Treasury says switch to electric cars will leave a hole in tax revenues

The Treasury has said it must consider how to offset a fiscal black hole from lost tax income when drivers transition to electric vehicles in its latest report.

It said it will be forced to increase other taxes or cut funding for services to compensate for the loss in taxes on polluting cars as well as fuel duty. 

The report comes admit reports that Rishi Sunak is reportedly in favour of a ‘road pricing’ scheme, which could see motorists charged for every mile they drive.

In its Net Zero Review Interim Report, it said: ‘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.’

Boris Johnson has already outlined his plans to outlaw the sale of new petrol and diesel cars from 2030, triggering a more dramatic switch to battery-powered cars. 

While this shift will undoubtedly help the Government achieve its green targets, officials have long been aware that the switch to plug-in cars will result in future losses of £40billion in revenue from drivers.

Vehicle and Excise Duty paid by car owners is currently based on the the CO2 emissions output of their motors, which will become a thing of the past when EVs eventually become mainstream. 

The Treasury also takes 57.95p from every litre of petrol and diesel pumped into cars, which will also go missing from coffers.  

In the report, the Treasury highlighted the potential huge loss in revenues and admitted it will need to consider how to recoup these funds via other means of taxation or reviews of spending.

The document said: ‘Co-benefits from decarbonisation, such as improved air quality, can also be economically significant. 

‘However, reaching net zero will also involve costs and lead to significant structural change. 

‘Overall, in the context of the rest of the world decarbonising, the net impact of the transition on growth to 2050 is likely to be small compared to total growth over that period, and it could be slightly positive or slightly negative. 

‘Policies like those in the government’s Ten Point Plan have a role in ensuring the UK is able to make the most of the potential opportunities. 

‘Regardless of the size or direction of the impact on the economy, the transition will lead to structural changes.’ 

Reports have already suggested that Chancellor Rishi Sunak is ‘very interested’ in the concept of a national road pricing scheme, which would force motorists into a ‘pay-as-you-drive’ system.

Road pricing in England is currently limited to schemes such as the recently-hiked M6 Toll in the Midlands, the Dartford crossing on the M25, London’s Congestion Zone and a handful of small tunnels and bridges. 

A similar plan to bill motorists for every mile they drove was shelved by the Labour government in 2007.

Under the plans, drivers would have paid to install a black box in their cars so they could be monitored by electronic tracking via satellite or roadside beacons.

Motorists would then pay between 2p and £1.50 a mile depending on the time of day and levels of congestion.

But the scheme was dropped in 2007 after an online petition was signed by 1.8million people.  

RAC head of roads policy Nicholas Lyes said it’s ‘inevitable’ a new system will have to be developed to replace lost revenue from fuel duty and VED when electric vehicles become mainstream. 

‘While not paying car tax is clearly an incentive to go fully electric at the moment, we will very soon need a system that can levy tax on both conventionally fuelled and battery electric vehicles fairly,’ he told This is Money. 

‘If this isn’t addressed, we risk finding ourselves in a situation where petrol and diesel drivers continue to pay all the tax for using the roads which is unsustainable.

‘But drivers are firm in their views that any new system must not be used as a way to increase the tax burden on them. 

‘Despite this, RAC research shows around four-in-10 drivers believe that some form of ‘pay-per mile’ system would be fairer than the current system of fuel duty, while half (49 per cent) agree that the more someone drives the more they should pay in tax. Drivers are also clear that tax revenues from any replacement for fuel duty should be solely reinvested back into the road network.’

AA president Edmund King says road pricing would be a difficult scheme to sell to the public and has for years been calling for a ‘Road Miles’ system.

Road Miles is a policy created by King and his wife Deirdre, an economist, and was shortlisted in 2017 for the Wolfson economics prize. 

It proposed to allow motorists to drive free of charge for 3,000 miles – 4,000 miles in rural areas – a year. After passing that threshold, drivers would then need to start paying per mile.

‘We do need a national debate about how we pay for our road infrastructure to bridge the taxation gap between falling fuel duty revenue and the electric vehicle revolution,’ Mr King previously told This is Money.

‘However, the British public will never vote for ‘national road pricing’ so we need greater imagination to sell the public something that they actually want – our answer is Road Miles.

‘In Road Miles drivers pay less, more is spent on roads, tunnels, cycling, buses and the Government gets £2billion extra per year.’

Speaking to BBC News, Doug Parr from Greenpeace said the Treasury could recover some of the vehicle taxation revenue losses by scrapping the £27billion roads programme and the £100billion HS2 rail line – both of which will increase carbon outputs.

‘Finally the Treasury has admitted that tackling climate change could actually be good for the economy,’ he said.

‘For years it’s been a total drag on climate policies – it used to get in the way of any good proposals.’ 

A new report issued by the UK Energy Research Centre earlier this month warned that manufacturers could flood the market with new petrol and diesel cars in months leading up to the 2030 ban on sale of new internal combustion engine passenger vehicles. 

In its Review of Energy Policy 2020, it warned that the 2030 deadline could result in ‘distortions and perverse behaviours’ in the lead up to the ban, which could have a ‘long tail’ impact on C02 emissions.  

The research centre’s director, Professor Rob Gross, said: ‘You might think that people not buying cars is a good thing for the environment. But it’s not a good thing if they delay buying a relatively inefficient car, and that car is still being used for longer.

‘Every gram of CO2 that enters the atmosphere stays there, potentially for hundreds of years.’ 

It proposed for the introduction of a 50 per cent purchase tax in 2021 on the most emitting models. 

For, it recommended the hiked taxation only on cars that produce in excess of 225g/km CO2.

In 2022, it said the 50 per cent tax could be levied on cars emitting more than 190g/km CO2 and so on, until only zero emission cars avoid the tax in 2030.