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Govenment mulls tax hikes to fund electric vehicle transition

Taxes could rise to account for the loss of fossil fuel tax as electric vehicles become more widely used, according to a new report from The Treasury. 

Reviewing the UK’s progress so far as it seeks to become net-zero by 2050, the new interim report discusses the costs associated with decarbonising various industries and sectors for all key stakeholders.

In doing so, the report sheds light on how the government might seek to recuperate some of the revenue lost during the mass switch to electric vehicles, which will prompt a sharp drop in tax paid on fossil fuels (petrol and diesel). 

“Revenues from taxes on the consumption of fossil fuels and from emissions-intensive industries will decline during the transition, for example, as petrol cars are replaced by electric vehicles.

“Over time the government will need to consider how to offset these lost tax revenues – whether through adjustments to other taxes or reductions in government spending – so that the UK can reach net zero while maintaining the long-term health of the public finances.”

While not confirming any specific area that might see a tax hike, this statement serves as acknowledgement of a significant barrier to EV adoption; that it will eradicate a substantial revenue stream for the UK government. It has previously been suggested that the government could implement a tax on electricity specifically used to charge electric vehicles, hiking charging costs as a means of recovering the lost fuel duty.

Fuel duty currently stands at 57.95 pence per litre of petrol or diesel, and estimates suggest that switching en masse to much cheaper electricity will bring about a £30bn loss to the national economy. 

The report also acknowledges obstacles to zero-emission vehicle (ZEV) adoption from the point of view of the public: “There is an additional dynamic market failure whereby a lack of adequate charging infrastructure may present a barrier to uptake of ZEVs, but the fact that enough ZEVs are required to be in use to make charging infrastructure profitable may prevent the infrastructure being delivered. 

“There are other static non-price market failures that also present a barrier to adoption of these vehicles: misinformation about range and environmental impact of batteries; inertia; and liquidity (up-front affordability) constraints.“

The UK’s electric vehicle charging network is widely acknowledged to be ill-prepared for a sharp rise in the amount of plug-in cars on the roads. Earlier this year, the government pledged to double its investment in improving the infrastructure, before announcing that the sale of new petrol and diesel-fuelled cars will be banned from 2030 onwards. 

Other revenue-boosting measures proposed recently include a charge on non-London residents driving into the city, which mayor Sadiq Khan said will compensate for Transport for London’s funding shortfall and unequal distribution of road tax across the city’s motorists. 

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