What financial incentives are in place in London?
Londoners are already offered many incentives to use alternatives to private vehicles. In this chapter, we review the various financial incentives and disincentives currently in place in London.
Financial disincentives to own and drive private cars
Intrinsic costs of owning a car
Many of the costs associated with owning a car are not a direct result of policy intervention. In the first few years of ownership, the cost of purchasing the car is often one of the largest costs. But high purchase costs do not always disincentivise people, and instead can be part of a given car’s appeal, symbolic of an individual’s wealth. 90 per cent of new cars are purchased on finance, allowing people to spread this cost over time. 11 However, over time, the purchase costs of a car become less relevant. If they purchase a car outright, after the first year, many people won’t consider the purchase costs at all. Furthermore, some people plan to resell their car, so the sunk cost is perceived to be lower than the actual cost of a vehicle.
Fuel price and fuel duty
The primary use cost associated with driving is the cost of fuel. This is typically paid in lump sums and spread out over multiple journeys. Fuel prices themselves often fluctuate according to market value, with supply chains heavily influenced by global politics. For example, prices most recently surged in the summer of 2022, peaking at 48 per cent above the previous July. 12 As well as VAT, automotive fuel is subject to a fuel duty which is calculated per litre purchased. The number of people who drive is relatively inelastic in respect to fuel price in the short term and increases in price in 2022 have resulted in relatively little reduction in consumption.
But a New Economics Foundation analysis reveals that the decision to freeze fuel duty in 2023 could result in a 3.9 per cent increase in total CO2 from road emissions over the next year. 13
Fuel duty raises substantial revenue for the government – estimated at £25 billion in 2022-23. 14 But keeping the fuel duty unchanged since 2011 is estimated to cost the government £9 billion a year according to the Institute for Fiscal Studies. 15 A growing number of experts are calling for national road user charging to replace fuel duty in response to falling fuel duty revenue due to the increased number of EVs. 16 In addition, road user charging could address other negative effects from driving such as congestion – we discuss this further in the policy paper section.
Vehicle Exercise Duty (VED)
VED, known as “road tax”, can incentivise people to choose low, or zero, emission vehicles. When people purchase a new car, they pay a charge calculated according to the CO2 emissions of the vehicle, with low emission vehicles paying as little as £10 whilst the most emitting vehicles pay over £2,000. This does financially incentivise people to choose low emission vehicles, but compared to other European countries, the tax differential is quite small. 17 People are also unlikely to consider the different first year VED costs when purchasing a new vehicle. Only first year VED is emissions graded, so people purchasing second-hand vehicles are not incentivised by this measure.
At present, EVs pay no VED at all, which incentivises drivers to choose them. But the government has recently announced that from 2025, EVs will be subject to VED, albeit at a reduced rate. One of the reasons behind this change is that in its current form, VED is a regressive tax, with low earners carrying the greater burden. This is exacerbated by the fact that people in the lowest 20 per cent of household incomes are least likely to own a car in the cheapest registration tax bands (A-C). 18
Congestion Charge
In London, additional charges have been introduced to disincentivise driving. The Congestion Charge, which was first introduced in 2003, is now a flat £15 fee for car journeys in the central charging zone. At the time when the charge was introduced, then-mayor Ken Livingstone also invested heavily in increasing public transport provision, such as deploying 300 new buses on the first day of charging. In 2021/22, the charge raised £423 million of revenue for TfL, which is reinvested in public transport provision. 19
In many ways, the Congestion Charge has been a success. In the first two years, congestion in the zone was between 20 and 30 per cent less than before the scheme. But by 2007, journey times within the zone were found to be comparable to those prior to charging. 20 Despite its success, the Congestion Charge is perceived to be outdated, and many observers are calling for reform of the charge. 21
Ultra-Low Emission Zone (ULEZ) charge
The introduction of the ULEZ in 2019 is another example of a use charge to disincentivise car journeys. But unlike the Congestion Charge, which is a flat rate for all non-exempt vehicles, the ULEZ differentiates between high and low emission vehicles to encourage people to switch to greener vehicles.
Initially it covered the same area as the Congestion Charge, but it was expanded in 2021 to cover the inner London area (inside the North and South Circular roads) and plans are in place to expand the ULEZ to cover all of Greater London in August 2023. The impact report on the first expansion of the ULEZ found that a greater share of vehicles driving in the ULEZ area were cleaner than before the expansion. 22
94 per cent of vehicles met ULEZ standards on an average day, up from 87 per cent before the expansion and 39 per cent in 2017. As a result, NO2 concentrations in central London have been estimated to be 44 per cent lower than they would otherwise have been, whilst inner London’s levels are 20 per cent lower.
Car parking
The cost of parking a car at home is another financial disincentive to own a car. Whilst for people with off-street parking this cost is internalised into the cost of their home, many people in London pay for parking permits from their local authority. Analysis from the RAC Foundation found that 56 per cent of households in London don’t have any access to off-street parking, compared to just 32 per cent across the rest of England. 23 The London average for a residential parking permit for the year is approximately £100, 24 but the charges vary substantially across the city. In inner London (excluding City of London), the average annual cost of a permit for residents is £130 whilst in outer London, the average cost is just £82. 25
Many local authorities in London are using residential parking permits to incentivise owning greener vehicles by charging higher prices for more emitting vehicles. Typically, this is done by categorising vehicles into bands according to their emissions, but in some cases, such as in Kensington and Chelsea, the charge increases for every gram of CO2 emitted. 26
The strength of the financial disincentive also varies; some boroughs charge in the region of £500 more per year for the most emitting category of car compared to the least, whilst in others the difference can be as small as £25. Some local authorities have also introduced emission-based charging for short stay parking, which increases the cost for emitting vehicles on a per journey basis.
Yet several local authorities don’t use any emissions grading in either their residential permits or short stay parking. Partly this is due to political will; many local authorities without emissions graded schemes are located in outer London where there are higher levels of car ownership and so higher political stakes to introducing such a scheme.
Financial incentives to dispose of private cars
Scrappage schemes
Along with the ULEZ charge, TfL also introduced a scrappage scheme for business vehicles, private cars and motorcycles. The scrappage scheme allows eligible applicants to exchange their non-ULEZ-compliant car for a £2,000 grant. People who live in London and receive at least one of a number of means-tested income benefits or non-means-tested disability benefits are eligible for the scheme. A TfL evaluation report found that the ULEZ scrappage scheme has cost the Mayor a total of £61 million since 2019 and has removed 9,786 non-compliant cars from London’s streets. 27
Approximately one in three recipients of a scrappage scheme grant didn’t purchase a replacement car or motorcycle. But of the two in three who did, the majority purchased a new petrol or diesel car, and only 3 per cent purchased an EV. It is likely that this can be explained by the high costs of EVs compared to traditionally fuelled vehicles, and a smaller number of EVs in circulation in secondhand markets.
Financial incentives to use active and sustainable modes of transport
Purchasing a bike at a reduced price
In a TfL survey, 50 per cent of non-cyclists who were open to cycling reported that not being able to buy and maintain a bicycle was a barrier. 28 Reducing costs could remove this barrier to cycling.
There are already schemes in place to do this. The national Cycle to Work scheme allows employees to purchase a bike and accessories through a salary sacrifice scheme. The employee pays for the bike through monthly contributions that are taken from their payroll before tax – meaning that the availability costs are spread over time and are discounted through reduced tax payments. Yet there is limited evidence to show that this scheme is a success.
In 2017, it was estimated that cycle sales made through the scheme accounted for just 4 per cent of adult cycle sales across the UK despite most people in employment being eligible to use the scheme. 29 A 2016 survey suggested that most people who had participated in the scheme were either initially non-cyclists or occasional cyclists. 30
Whilst this scheme makes bicycles more financially attractive for people in employment, there are no incentives in place for people who are unemployed, self-employed or students. Low earners and employees from SMEs are often ineligible for the scheme either because their employers haven’t registered or because it would mean their salary would be below minimum wage. 31 Local authorities also introduced schemes to support people with this cost by providing people with a bike to try for a monthly fee. Once the purchase cost is covered, people can keep the bike. This scheme supports people by spreading the cost of purchasing a bike over several months.
Providing affordable secure storage space
For many people, a lack of suitable and safe bike parking is a barrier to switching to cycling. In London, many people don’t have space inside their homes to store a bike, and there is a shortage of secure bike parking on residential streets. Research from Fare City found that there are over 63,000 people on local authority waiting lists for secure hangar spaces and currently only 21,000 spaces in use. 32 This shortage doesn’t affect all Londoners equally; in a TfL survey, 47 per cent of low-income individuals reported that having nowhere secure to store a bike at home was a barrier to them cycling. 33 Providing bike storage isn’t directly a financial incentive, but some boroughs have subsidised secure bike storage space to remove this barrier.
The average cost of a cycle hangar space in London is £58 per year, which is lower than the average cost of car parking. 32 But for households of more than one person, the cost of parking multiple bikes can quickly add up to more than the price of space for a car. The cost of cycle parking space varies substantially across London. Boroughs with higher costs justify this with the argument that they are creating a financially sustainable scheme that will operate without any future capital boosts.
“What we are doing that I think a lot of other boroughs are not doing is we’re trying to create a sinking fund for the replacement and renewal of these hangars. Something that’s truly sustainable. My understanding of looking at other boroughs is that if you have a very low level of charge and it just pays for the administration, at some point you’re going to have to replace all these bike hangars, you’re going to need a fresh injection of capital” – Local authority officer
“We’ve got requests through the roof for these hangars. We would rather spend that money on making more spaces available for people than subsidising the ones that are there.” – Local authority officer
Whilst many of the local authority representatives interviewed admitted that the high cost of their cycle hangar spaces could be a barrier for Londoners on lower incomes, interviewees also highlighted the need to keep the cost relatively high to prevent “low-active” occupancy (i.e. having a bike parking space and not using it). Flexible management of cycle hangars, including a pay per month system and refund options, could be explored as an alternative way to address this low level of active occupancy. London boroughs could look at building internal capacity to manage cycle hangars to increase efficiency and lower the costs.
Shared transport
Choosing to cycle does not necessarily entail availability costs. Hire bikes, such as TfL’s cycle hire scheme, only charge per use. With Santander cycles, people can also choose to pay a monthly or annual fee, and can receive help with this from their employer. The subscription model can incentivise greater levels of cycling, as people want to feel they are getting their money’s worth.
Car clubs allow members to hire cars for just a few hours or days, and the cars are often used for trips where alternative forms of transport are either unsuitable or unavailable. A survey of car club members in London by CoMoUK found that 43 per cent of respondents used a club car for journeys to carry bulky items, and 35 per cent used one for journeys with no public transport alternative. 35 Car clubs also don’t incentivise frequent short journeys in the same way as owning a private car; most members in London use the service for five or fewer journeys each year.
Compared to personal ownership, car clubs can offer a cheaper alternative for accessing a car. Membership involves a monthly or annual subscription, with additional hire costs depending on the length of the journey. But many people aren’t aware of the cost savings that they could make by swapping to car club membership.
Furthermore, car club memberships can be used to financially incentivise people to give up their cars. In 2019/20, Camden trialled a “scrappage” scheme where residents were offered car club memberships in exchange for not renewing their residential parking permits. Whilst all 200 memberships were taken up, the long-term impact of the scheme is unknown.
Financial incentives to use public transport
Using public transport in London is relatively expensive. There are several ways that policymakers have reduced public transport fares in order to incentivise people to use it more. For example, the cap on Oyster and contactless payments over a week gives regular users more certainty about travel costs, making regular journeys such as commuting on public transport more attractive.
Discounted travel can also act as a financial incentive. TfL offers a range of photocards for young people, students and people over 60 to make public transport cheaper. Census data reveals that at least 31 per cent of Londoners are eligible for free public transport either because they are younger than 10 years old or older than 65 years old. 36 But the number of eligible Londoners is likely to be much higher than 31 per cent as other concessionary schemes exist (e.g. Veterans Oyster Card, TfL staff and TfL “plus one” perk). 37
Interviewees, especially those from outer London boroughs, mentioned the need to reduce fares to encourage more people to use public transport. But TfL is currently in a financial situation that makes it difficult to change fares. Furthermore, there is little clear evidence of modal shift with a marginal decrease in the cost of public transport fares. A report reviewing the effects of different measures to lower public transport fares found that these measures lead to new trips but don’t encourage modal shift. 38