When Rishi Sunak announced a temporary cut of 5p a liter in fuel duty in last week’s Spring Statement, electric vehicles were probably not at the front of the chancellor’s mind. He was focusing on the vast majority of road users who experience “pain at the pump” from spiralling petrol costs. Yet the accompanying fiscal outlook from 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, it forecast the proportion would rise to 59 per cent – double its forecast only six months ago. Consumer appetite for electric vehicles has consistently run ahead of the OBR’s estimates.
This poses a headache for the exchequer because of the importance of revenues from fuel duty and vehicle excise duty, neither of which electric car owners have to pay. Together, they raise about £ 35bn a year. The OBR forecasts the higher share of electric car sales alone will reduce motoring tax revenues by £ 2.1bn by 2026-27. It also assumes Sunak will be able to keep his promise to reverse the 5p cut in fuel duty – which may well prove over-optimistic.
The buoyant market for electric cars is in some ways a good problem to have. Increased electric vehicle uptake is vital to UK hopes of meeting its net zero targets. It is an endorsement of the success of the UK’s subsidy regime, and the industry’s ability to produce desirable vehicles. Yet even though electric vehicles today make up only a tiny percentage of cars on the road, for a chancellor with an ironclad focus on sustainable government spending finding a replacement for lost fuel duty should be a priority.
One way to help balance the books might be to remove the subsidy regime, which has already been scaled back over the past decade and is now capped at a £ 1,500 grant on electric cars costing less than £ 32,000 – helpful support for EV sales. This would be foolhardy. The EV market is still in the nascent stages of growth, and government support to improve uptake will be warranted for some time yet.
The Commons transport select committee last month recommended considering road user charging as a like-for like replacement for fuel duty. This would involve monitoring all cars in the UK and charging according to the distance they drive, factoring in the type of vehicle used, and congestion. Some economists like this idea as a way of charging motorists proportionately for the public cost of building and maintaining roads. As the committee cautioned, however, any road charging mechanism should entirely replace fuel duty and vehicle excise duty rather than being added to them, and should not result in motorists paying more.
Imposing such a charge too early also risks disincentivizing take-up of EVs, whose users currently benefit from lower road-related taxes. This is why a broad-based carbon tax may ultimately be the most efficient replacement to fuel duty. It is fairer than a tax targeted narrowly at cars, and sends an important market signal about the UK commitment to decarbonisation.
Implementation of carbon taxes can be politically fraught, 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 sensibly for how to bring about a carbon tax, and should use it. Thanks to a happy combination of government policy and an effective industry, the UK can plan for a world without fuel duty, rather than risk being caught cold by the success of electric vehicles.