Electric vehicles: what will happen to fuel duty revenues?

Electric vehicle use will impact fuel duty revenue

An issue that often arises when discussing a transition to electric vehicle use is fuel duty revenues, and how and whether governments will enforce new taxes to replace them.

How much revenue does fuel tax generate, and how long would it take for UK fuel duty revenue to reach zero?

The revenue generated by fuel tax in the UK currently stands at around £27.6bn, however, the first point to understand here is that this will not be a cliff-edge, with a dramatic £30bn hole suddenly appearing in the UK government’s budget.

Even if the sale of conventional internal combustion engines was banned tomorrow, 22 years ahead of the proposed ban, it would take over twelve years for all petrol and diesel cars to be replaced and fuel duty to erode to near zero. This is because we only replace around 2.5 million cars of the 30 million cars in the UK vehicle fleet each year.

Second, passenger cars do not account for all UK fuel duty revenues, since fuel duty is applied to all road fuel sold. Vans and HGVs contribute a large part of this revenue and the technologies required to reduce carbon emissions and fuel consumption from heavy goods vehicles are still relatively nascent. We are still a long way off fleets of electric trucks and even efficiency improvements are yet to be mandated in Europe.

Third. Inflation matters. The importance of fuel duty to government finances will erode in real terms unless the tax rate is increased (a policy that has proven to be so highly unpopular that previous Chancellor’s Budget announcements to freeze fuel duty rates were met with whoops and cheers in the House of Commons).

In contrast, VAT and income taxes are defined in relative terms and so increase in line with price inflation and wage inflation, respectively. Moreover, unlike fuel duty, VAT and income taxes are expected to grow in real terms as the economy grows.

How could the government go about replacing fuel duty revenue?

If we accept that we need to meet our legally binding climate goals, an inevitable consequence is that fuel duty receipts will eventually disappear.

Policy-makers have a choice in how they manage this budget transition. They could simply let fuel duty revenues erode slowly and raise other taxes as necessary, factoring in the political and economic conditions facing them. Indeed, our analysis has shown that the missing fuel duty is mostly, and in some cases fully, offset by the wider net economic benefits of a transition to low carbon cars and the huge savings in imported oil that that entails.

However, it seems much more likely that government will either increase fuel duty or introduce new taxes for motorists. The simplest option would be to increase the rate of fuel duty, perhaps at least in line with inflation. This option has many advantages such as (1) incentivising consumers to buy cleaner cars; (2) dis-incentivising the use of the most polluting cars, vans and HGVs; and (3) reducing the burden of increasing taxes on income, employment or consumption.

Could road pricing replace fuel duty?

A better option for the longer term could be to introduce road pricing. Road pricing offers both an option to replace falling fuel duties and has the added benefit of discouraging road travel and reducing congestion to grid-locked urban areas.

Ultimately, the road to ultra-low emissions vehicles will be long and difficult, budget concerns represent just a small pot hole on that road that can be easily filled.

Philip Summerton Managing Director ps@camecon.com

3 Comments

  • David Hughes
    5th October 2017 | 11:24 am5/10/2017

    There are a few comments I would like to make on this analysis
    First the promotion of EVs presumably is to reduce CO2e emissions. A Nissan Leaf emits about 90g/km but does not provide any heat and has a limited range. While this may improve in the future there are many traditional cars that are below 100g/km and with the introduction of light weight materials including carbon fiber and aluminum it is quite possible that the emissions could drop to 50g/km if this sector of the car manufacturing industry gets the right signal.
    By increasing excise duty this sector of car manufacturing will be disensentivised and EVs will be the only show in town in spite of them having higher emissions per km. Adding EVs to the grid will also be hugely challenging and will de-leverage the renewables already on the grid which will actually increase the carbon intensity of the grid.

    What Government should do is to set an emissions standard e.g. 90g/km and to indicate that it will be reduced year on year in line with Paris or other world wide targets. It will then be up to the industry to respond with the best way of doing this.
    Picking technologies distorts the market. The role of Government is to set the standard and performance not to pick the technology.

    • john Vickers
      2nd May 2018 | 9:10 pm2/5/2018

      All that will happen is this. The government are pushing so hard for the 2020 smart metre roll out and the energy companies will become fuel duty tax collectors via smart metres. The smart metre will know When a car is plugged in and charge the fuel duty accordingly. In the end to charge an empty battery will be same the same as filling up good fuel efficient car. A Porsche or similar high end brand car will cost more as the metre and car will tell government they are electric but less efficient.
      No way the government will lose £28 billion in tax to electric cars.
      Simple

  • T D Russell
    2nd July 2019 | 2:56 pm2/7/2019

    I still haven’t seen any projections as to how people in mass population buildings(block of flats) are ever going to be able to charge these “Holy Grail” cars of the future? Its going to be difficult enough in a normal street, with someone nicking your parking spot, how would you recharge then? When will the UK have enough electrical power generation to implement these changes, our latest nuclear power station is 20YEARS away.

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