What are the funding options for electric transport?

Prime Minister Boris Johnson confirmed in his 10-point plan that new petrol and diesel cars will be phased out by 2030. While this is very positive given that transport is the largest source of UK emissions[1], it intensifies the pressure on Treasury to develop a new road pricing model as transport shifts from petrol and diesel to electric (and hydrogen).

Taxes on motoring currently raises £40 billion a year for the Exchequer – around 5% of government revenue and 2% of national income[2]. The majority of this, at £28 billion, comes from fuel duty where motorists are charged 57.95 pence for each litre of petrol and diesel they buy. However, this figure has been frozen since March 2011. The VAT payable on this fuel duty raises an additional £5.7 billion, while around £6.5 billion comes from vehicle excise duty.

Figure 1 – Breakdown of motoring taxation for 2019-20 (IFS)

As passenger transport becomes largely electrified, this £40 billion a year in revenue will quickly disappear.

So how do you tax electricity for transport use?

Levy on household electricity bills

Research by Delta-EE shows that 71% of charge points will be installed in homes[3] by 2030. With the majority of charging taking place at home, a potential funding model could be to levy a tax on household electricity bills. However, this could be difficult to administer as it may be difficult to work out the different proportions of electricity consumption between vehicle charging and space heating. One method could be to estimate the annual level of electricity consumption for vehicle charging based on a typical household’s annual vehicle mileage. Assuming 1 kWh of electricity is consumed for every 3.5 miles, this suggests total electricity charging demand of 2,057 kWh (based on a households average vehicle mileage[4]). Assuming the current level fuel duty is applied (in kWh equivalent), this yields an annual tax bill of ~£126 per household. One drawback of this approach is that the annual tax bill is modelled on a set of static assumptions, is not dynamic and does not represent actual household behaviour.

National tax mile

Motorists could be charged via a road toll system (such as the M6 toll) or a “pay-as-you-drive” scheme. Vehicle users would be charged for every mile they consume. An exemption could be made for the first several thousand miles (e.g. 3,000) after which every mile above this threshold is charged at a specific rate. This idea of a national road pricing scheme was previously backed by the Labour Government, under Tony Blair, but was later abandoned after petitions against the plan reached just under 2 million. However, recent research by RAC[5] found that around 40% of motorists believe that some form of ‘pay-per-mile’ approach would be fairer than the current system of fuel duty. Also, just under half of respondents (49%) agree that the more someone drives, the more they should pay in tax.

Between now and 2030 the uptake of electric vehicles is only going to increase. This means the Government needs to rethink how it taxes motoring before the revenue disappears and expectations of low-tax motoring becomes ingrained. The heart of this will be trying to find the best balance between taxing electric transport and simultaneously encouraging  uptake.

Original blog  by Faisal Haroon

Media contact: Christina Thompson-Yates

[email protected]


Data table

[1] 2020 UK greenhouse gas emissions, provisional figures (2021) – BEIS

[2] A roadmap for motoring taxation (2019) – Institute for Fiscal Studies

[3] UK EV chargepoint market set for 29% annual growth despite Covid-19 impact (2020) – Delta EE

[4] Annual mileage of cars by ownership and trip purpose (2020) – Department for Transport

[5] New ‘pay-as-you-drive’ road tax to cover £40 billion tax shortfall considered (2020) – RAC

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