Transport Committee chair declares it is ‘time for an honest conversation’ about road pricing, as report warns that accelerating switch to EVs will lead to plummeting revenues that could impact funding for critical public services

The government must act now to prevent the transition to electric vehicles (EVs) burning a major hole in UK tax revenues that could see public services defunded and road congestion soar, MPs have warned.

A report published by the Transport Committee today warns that the UK faces an “under-resourced and congested” future if the government does not act to create new road taxes to replace the tens of billions of pounds currently raised from fuel duty and vehicle exercise paid by internal combustion engine drivers.

The report highlights how currently £35bn is raised each year from the two road taxes, a sum that amounts to around four per cent of the UK’s entire tax-take and as such funds a wide range of public services, from roads to schools and hospitals.

However, revenue from these motoring taxes is set to plummet as EVs account for an increasingly large share of vehicles on Britain’s roads. Figures published this morning by auto industry body the SMMT highlighted how sales of electric vehicles and plug-in hybrids are continuing to outperform the wider market, representing 12.5 per cent and eight per cent of all new cars sold in January, respectively.

Huw Merriman, chair of the Transport Committee, said it was “time for an honest conversation on motoring taxes”, as he warned that the Treasury was facing a potential “£35bn black hole” in public finances.

“We need to talk about road pricing,” he said. “Innovative technology could deliver a national road-pricing scheme which prices up a journey based on the amount of road, and type of vehicle, used. Just like our current motoring taxes but, by using price as a lever, we can offer better prices at less congested times and have technology compare these directly to public transport alternatives.”

Despite considerable political, technical, and privacy challenges, road pricing has been touted by policy experts as a potential replacement to the existing tax system that can both raise revenues and tackle congestion and other externalities, while still incentivising the shift to EVs. Dynamic road pricing in particular, similar to that used by ride-hailing apps such as Uber, provides a high tech means of combatting congestion and air pollution in near-real time.

The Committee’s report calls on the government to ensure any new charging mechanism entirely replaces fuel duty and vehicle excise duty so that any new taxation is “revenue neutral”, with motorists paying the same or less than they do currently.

The MPs have also recommended that any data capture required to deliver road pricing is subject to rigorous governance and oversight and protects privacy.  

Merriman stressed the need to reform road taxes was urgent. “New taxes, which rely on new technology, take years to introduce,” he said. “A national scheme would avoid a confusing and potentially unfair and contradictory patchwork of local schemes but would be impossible to deliver if this patchwork becomes too vast.  The countdown to net zero has begun. Net zero emissions should not mean zero tax revenue.”

The MPs have also called on the government to consider the impact of any reforms on vulnerable groups and those in the most rural areas so as to ensure the scheme does not undermine progress towards targets to increase access to active travel and public transport.

The report echoes a series of recent studies that have warned that without reforms to motoring taxation the current regime will become increasingly regressive, hitting less wealthy households hardest as the electric vehicle transition gathers pace. As things currently stand, wealthier drivers who can afford the relatively high upfront cost of EVs are currently paying less tax than drivers from lower income brackets, who must wait for the cost of EVs to fall before they can switch away from their fossil fuel vehicles.

In response to the new report a Treasury spokesperson said the government was aware of the risk to tax revenues posed by the shift towards EVs. “The government has 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,” they said. “We will respond to the Committee’s recommendations in full in due course.”

Want to find out more about how the net zero transition will impact your business? You can now sign up to attend the virtual Net Zero Finance Summit, which will take place live and interactive on Tuesday 29 March and will be available on demand for delegates after the event.

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