With the rise of electric vehicles, who will pay for Britain's roads?
6 min read
It’s not often that a Rolls Royce is the cheaper option. But, as of 2024, it might be.
This year, the carmaker released the Spectre – the first electric incarnation of the Spirit of Ecstasy. Like all electric vehicles, it burns no fuel, and therefore pays no fuel duty as it sails along the highway. That, among other things, separates it from the third-hand family runaround stuck behind it at the lights, whose drivers pay an average of £820 in fuel duty every year.
This does not match our instincts. Motoring taxes evolved from the principle that horseless carriages were the conveyance of the rich. But today, cars are indispensable – the poorest 10 per cent of households spend 4.2 per cent of their disposable income on fuel duty alone. That figure is even more remarkable remembering that only four in ten of them have access to a car.
Historically, we have accepted this because we think motoring taxes apply to all; and those that travel swathed in luxury will pay more, at least in absolute terms.
But this is no longer true. Fuel duty revenue is collapsing because a growing proportion of motorists step entirely outside of the existing tax regime, while others keep paying the same amounts they do today. And this privilege goes not to the poorest, but to those who can best afford to buy a new car.
Hazard ahead
This is an accident, but potentially a serious one. Governments and carmakers have turned to electric vehicles as the only realistic way to decarbonise roads. Unlike most changes for net-zero, electric vehicles are a rare example of where going green means real savings for the people making the switch. The lower running costs of electric engines means this should be one of the easiest ways to cut carbon, and one of the least controversial.
But then comes tax. People may be destined to drive electric vehicles, but right now they pay fuel duty and remember the cost of fuel more than any other price in the economy.
There is a real potential to tell a much darker story about electrification – one in which people feel they are being shut out from its benefits while having to shoulder unfair costs.
This could turn a win-win story into a bitter argument.
This matters even more now, as motoring tax is one of the largest sources of revenue around that Labour has not pledged to hold steady. Fuel duty (including associated VAT) currently raises nearly £30bn – enough to pay for every primary school in the country. The pressure to raise rates will persist, even as revenues decline.
For our report Uneven Road Ahead, Stonehaven asked 2,200 people for their views on what level of tax they thought electric vehicles should pay. For every person who thought it was reasonable for electric vehicles to pay no tax, two disagreed.
It was a position that united Labour and Conservative voters; Liberal Democrat and SNP; Green and Reform. It was true for every region. Among those over 65, the ratio was four-to-one against. As we reviewed the numbers, our thoughts shifted from asking whether anyone had concerns about the status quo to whether there was any group that didn’t.
Rules of the road
Finding an answer to this problem is not simple. Electric vehicles will start paying vehicle excise duty (VED) from April, equalising about 20 per cent of typical motoring tax. But replacing fuel duty is harder.
Partly, this is about logistics. Fuel duty is one of the easiest taxes to collect, gathered centrally at well-audited oil refineries; but electric vehicles use the same electricity that comes out of a billion sockets, so can’t be taxed at the power source. Metering electricity on individual cars has its own complexities, especially when car batteries are integrated into a smart grid.
That leaves some kind of pay-per-mile system, last attempted by Alistair Darling in the mid-2000s. This has long been the favoured option of transport wonks, who have been designing, debating, finessing and abandoning plans for generations. But few politicians want to reopen a debate that ended with 1.7 million people signing a petition telling them to stop. For ministers and officials, the question is more acute – can this be done safely?
Taking a shortcut
Fortunately, since the great debate on road pricing, we have learnt more about how to build taxes that bring the public with them. Indeed (whisper it) we even brought in a nationwide system of road user charging in 2014 – for lorries.
It turns out that the public is much more open to new taxes on cars once they hear that their own vehicle will be exempt. In 2015, government simplified vehicle excise duty, charging the greenest cars £140 more – but only on vehicles bought from 2017 onwards.
The public responded not with protests or petitions but by buying 280,000 more cars in order to beat the deadline.
Such ‘grandfathering’ could be the key to quiet reform now. A tax that only applies to new electric vehicles, bought after some future deadline, would make no enemies. Conventional drivers are already taxed and can be left alone. Numbers of electric vehicles are still low, meaning they can be exempted from any new tax without destroying revenue.
Taken together, this means that no one has a tax imposed on them against their will.
Then, when they do eventually switch into the new system, they only start to pay when they swap their vehicle. Few things dampen revolutionary sentiment more than a new set of car keys.
We would even expect to see a boom in electric vehicle take-up. In the month before the new VED rates came into force, when people were scrambling to get a car at the outgoing tax rate, the jump in sales was equivalent to every household in Doncaster buying a new car.
Diversion route
But there is a catch. This opportunity for painless reform is limited by time. Fuel duty is impossible to change because tens of millions of people pay it. The longer government takes debating how to tax electric vehicles, the more people there are to object and the greater the cost of exempting them from change.
Our report talks about the idea of a ‘window’ – when electric vehicle sales are high but numbers on the road are low – and when painless reform is cheap and effective. The problem is that many countries have already passed that stage. The UK is perfectly positioned now, and as an added bonus swift action could have the system live (and the revenues coming in) before the next election. But by 2029 the chance of easy reform will have gone.
We have spent our lives in a world where motoring taxes have been held to be unchangeable. But our tax-free Rolls Royce may have driven us to a place where change is not only possible but imperative. This isn’t the result of abstract debates about better transport; it’s about a more basic need to preserve the legitimacy of the tax system and head off a challenge to decarbonisation.
Driving will never be the same again.
Michael Dnes is head of transport policy at Stonehaven and a former senior official at the Department for Transport
PoliticsHome Newsletters
Get the inside track on what MPs and Peers are talking about. Sign up to The House's morning email for the latest insight and reaction from Parliamentarians, policy-makers and organisations.
