A PAY-PER-MILE TAX JUST FOR ELECTRIC VEHICLES. SURELY NOT?

 One of the ideas being floated for the budget is the imposition of a pay-per-mile tax for driving on UK roads. The immediate motive for this is the growing realisation that revenues to HM Treasury from fuel tax will shrink rapidly as electric cars replace the internal combustion engine.

 

However current proposals, including those from the Resolution Foundation, suggest that the charge, of perhaps 3p per mile, should apply only to electric vehicles and not to internal combustion engine (ICE) vehicles.  I cannot think of anything that would be better calculated to destroy Labour's credentials as a party committed to environmental protection and public health. The international reputation of the UK on climate matters would similarly be demolished, if it were to sabotage what has hitherto been one of the more promising and successful planks in its raft of low carbon policies (after decarbonisation of the power sector).

 

It's worth starting with a simple observation on the current level of fuel duty, frozen since 2011. There is a general principle of sensible taxation for products or activities that cause widespread damage to society. Where the damage is general and a realistic measures and estimates can be made, so-called Pigovian taxes, sometimes described as “sin” taxes, should at least equal the estimated cost to society of the damage done. Otherwise, consumers are not covering the costs of the damage they inflict. If they were obliged to do so, they would tend to consume less of the product, and we would be collectively better off; in this case they would be more likely to switch to low carbon alternatives, hydrogen or electric vehicles.

 

Surprisingly, for ICE fuels, we do have a number that we can use.  Treasury Guidance, which supposedly provides a basis for UK public policy and project appraisal, sets a cost/value to be placed on CO2 emissions/savings. It was set at £265 per tonne of CO2e for 2022. The implication of this is that fuel duty should be set at somewhere around 60p per litre or higher, simply to compensate for the emissions for which it is responsible. For ICE fuels, the current level of fuel duty is 52.95p per litre; in other words ICE vehicles are not paying the true societal costs of the fuel they use.

 

Incidentally this analysis excludes the health costs of urban pollution from ICE vehicles. This is a similar order of magnitude, and is already recognised in London with ULEZ. There are plenty of studies that do cost the health effects, and the numbers are large. So the growing use of electric vehicles is overwhelmingly in the public interest, whether from a national or a global perspective.

 

There are a few rather specious excuses for the proposal to levy pay-per-mile charges on EVs. The main one is that they tend to be heavier, like for like, and may therefore incur higher road maintenance costs. Apart from the fact that the UK sensibly and rarely hypothecates taxes in this way (duties on wines and spirits are not used to subsidise pubs or off-licences), there are two responses that demolish this argument. One is that the relative impact of EVs, compared to large commercial vehicles, or to other factors like weather, that impact on roads is firly insignificant. The other is that if this really were a serious issue we should already be imposing differential weight-based charges on ICE vehicles as well

 

Purely from a climate or public finance perspective, there should not necessarily be any objections in principle to the introduction of pay-per-mile. Road use charging is potentially just one more method of revenue raising, with the advantage that it is to some degree related to an infrastructure cost, with the disadvantage of being quite hard to implement effectively. Like any tax it will also be examined for its wider impacts. But if introduced these taxes should apply to all vehicles, in order to retain the incentive for cleaner vehicles, whether hydrogen or EVs.

 

But if we do introduce charges per mile, we should go all the way to a proper system of road pricing, charging only for the most heavily used and congested routes. This would alleviate city congestion, save time and money, and, while we still have mostly ICE vehicles, would also reduce pollution and improve health outcomes.

 

Perhaps most importantly, imposing a tax specifically targeted at EVs, after a long period when governments have been actively encouraging their purchase, would destroy the credibility of future incentives that governments may wish to use in pursuit of their policies. Such a loss of trust in the consistency and stability of future economic incentives would not be confined to the energy sector or to zero carbon issues.

 

FARAGE AND NET ZERO

I had been tempted to retire from posting comments on CO2ECONOMICS, partly because so much of the basic truths I described were becoming mainstream, and partly because my own direct involvement in climate issues and their analysis was reducing. However there is nothing like a piece of truly egregious dishonesty, or a deliberate attempt to hide the facts, to stimulate response in the climate policy debate.

 

Step forward Nigel Farage in his recent interview with Laura Kuenssberg (20 July). According to the fiscal maestro, future tax reductions would be funded, inter alia, through the fiscal savings of £ 30 billion that would result from scrapping the government’s net zero targets. The £30 billion estimate was attributed to the independent and usually authoritative Office of Budget Responsibility.

 

[We should not, incidentally, ignore the hapless Tories under Kemi Badenoch in this discussion, as they have been only too happy to jump on the “scrap net zero” bandwagon.]

 

As ever, when dubious arguments appear to depend on evidence from normally reliable sources, it is worth checking the sources themselves. And the Farage claim is no exception. Simple headlines conceal the real truths which tell a rather different story.

 

The most recent OBR projections (July 2025) do indeed indicate a £30 billion a year cost to the public finances to 2050. However two-thirds of this stems from lost government revenues – especially fuel duty – as drivers switch to electric vehicles. 

 

It’s actually a tax cut!

 

In other words one major impact of net zero policies is expected to be a huge reduction of about £ 20 billion per annum in the take of the hated fuel duty tax, something one might expect a Reform leader, in other contexts, to be championing or celebrating. The impact of net zero in this respect is not a cost to the economy or living standards, but simply the reduced take from one particular means of taxation, easily replaceable by an equivalent levy, eg via road pricing, on electric vehicle use, or in many other ways.

 

Moreover scrapping net zero policies would not mean that drivers would stop changing to ever improving electric cars.

 

There is a lot more from the OBR on climate change that deserves serious discussion. Among their more important conclusions are the following:

 

·      Estimates of the real cost to the economy of a net zero policy have fallen dramatically in the last few years. (This of course is an even more important metric than the impact on public finances.)

·      The cost of net zero policies is a magnitude less than the costs we face through a global failure to address the problem.

·      Acting early carries a substantially lower cost burden than delay.

 

Surely time for one of our political heavyweights to put the record straight!