Black Holes and Revelations

EVs, the missing fuel duty and charging for road use

Pay As You Go (PAYG) road user charging has been about 10 years away for as long as I can remember.  Every economist or transport planner (or anyone else for that matter) all seem to agree it is the most logical way forward.  Yet the politics have always pushed it into the longest of long grasses.  Why might this now change dramatically?

While the new Chancellor is on trend comparing fiscal problems to astronomical anomalies, so far there has been a missing element from her Black Hole: the loss of tax revenue from electrifying road vehicles.   To give the context, fuel duty and VAT on fuel will be about £35-40billion this year.  The OBR has highlighted this potential loss in its most recent risk assessments (2022 and 2023), and so has the Transport Select Committee. 

What did the previous Government say about this?  In its odd and dismissive EV Impact Assessment last year it doesn’t count this in the cost benefit “….tax revenue change is counted as a transfer.”  It then goes on “However, this transfer is non-trivial for HM Treasury”.  How’s that for understatement?

So how “non-trivial” is the question – they estimated £1.1billion a year lost from cars and £650million from vans by 2030.  This is simply way off anyone else’s calculations, including the OBR and my own – yes I’m a transport planner and I do love a spreadsheet…. 

I estimate EV cars alone will cause a loss of over £5billion a year by 2030 – not counting any increase in fuel duty as programmed.  This rise is built in to OBR estimates for income and is partly (about a third) what led them to estimate lost fuel duty as £13billion by the same year.  So my number looks a bit cautious (I’m working on it).

But the fiscal hole is only part of the problem.  What will happen as EVs roll out is that there will wildly (and I mean wildly) differing costs per mile for different vehicle owners.  Well off car users who can afford EVs, have a house large enough for a driveway and possibly solar panels will pay next to nothing and VAT at 5% maximum.  Those who don’t have roadside access but can afford EVs will pay commercial roadside electricity rates plus 20% VAT.   Those stuck with more conventional cars will pay full fuel duty (most likely uprated).  What’s even more remarkable is that the fastest roadside chargers can cost more per EV mile than petrol or diesel.  Latest RAC data (who are on to this issue) has a range from 7p per mile for home charging to 24p for ultra fast charge points.  Off peak charging can lower this to around 3p.

The next part of the problem is that the dramatic change in cost for some users will cause traffic generation – although (fortunately) the level of increase (elasticity) should be low.  But the impact will be felt most in areas where we have not traditionally forecast traffic increases – centred around the cheapest recharging. And it won’t be small if the cost per mile falls by 80% in areas of high car ownership.  This would need comprehensive rewriting of congestion maps and traffic forecasts.

Given the social equity, congestion and fiscal issues are about as non-trivial as you can get, what’s to be done?  First is to be transparent about all this, engage the public and include the issue in the Budget as an area for urgent action even while putting up fuel duty in the short term.  Second is to develop, very quickly, some options for reforming road use charging.  There are already proven HGV options so let’s get on with that straight away. 

One important aspect is not to confuse this reform with local congestion charging.  While the latter may be facilitated by PAYG, this is a separate and potentially more divisive argument.

For what it’s worth I think options for retrofitting cars for PAYG looks complex and costly.  Building in the tech for new EVs would be much easier.  Introducing annual tax for EVs is part of the OBR predictions and this could be abolished together with that for petrol and diesel as part of a move to an entirely use based system.  That should make most economists happy, as well as transport planners and the Treasury!

Big Commissions or Inquiries take too long and there is an urgent need to get this item high on the Chancellor’s agenda (although it may well be there already).  Over many years there has been so much work on this subject I think a rapid, open consultation which genuinely engages the public (not just explaining why they should choose your favoured option) would produce realistic results and, most importantly, the wider understanding of why this has to be tackled.  And tackled quickly if we are to avoid trade offs between cheaper driving for the well off and increasing taxes or cutting public services just when they need reviving.