The Royal Commission on Pollution: Business warns of price increases as costs are passed on

The Royal Commission's recommendations would raise costs, lead to price increases for consumers and reduce British competitiveness, according to businesses. While industrialists agreed that the transport system must be environmentally sustainable, many were horrified by proposals which envisage petrol costing pounds 5 a gallon by 2005.

The report says higher fuel duty would cut profits and employment in car and component manufacturers and hit road hauliers, but there would be more jobs in public transport. It also argues that the impact on prices would not be large. Although transport costs account for about one-tenth of final prices, fuel makes up only a fraction of total transport costs and represents a quarter of the cost of running a car for the average driver.

The commission calls for subsidies for manufacturers who switch from road movement of bulk goods to inland waterways or coastal shipping. It wants more grants awarded to encourage a shift from road to rail and sets a target for trebling the railways' share of freight from 6.5 per cent last year to 20 per cent in 2010.

Most businesses saw little scope for switching from road haulage to rail and water transport. John Guttridge of the Freight Transport Asssociation said modern manufacturers needed the flexibility and wide coverage road freight provided. 'We're not going to see a return of the heavy industry and coal mining which favoured rail,' he said.

Airlines said that if they lost their exemption from tax on fuel, it would seriously reduce their ability to compete against overseas carriers. British Airways said fuel made up 11 per cent of its costs and any tax would be fully passed on to customers.

The Confederation of British Industry argued that halving the spending on the roads programme would increase congestion and damage competitiveness.

Howard Davies, its director-general, said: 'The fear is that the short, sharp, shock treatment proposed by the commission will in the medium term make road transport in the UK very expensive but offer little in terms of realistic alternative ways for individuals to travel and for businesses to transport their goods and services.'

The CBI argued that the Government should bring Britain's infrastructure up to the same standard as in other European countries to aid competitiveness.

Mr Davies said: 'Although our main competitors in Europe face similar environmental concerns, they are still planning improvements to their road networks.'

The car industry did not expect higher fuel costs alone to cut demand, but was critical of the targets for improved efficiency. Geoff Whalen, deputy chairman of Peugot, said a 10 per cent improvement in fuel efficiency would be possible by the end of the decade, but a 40 per cent improvement by 2005 was not feasible.

The commission argues that tax revenue from road users may not be covering the total bill for society. The real costs of road transport in Britain, including damage due to air pollution, climate change, noise and accidents, is running at between pounds 10bn and pounds 20bn a year. Total tax revenue from road vehicles at pounds 20.4bn a year equals this upper estimate, but it also has to cover the pounds 6.9bn annual spending on roads.