From our ‘Thinking outside the box’ series, Professor John Stanley explores why Australia’s reliance on fuel taxes is no longer fit for purpose as vehicles electrify. He outlines a shift to distance-based road pricing that reflects road wear, emissions and congestion, showing how modest congestion and carbon charges could improve efficiency, support fairer outcomes, and help fund better public and active transport.

Charging for road use in Australia is largely based on fuel taxation, a Commonwealth Government impost, with additional road related charges levied by state governments for purposes such as vehicle registration and driver licensing. These state charges are fixed charges, not use-related. States also levy one-off stamp duties on vehicle purchase but these are not related to road use charge. In addition, some states levy a parking charge in central areas as a proxy for congestion pricing. Local government road spending is largely funded from rate revenue and from grants from higher governments (and developers).

Commonwealth fuel excise totals around $A17b, with about $A15b being reinvested in land transport in 2024-25 (AAA nd).  As electrification of the vehicle fleet becomes more pervasive, fuel tax revenues are falling. This leads to a requirement to look for other ways of raising revenue to help fund road improvements. Total road expenditure is around $40b, with states and territories having the main responsibilities for road expenditure decisions and relying partly on Commonwealth funds to pay for this work (an example of vertical fiscal imbalance).

Economic theory says that, for an efficient road pricing system, road users should be confronted with the marginal social costs attributable to their road use. Simple arithmetic suggests that this will require a substantial change in how Australian road use is charged. Charges would be set to cover road damage costs, congestion costs plus other external costs of road use, which would include GHG emissions, air pollution, noise and that part of accident costs not met by road-user insurance contributions.

Order of magnitude numbers indicate that total annual costs of Australian road use sum to around $75 billion, comprising road spending ~$35b (excluding local authority road costs covered from rate sources), congestion costs (deadweight loss) ~$25b (BITRE 2016), accident costs not covered by insurance payments maybe $10b, GHG emissions costs ~$5b and air pollution + noise costs ~$1-2b. Costs for damage to ecosystems should also be added to this total.

Road spending of around $40b annually is thus only about half the total social cost attributable to road use. In consequence, seeking to cover all the societal costs of road use would require substantial increases in charges. For example, Stanley and Hensher (2017) suggested that, if fuel taxes were to be used to recover the societal costs of road use, optimal prices (based on marginal social costs) would have required fuel taxes to increase by over 50%.

The expected political unpopularity of major increases in road user charges often leads to arguments for revenue-neutral road pricing reform, with a focus on shifting all charges to a use-base. This would provide better pricing signals for efficient road use than the current charging arrangements, where only some of the charges are use-based, but would still be well short of what would be required to make road users fully accountable for their costs.

By way of illustration, the Institution of Engineers Australia (2025) has recently argued for a revenue neutral scheme in Australia, which largely mirrors what New Zealand is in the process of implementing, with charges based on three cost components:

1. a base layer, which charges for road use on a per kilometre basis, with the relevant charge scaled to reflect vehicle weight. Heavy vehicles would pay considerably more than light vehicles, as they do under current Australian heavy vehicle road use charging, because road damage is seen to increase with the fourth power of axle mass. NZ petrol-fuelled light vehicles currently pay fuel excise at around NZ77c/L with diesels and EVs, instead, paying 7.6c/km for road use. All NZ vehicles will migrate to a distance-based road use charge in 2027
2. an emissions layer, which charges for GHG emissions (and could, in principle, also include a charge for air pollution), again based on vehicle weight but with exemptions for electric vehicles. New Zealand charges light petrol vehicles 14c/L (New Zealand cxurrency) as an Emissions Trading Scheme levy, covering GHG emissions, which converts to about (NZ)1.2-1.3c/km, on average, for light vehicles
3. a congestion layer comprising time- and location-based charges to manage peak urban road demand. Time of travel charging can be introduced in NZ from 2027, at a local level. Victoria and NSW both have parking levies in some central/inner areas, as a proxy congestion charge, raising a few hundred million dollars annually in total. These Australian charges would presumably disappear if a congestion charging scheme was able to be applied in all Capital Cities.

Light petrol-fuelled vehicles in NZ, for example, would be currently paying around 9c/km for their road use, through fuel charges and the emissions charge, with EVs avoiding the emissions charge but paying a distance-based charge for road use.

Institution of Engineers (2025) does not suggest particular charge levels for any of these three layers, to achieve its intended revenue neutral outcome for Australian road use charging. However, the scale of societal aggregate costs attributable to road use noted above (adding to >$75b) suggests that a wide range of possible pricing combinations is possible.

Australian Governments spent ~$38b on roads in 2022-23. After deducting ~$4b raised from heavy vehicles, where a form of mass-distance charging has existed in Australia for over 30 years, and deducting another ~$4 b for local government road spending that is appropriately funded by rate revenue, a revenue-neutral road user charging scheme would need to raise around $30b, in broad terms (in 2022-23 prices).

For simplicity, the following analysis assumes that all this revenue is to be raised from light vehicles. Heavy vehicles perform around 10% of total Australian vehicle kilometres, so spreading the target funding levels over all VKMs would mean light vehicle charges around 10% less than calculated herein.

Model 1 in Table 1 shows that if $30B was to be raised solely by a distance-based road use charge on light vehicles, an average charge of ~12.8c/vkm would be needed. However, if the NZ approach was to be taken, then a charge for road damage plus GHG emissions would be raised, which should be an easy place to start reforming road pricing, to provide better pricing signals for efficient road use. To give incentives to reduce GHG emissions, there is a solid argument to say that the full cost of GHG emissions should be priced into road charges.

Using a shadow price of carbon of $A70/tonne (Quiggan 2024) and an average emissions rate from the Australian light vehicle fleet of 193.7g/km (NTC 2024), an average emissions charge for light vehicles of ~1.4c/km is implied, if all light vehicles were to pay this charge. However, electric vehicles should pay no charge and hybrids should get a discount, recognizing better carbon emission performance. Petrol and diesel fuelled vehicles accounted for 96.3% of the Australian vehicle fleet as at January 2024, so simplicity suggests that the charge rate of ~1.4c/vkm can be used to approximate carbon charge levels for all light vehicles that would be subject to this charge, within a revenue neutral regime.

This charge rate is slightly higher than the current NZ level. If all petrol/diesel light vkms paid this carbon price sum the total raised would be ~$3.6b. However, heavier vehicles need to pay more, because of higher emissions, with the total revenue raised from the emissions charge needing to be ~$5b (75mt of emissions at $70/t). EVs would not pay this charge component.

That leaves around $25b to be raised by a road use charge on light vehicles, for revenue neutrality in Model 2 (Table 1), requiring an average charge rate of ~10.6c/km. Adding this to the emissions charge (~1.4c/vkm) suggests an average (revenue neutral) charge rate of ~12c/km for most light vehicles, with EVs paying ~10.6cv/vkm in this pricing model.  The Total charge (12c/vkm charge) on most light vehicles (non-EVs) in Model 2 is less than in Model 1 because heavy vehicles need to carry some of the Model 2 carbon charge.

Congestion costs are the wildcard, because they are so significant in total, at around $25b annually for Australia’s Capital Cities (in a projection by BITRE 2015). Any significant contribution from congestion charges in a revenue neutral setting will increase urban road use charges and reduce charges in rural/regional areas, as they should, the scale of impact depending on the revenue contribution sought from the congestion charge.

New York’s new cordon-based charging scheme is estimated to raise ~$US500m a year in its early years, or around $A750m. London’s annual congestion charge revenue is of a similar magnitude, suggesting that perhaps $A2 billion nationally might be the maximum that could be countenanced in Australia, even though congestion deadweight costs have been estimated to be >10+ times this scale. NSW and Victorias currently levy congestion charges on inner area parking, raising a few hundred million dollars annually

Allowing for a very modest $2b to be raised from congestion charges and another $5b from emissions charges, would leave ~$23b to be recovered from the base (road use charge) layer charge across all light vehicles. Model 3 in Table 1 shows that recovering $2b from a congestion charge across all Capital City vkms (143bvkms in 2023) would require an average congestion charge rate of ~1.4c/vkm in Capital Cities, with no charge in rural/regional areas. 

That would take the average Capital City charge for a light petrol vehicle to around 12.6c/vkm, comprised of ~9.8c/vkm for the road charge (to raise ~$23b), 1.4c/km for carbon emissions and 1.4c/km for congestion. However, congestion (or time of use) charging should really be focused on the most densely used part of road networks at peak time, rather than being spread across the whole city, so charges in inner areas, for example, should be considerably higher than implied in these average numbers, to promote more efficient road use.

A more heroic, but politically challenging, approach would be to use the emissions and congestion charge revenues to increase the total revenue pool beyond revenue neutrality, and hypothecate the additional revenues (~$7b) to improve travel modes with lower societal costs, such as public transport and active travel, and to improve the quality of local places.

This would send stronger price signals for behavioural changes in favour of using less polluting modes and help fund improved transport opportunities in transport-disadvantaged locations, where people are more likely to be adversely impacted by higher prices (e.g., because they have fewer alternatives to car use). This model assumes, like the others, that the core road program is sustainable in triple bottom line terms, which should be demonstrated through CBA.

Model 4 thus seeks to raise $37b, with $30b from the road charge to cover road costs (plus the separate heavy vehicles road charge/costs), $5b to compensate for carbon emissions costs and $2b to compensate for urban congestion. Average light vehicle charges per km would be ~12.8c/vkm for the road use charge plus ~1.4c/vkm for emissions (exc. EVs) and ~1.4c/km for congestion, totalling ~15.6c/km in Capital Cities. EVs outside capital cities would pay only 12.8c/km. These are only ballpark figures but they provide a basis for a conversation about policy options.

The more road users are expected to pay for the societal costs attributable to their road use, the higher the price of urban road use, in particular, that should be expected, if economic efficiency is to be improved. Urban areas are where external costs of road use are highest, especially congestion costs. The scale of absolute societal costs of road use suggests that revenue neutrality is too soft a charging option and that more should be done to drive behavioural changes in the desired directions, towards lower levels of VKT and cleaner VKTs.

Recovering road costs in a revenue neutral way, from a road use charge, and then adding road-related GHG emissions costs (~$5b), based on a shadow carbon price, plus <10% of estimated congestion costs (~$2b), would provide a way of generating revenue of around $7b annually to improve opportunities for non-car-based travel and improve the quality of place, such that the demand for VKMs of inefficient car travel is reduced.

Such improvements can be positively designed to deliver improved transport/place equity, such as by substantially improving public transport opportunities and place/making in outer urban growth areas and in parts of inner/middle cities and regions. Ignoring this opportunity only tends to continue encouraging excessive levels of road use.

Difficulties of implementing congestion pricing schemes underlines the importance of an extensive community consultation in any city contemplating reform of road pricing arrangements. Stanley et al. (2023) argue that this is likely to require a one- or two-year community consultation, covering such matters as:

• why an externality-reflective road pricing scheme might be needed
• alternative means of achieving the same policy purposes
• how a road pricing scheme might be implemented
• identification of prospective winners and losers
• what will be done to assist losers (e.g., improved PT services, which should be in place before charges are levied for costs such as congestion, as occurred in London)
• privacy protections
• whether, and in what ways, public transport pricing might change if road pricing is reformed (pricing road use to better reflect its costs reduces the case for subsidising public transport)
• ways of shaping a scheme to make it most acceptable to most people.

It is noteworthy that some congestion pricing schemes have been implemented without majority support but have achieved such support after operation. This draws attention to political leaders being prepared to take what Yes Minister might call a courageous decision!