The Economic Black Hole At The Heart Of The Shift To Electric Vehicles
John Bryson, Tasos Kitsos, 10 Aug 17
       

Jason/Flickr, CC BY-NC

The ban on the sale of new diesel and petrol cars and vans from 2040 is perhaps the most significant policy announcement made by the UK government in the past decade (with the possible exception of Brexit). It feels like a key moment for the fight against pollution and climate change, but the shift from petrochemicals to electric vehicles will be disruptive and extremely expensive. The ramifications need to be considered systematically.

The issue that springs most immediately to mind is that the UK’s national taxation system will experience a major shock. The government raised about £28 billion from fuel duties over 2016/2017. It is the largest component of indirect taxation and pulls in about the same as tobacco, alcohol, gambling and vehicle duties combined.

The removal of diesel and petrol cars and vans will undermine this tax stream and it will need to be replaced. Tax on petrol and diesel currently accounts for 69% of the total price. To put it in context, one year’s worth of fuel duty revenue pays for more than 4m UK state pensions.


Charging more?  nrqemi/Shutterstock

Electric dreams

One option to replace lost fuel duty might be a tax on electric vehicle charging. Currently, VAT on domestic energy consumption is charged at 5% – this will have to rise dramatically to cover the shortfall.

The government has been silent on this. The issue appears to have been taken for granted or perhaps overlooked. It may seem that 2040 is a long way off, and the transition will be softened by product lifecycles, but people’s vehicle buying habits will start to change long before deadline day.

A creative solution to the taxation deficit will have to be developed for every country pursuing a similar course.

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