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Fuel duty revamp urged in favour of track-and-charge system as EVs proliferate

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Electric cars and increasing fuel efficiency in vehicles could deplete the tax money raised through fuel duties, according to The Institute for Fiscal Studies (IFS), which has called for a switch to a pay-as-you-drive model.

In a report, the body said that alternative taxes will need to be introduced to ensure the social costs of motoring are reflected in the prices people pay. It suggests the government should form a long-term term strategy for taxing motoring and should do it now before revenue from fuel duties “disappears entirely”.

One solution is a track-and-charge scheme whereby motorists would have trackers installed in their cars and would be docked money when reaching certain checkpoints.

“The technology used there is relatively simple,” the report states. “Vehicles are required to contain an ‘in-vehicle unit’ which can be detected by radio frequency identification (RFID) when they pass under gantries that are located along the most congested routes, along with a pre-paid card from which payment is deducted.”

The system could have variable pricing depending on the time and location as this would be “the best way” to incorporate the costs of congestion into the prices paid by drivers the IFS said. For example, entering an area of heavy congestion - such as a city centre - could see the rate increase, the report said, in a bid to counter traffic jams.

Failing the immediate introduction of a system like this, it proposes introducing a flat-rate tax per kilometre driven. This would ensure the continuation of revenue and discourage driving once alternatively fuelled vehicles replace petrol and diesel ones.

The report recommends that in the meantime the Government should move to monthly indexation of fuel duties in line with the Consumer Prices Index. Recent years have seen repeated delays to fuel duty increases for politically motivated reasons which do not take into account the harm that driving has on the local environment.

The amount raised through taxes at the pumps has plummeted in recent years, with Treasury coffers down by £19bn in the past two decades - equal to 1 per cent of national income.

Rebekah Stroud, co-author of the report, said the Government should “set out its long-term plan for taxing driving” with the transition to electric cars set to hit the public purse further: “Cuts to fuel duties over the last two decades have contributed towards revenues’ being £19bn a year lower than they would have been,” said the research economist. “Another 2p cut, as reportedly mooted by the Prime Minister, would cost a further £1bn a year. The bigger challenge is that revenues are now set to disappear entirely over coming decades as we transition to electric cars.”

“The Government should set out its long-term plan for taxing driving, before it finds itself with virtually no revenues from driving and no way to correct for the costs - most importantly congestion - that driving imposes on others.”

London introduced an ultra-low emission zone in April which charges motorists driving older and more polluting vehicles an additional £12.50-a-day to enter the city centre.

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