pollution. Hence the buy in needs to recognise the starting position as revenue neutral in terms of the taxing regime, but that add-ons can provide specific types of benefits that individual may wish to opt into. The best example is an adjustment upwards for peak metropolitan travel whereby car travellers can choose to continue in the peak or opt out into the off-peak, or another mode where feasible.

While explicitly linking a replaced fuel excise with a DBC has merit in broadening its intent, the decoupling from the fuel price at the pump may have different behavioural responses (including a perception that travel is now more expensive), although with onboard smart sensing technology (just like electronic tolling), the perception gap might converge. Another way of considering an appropriate mechanism to charge pure electric and hybrid cars while we wait for a re-pricing of all car usage as a DBC and a possibility of a reduced registration fees, is a 'solution' in which an electricity energy excise (EEE) is calculated on the charging for the ECs (including hybrids) as a kilowatt per hour fee, similar to a cents/litre fee for ICEs. Whether this is equivalent to the 5.16c/km is an empirical issue and requires knowledge of electricity prices and the various sources. In Sydney, as of August 2025, the average cost per kilometre for electricity when driving an electric vehicle is approximately $0.04 per km, based on grid electricity. This is based on an electricity rate of 33.7 cents per kWh; the cost to fully charge a standard-range EC (55kWh battery) of $21.32; an estimated range from a full charge of approximately 450 km (varying by model); resulting in a cost per km of $21.32 ÷ 450 km ≈ 4.7 cents/km. This aligns closely with the national average of $500.

¹ Hensher et al. (2021) evaluated the impact of a DBC of level identified in this opinion piece that showed that in 2041, with no EVs, that total daily fuel excise revenue is forecast to be $11,121,584 (or $11,244,721 if we remove fuel excise and add in a DBC), but when we include the predicted share on EVs in the mix (26.5%) and remove the fuel excise on all cars, daily revenue is $12,084,021.