Why all roads lead to a tax on EVs

The government is facing increasing pressure to look seriously at a way of taxing motorists who drive EVs, with the 2030 ban on the sale of new petrol and diesel vehicles otherwise set to leave the Treasury with a £35bn fiscal black hole.

Speaking in front of MPs in the Commons Liaison Select Committee, outgoing prime minister Boris Johnson recently accepted that it was “certainly the case that we will need a substitute for fuel duty”. The need is clear: combined with vehicle excise duty (VED), the two taxes amount to 7 per cent of the exchequer’s annual take, although Number 10 has been accused of blocking the Treasury from setting up a working body to investigate the issue. 

Road pricing is not a new concept and it has always proved a difficult political sale.

“The government doesn’t tend to allow you to say the words ‘road pricing’ in the corridors of Whitehall; it’s almost like swearing because it’s such a sensitive issue,” says Glenn Lyons, Mott MacDonald professor of future mobility at the University of the West of England.

Lyons, who prepared a series of technology roadmaps for the Department for Transport on decarbonising domestic transport, describes introducing the road pricing as “a Sisyphean task: a heavy rock we push, time and time again, up the slope to the summit of implementation, only for it to slip down again to the bottom before the top is reached”.

A panel was first set up by the Ministry of Transport to examine road pricing in 1962. The idea was to tax motorists more when they used congested roads than when they used uncongested ones. That proposal failed to take off.

Fast-forward a little over 40 years, to 2003, and London introduced the UK’s first congestion charge zone. However, failed referenda for similar approaches in Edinburgh and Manchester followed. In 2006, a national scheme supported by the Labour government seemed likely to go ahead, until a Number 10 petition with 1.7 million signatures against the idea overcame political resolve. “Down slipped the rock once again,” says Lyons.

Achieving the UK’s commitment to net zero carbon emissions by 2050 means decarbonising transport and this has put road pricing back on the agenda. EV consultant Mark Daly says road pricing is not only inevitable, but could also be a fairer way of funding the road network.

“The current VED tax is based on the CO2 emissions from your tailpipe and obviously EVs don’t have any, but the flip side of that is that the government will lose tax revenue if everybody switches to electric cars. Road-user charging will make up this shortfall and it is a more equitable way of doing it; if you drive more, you pay more,” he says.

James Court, chief executive of the Electric Vehicle Association, agrees that road charging is “inevitable and the right policy move,” but he warns that the timing of its introduction and its design are “going to be critical”.

Back in February of this year, the cross-party Transport Select Committee (TSC) published a report in which it said there was “no viable alternative” to road pricing and work should start immediately on creating a replacement for fuel duty.

At the time, TSC chair Huw Merriman, said: “It’s time for an honest conversation on motoring taxes… work should begin without delay. The situation is urgent. New taxes, which rely on new technology, take years to introduce… the countdown to net zero has begun.”

A government spokesperson said the present administration was “committed to ensuring that motoring tax revenues keep pace with the changes brought about by the switch to electric vehicles, whilst keeping the transition affordable for consumers.” However, it would not comment on any specific work that it might be carrying out on road pricing.

Why, then, does the government appear lacking in urgency?

One reason could be that it has frozen fuel duty for twelve consecutive years. In the face of soaring fuel, gas and electricity prices - prompted by geopolitical instability and war in Ukraine - the former chancellor Rishi Sunak, in his 2022 Spring Budget, reduced fuel duty by 5p per litre, hailing it “the biggest cut to fuel duty rates ever”. 

Reflecting on this decision, Lyons says: “The government is consciously making it more affordable in relative terms to run a car. Against that backdrop, with a general election coming up, the government is reluctant for it to say to hard-working families, sorry, we are going to charge you even though you thought you were doing something good for the environment”.

On the other hand, Lyons notes that a successful high court challenge this month against the government’s net zero strategy means that it will have to demonstrate by April next year more clearly how the measures it plans to take will lead to the reductions in emissions to which it has committed itself. “That could create a harder environment that motivates political leaders to say to the public ‘We are between a rock and a hard place, we have to do this now,’” he says.

For this reason, Lyons doesn’t agree with the ‘revenue neutral approach’ set forward by the TSC, which would mean most motorists paying the same or less than they do currently.

Lyons thinks this conveys a "weak” message. Similarly, the Local Government Association (LGA), which carried out a survey on road pricing last month, found that many local authorities in urban areas thought revenue neutrality was not ambitious enough in supporting local objectives, “like encouraging more public transport use, walking and cycling”. 

Other councils however, felt that revenue neutrality was “absolutely required to sell a national road pricing system to the public”.

Messaging will be crucial. “Perhaps attention needs to turn from notions of neutrality to being politically acceptable and fair,” says Lyons.

One mantra to come from a roundtable on road pricing chaired by Lyons in April this year was the infamous ‘KISS’ principle: “Keep It Simple, Stupid”.

Steve Gooding, director of the RAC foundation who attended the roundtable, suggested sticking with fuel duty for petrol and diesel vehicles and introducing a simple distance-based charge for all zero-emission vehicles. A distance-based charge would be simple to administer and could, for example, be collected annually at the time of a vehicle’s roadworthiness test (MOT), he argued.

However, Court agrees with many local authorities who took part in the LGA survey that a simple distance-based charge could penalise rural travellers.

“If you are down in Devon, you don’t have the public transport options that other areas of the country have, but you’d be expected to pay the same as someone living in a more connected area, so you’re getting doubly punished,” he says.

One compromise, according to Lyons, could be to set up a simple scheme that is deliverable and which holds a later prospect of being able to deliver transformational change, such as charging motorists more for using busier roads at different times of the day.

Fairness is also a matter of timing.

Court thinks road pricing should not be introduced before 2027, when the price of EVs will have come down to the level of internal combustion engine vehicles. It is a delicate balance, he says: “If we launch into it too early, it will affect the economics of total cost of ownership and this would slow down the transition massively and impact the public trust in the technology.”

Another way to ensure public support says Glenn, would be a ‘try before you buy’ approach. Manchester and Liverpool held referenda on road charging and the public said no, explains Lyons, but in Stockholm they introduced a scheme for six months and had a referendum afterwards and the public said yes “because they saw the benefit once it had been trialled”.

There was also strong agreement across local authorities in the LGA survey that at least some portion of revenues raised from a national road-user charging system should be ringfenced for investment in public transport and active travel. Currently, there is no hypothecation of fuel duty for investment in transport. In this way, while some politicians may see road pricing as a political headache, many experts argue that it could be a huge opportunity.

“A well thought-out, well-planned and well-signalled in advance road-charging policy could be one of the most significant and best things that we can do for our transport system in the round,” says Court.

To realise this, says Daly, the government “really needs to get a jog on”.