The Department for Transport last week launched a consultation paper on reform of the Bus Service Operators' Grant in England, which enables bus operators to claim back tax on fuel. The grant, formerly known as Fuel Duty Rebate, is worth more than £400m-a-year to the industry.

In the short term, reform of BSOG could see the mechanism linked to greater fuel efficiency and improved emissions from vehicles. In the longer term, the government is considering sweeping reforms that could include devolving the management of the regime to local authorities or introducing a payment per passenger carried.

Commenting on the move, transport minister Ruth Kelly told a PTEG parliamentary reception last week that a more effective mechanism for subsidising bus operators was now imperative. "We're trying to open up the possibilities to reform how bus services work for the passenger, by using the money available to the most effective value," she said.

The DfT's consultation document explains that reforms to BSOG would bring operator payments into line with wider government objectives in tackling climate change. Operators currently receive a rebate on 82% of the fuel duty they pay when purchasing fuel. Payments in England this year are expected to reach £413m, which equates to 8.7p per passenger carried.

The government admits that BSOG would appear to offer good value for money to the tax payer, but claims that there is a case for reform. The consultation paper states: "BSOG is poorly targeted particularly on environmental outcomes, suggesting that alternative subsidy arrangements could more effectively deliver objectives and provide higher value for money."

The document adds that at present BSOG does not encourage operators to invest in more fuel efficient or environmentally friendly vehicles, creating problems with wider objectives to cut C02 emissions.

Among short-term proposals for reform are:

* Capping BSOG at a minimum fuel-efficiency level. Operators meeting a certain level of fuel efficiency would receive a full BSOG payment, but those failing to meet the target would only receive a payment based on the fuel they would have used had they met the target;

* Rewarding operators who move to more fuel efficient, low carbon vehicles such as hybrid buses, perhaps by increasing BSOG payments on these vehicles to 100% of fuel duty;

* Devolving payments to areas undertaking Quality Contracts. This would include London, with TfL taking over payment to operators in the capital;

* Tiered rates of BSOG. This would reward operators who invest in technology such as smartcards and Automatic Vehicle Location;

* Payment of BSOG in arrears. At present operators are paid on the basis of their fuel and mileage estimates for the year ahead. DfT auditors have already recommended a move to paying operators this way to end the practice of a small number of operators ending up in debt to the DfT.

In the long term, the document's proposals include devolving BSOG support to local authorities. The DfT says this could lead to "big efficiency wins". It also ponders a move to a per passenger payment. Although this would be a radical step in the way BSOG operates, it would allow the subsidy to be directly targeted at growing bus use. However, the document admits that any move to this payment system could result in significant disruption and difficulty without the widespread introduction of smartcard ticketing technology.

The plans were broadly welcomed by PTEG chair Neil Scales. "We are pleased to see that at long last some far reaching reforms are to be made to this outdated and environmentally indefensible subsidy regime," he said.

"The consultation document makes some sensible proposals for short term reforms to BSOG while raising some big questions about how, in the long term, the entire basis on which Britain's bus services are subsidised could be reformed."

He continued: "It's good that the government is thinking big about buses - specially as with every year that passes the public sector picks up more of the tab for what is still, nominally, a free market outside London. This is recognised in the proposals that the subsidy regime could be entirely devolved to local authorities - with or without the introduction of Quality Contracts."