Electric cars

The success of electric vehicles is a headache for the Treasury

The success of electric vehicles is a headache for the Treasury

When Rishi Sunak announced a temporary 5p per liter fuel tax cut last week spring statement, electric vehicles were probably not at the forefront of the Chancellor’s mind. It focused on the vast majority of road users who are experiencing “pains at the pumps” due to soaring gasoline prices. Yet the budgetary outlook that accompanies it the Office for Budget Responsibility, the independent watchdog, noted that more than one in 10 cars sold in the UK last year were electric; by 2027, he projected the proportion would rise to 59%, double his forecast just six months ago. Consumer appetite for electric vehicles has consistently outpaced OBR estimates.

This poses a headache for the public treasury due to the large revenue from fuel tax and vehicle excise duty, which owners of electric cars do not have to pay. Together they raise around £35bn a year. The OBR predicts that the higher share of electric car sales alone will reduce car tax revenue by £2.1bn by 2026-27. It also assumes that Sunak will be able to deliver on its promise to reverse the 5p fuel tax cut – which may well turn out to be overly optimistic.

The buoyant market for electric cars is in some ways a good problem to have. Increasing the uptake of electric vehicles is essential if the UK is to hope to meet its net zero targets. This is an acknowledgment of the success of the UK subsidy scheme and the industry’s ability to produce desirable vehicles. Yet even though electric vehicles now represent only a tiny percentage of cars on the road today, for a Chancellor who is fully focused on sustainable government spending, finding a replacement for the wasted fuel tax should be a priority.

One way to help balance the books could be to scrap the subsidy scheme, which has already been cut over the past decade and is now capped at a £1,500 subsidy on electric cars costing less than £32,000 – useful support for sales of electric vehicles. It would be reckless. The EV market is still in its early growth stages and government support to improve adoption will be warranted for some time to come.

The Commons transport select committee last month recommended considering road user feesing as a similar replacement for the fuel tax. This would involve monitoring all cars in the UK and charging them according to distance travelled, taking into account the type of vehicle used and congestion. Some economists like this idea as a way to charge motorists in proportion to the public cost of building and maintaining roads. However, as the committee warned, any road pricing mechanism should entirely replace fuel tax and vehicle excise duties rather than add to them, and should not cause motorists to pay more.

Imposing such a charge too early also risks discouraging the adoption of electric vehicles, whose users currently benefit from lower road taxes. This is why a broad-based carbon tax may ultimately be the most effective replacement for the fuel tax. It is fairer than a targeted car tax and sends an important signal to the market about the UK’s commitment to decarbonisation.

Implementing carbon taxes can be politically difficult, in part because governments have introduced rushed and complex schemes. They are easy to demonize by political opponents and vested interests.

The UK government, however, has some time and breathing space to plan wisely how to implement a carbon tax, and should use it. With a happy combination of government policy and efficient industry, the UK can plan for a world without fuel taxes, rather than risk being caught off guard by the success of electric vehicles.