Electric cars a game changer for motor-tax revenue

Up to €5 billion of Government revenue derived from motor transport activity

 

If we are to halt climate change by 2050, we need to make dramatic alterations in our economy and in wider society. A key part of this transformation will be moving road transport from its current dependence on fossil fuels to alternative sources of energy.

While predicting technological change is even more difficult than predicting the economy, it now looks highly likely that electric cars will become the “cheap” option in the first half of the next decade. This does not rule out other technological developments, but it does mean we need to plan for such a transition to new technologies.

The cost of electric cars has fallen rapidly so that they will soon be cheaper to manufacture than cars using combustion engines.

The major obstacle to their adoption is the travelling range of such cars using current batteries. However, battery technology is also developing so that by 2025, if not before, electric cars are likely to squeeze out fossil fuel cars, even without tax advantages.

In turn, as older cars are phased out, it seems likely that the bulk of cars on the roads from 2030 onwards will be electric.

The electrification of road transport will have important implications for the economy across a range of dimensions.

If road transport is to be truly free of fossil fuels, it is essential that electricity production is also carbon free. This is, in some ways, a bigger technological task than a move to electric cars.

To ensure that this transformation happens, it is essential the EU Emissions Trading Scheme is reformed to guarantee that the European electricity system no longer contributes to global warming. Electric cars, dependent on electricity generated by using fossil fuels, would not be a sustainable outcome.

The widespread adoption of electric cars will, in turn, have important infrastructural implications.

In the medium term, concerns about range may require some filling stations to be re-equipped to provide rapid charging of batteries. However, it will eventually make the investment in filling stations supplying petrol and diesel redundant. Instead cars will be charged with electricity at a range of locations, including at home.

Major costs

The electrification of road transport will have very significant implications for government revenue.

At present around 7 per cent of Government revenue (up to €5 billion) is derived from motor transport activity, representing almost 2 per cent of GDP. Some of this revenue goes to pay for the major costs of the road transport network and other related transport activity. However, the majority goes to finance other vital expenditure, such as health and education.

If all of motor transport were electrified, the Government would lose most of this revenue. Currently motor tax on electric vehicles is very low and, when purchased, they also attract a lower rate of excise, and hence less VAT. Because they use no petrol or diesel, all of the revenue from this source would disappear. This revenue would have to be replaced from some other source.

In the case of the tax on new cars, and annual car tax, the Government could change the basis on which these taxes are levied so that the rates of tax on electric cars were the same as those on petrol or diesel cars today, with much higher rates on traditional cars, preserving this source of revenue. However, this would need to be signalled well in advance to avoid “disappointment” among existing car owners.

Replacing the revenue from motor fuels would be much more complicated.

While the NCT test could be used to check the distance travelled by cars, opening up the possibility of taxing based on kilometres travelled, this would be difficult to administer as car owners could face very large bills at infrequent intervals.

A much more sensible way of raising the revenue would be to charge for road usage – effectively taxing congestion. This approach is being considered in the UK to replace excise on motor fuels. It would have the benefit of rationing scarce urban road space, while reducing the cost for those in rural Ireland using uncongested roads.

Experience suggests that introducing such a “novel” charge, albeit replacing another tax, could lead to major opposition.

There are still a few years before any new charging regime will need to be phased in. If the Government is to preserve this key revenue source in the face of a gradual decarbonisation of transport, they need to begin the debate today on new sources of revenue to achieve a national consensus.

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