New taxes? How governments might replace falling fuel duty

Vehicle electrification will leave a massive hole in government tax revenues unless an alternative way to tax motorists is found.

European governments are staring down the barrel of a gun as vehicle electrification rapidly erodes tax revenues from petrol and diesel. The potentially massive shortfall in income raises the question of how countries will tax electric vehicles in future, and how these policies will impact fleets.

A newly-published forecast by the UK’s Office for Budget Responsibility (OBR), which provides independent forecasts and analysis of public finances to the UK Government, reports that the complete transition of all UK vehicles to battery power (with a ban on the sale of petrol and diesel vehicles from 2030): “will result in a revenue loss of 1.5 per cent of GDP (equivalent to £31 billion [€35.8] in today’s terms).”

This serious financial loss represents the fiscal cost of delivering net zero emissions, and while the UK Government has already moved to introduce annual road tax for EVs from 2025, introducing duty on electricity is far more problematic because so many drivers charge at home.

In fact, a campaign to remove VAT from public charging, in order to bring it in line with home charging, is gathering momentum.

Billions of euros at risk

Across Europe, Governments are facing similar pressures. Figures published by the European Commission show that Sweden raises more than €40 billion per year from fuel and lubricant taxes; Germany gathers almost €38 billion annually from similar taxes, and Italy and France are close behind.

According to ACEA, the vehicle manufacturer’s association, motor vehicles generate almost €375 billion in taxes per year for major European governments, a colossal sum, much of which is at risk of disappearing over the next 20 years.

As a result, discussions are starting about how the use of electric vehicles can be taxed most fairly, with suggestions including:

• Duty on EV charging

This may be possible for public charging, but would be contentious because it would disadvantage drivers who cannot charge at home or work. And at home and the workplace, authorities have no way to identify whether a kilowatt of electricity has been used to charge a vehicle, power a light or heat an office.

• Road pricing and tolls

This scenario would charge vehicles for every kilometre driven, with different fees depending on the size and weight of a vehicle. Kilometres could be measured by roadside cameras, smartphone apps, annual odometer readings, or in real-time by connected vehicles themselves. The Social Market Foundation advocates a road-pricing regime with a flat rate for each kilometre driven and an annual ‘free’ kilometres allowance for every driver, protecting low mileage drivers and passing the financial burden to higher mileage drivers, a policy that would impact fleets more heavily (in the same way that fuel duty impacts vehicle owners that use the most fuel).

• Variable road pricing

This more sophisticated approach would charge higher fees per kilometre at peak times and on busier roads in a bid to reduce congestion. This could provide fleets with an incentive to change working hours and delivery times in order to take advantage of lower road pricing charges. It would also lead to a greater focus on fleet route planning to find the optimum balance between the speed and cost of a journey.

According to the Institution of Civil Engineers: “Pay as you go for roads could encourage more efficient use of roads and could support efforts to reduce congestion. It would encourage road users to think of a per journey cost and would incentivise more people to consider modal shift, vehicle sharing or the necessity of the journey.

Policy makers would also have to be sensitive to the requirements of rural communities that are not served by public transport, to avoid their car dependency being unfairly disadvantaged by a pay-as-you-go system.

• Fuel duty and road pricing

As an interim measure, governments could retain fuel duties for legacy internal combustion engine vehicles, while introducing road pricing for EVs. Given that the cheaper price of electricity per kilometre, compared to diesel, is an important element of the business case for electrification, this approach would weaken the TCO of battery-powered vehicles during the transition phase of internal combustion engines to electric motors.

Fuel duty is a relatively efficient tax for governments to collect and vehicle owners to pay, and governments will need to ensure that any road pricing solution is equally efficient to administer and use.

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