As the western motoring world edges gradually towards the electric vehicle, governments across the globe face a pressing budgetary dilemma: what, precisely, is to be done about declining fuel tax receipts?
For many motorists, much of the price paid for a liter of petrol or diesel is accounted for by excise duties, value-added tax (VAT), a carbon levy and/or an energy levy. This means that as electric vehicles (EVs) take to the road in ever greater numbers, governments are being deprived of those sources of income.
In response to this shifting outlook, the British government has published its plan for an Electric Vehicle Excise Duty (eVED), a measure that has, since its announcement, been widely described as a pay-per-mile road tax..
From 1 April 2028, a new mileage-based charge will come into force, applying to battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and hydrogen fuel cell electric vehicles (HFCEVs) that are classified as cars.
The eVED will be implemented as an extension of the current Vehicle Excise Duty (VED).
Pence Per Mile
Under the new levy, drivers of battery-powered and hydrogen-powered electric cars will be charged three pence per mile (about 4 cents), while owners of plug-in hybrids will pay a rate of 1.5 pence (about 2 cents) for the same distance.
According to the British government, the tax will be uprated in 2029-30 and thereafter maintained in line with inflation, so as to preserve the charge's ongoing "real-terms value".
To calculate how much eVED to pay, British drivers will be required to submit a mileage reading from their car and estimate their mileage for the upcoming tax year.
Based on these self-reported figures, an annual mileage of 7,000–7,500 miles, roughly the current national average, could translate into a charge of £210–£225 a year ($285–$305).
Lower rates of tax were, in the early stages of Europe's and the UK's adoption of green policies, promoted as one of the principal benefits of purchasing an electric vehicle. As such, this redesign of the tax system seems unlikely to be warmly welcomed by Britain's motorists.
The government now says, however, that the move is required to ensure EV drivers contribute towards the costs associated with congestion and wear and tear on the roads, costs that have traditionally been covered by fuel taxes.
Whereas drivers of petrol and diesel vehicles pay fuel duty at the pump and so, in the words of the official government page, "contribute their fair share", drivers of electric vehicles have, until now, paid no equivalent.
A Shrinking Revenue Stream
The UK has been unusually explicit in projecting and quantifying the impact of the country's ongoing shift to electric vehicles on fuel duty revenues.
The Office for Budget Responsibility (OBR) forecasts that fuel duty receipts will keep rising in cash terms until 2030, after which they are expected to fall significantly, as routine increases in the tax rate are increasingly offset by the continued decline in fuel consumption brought about by the shift to electric vehicles.
The OBR's latest predictions indicate that receipts will increase to £26.5bn ($35.8bn) in 2027-28, followed by a further increase to £26.6bn ($35.9bn) in 2028-29, before falling by almost £1bn ($1.35bn) by 2030-31.
Fuel duty receipts hit a peak in cash terms of £28.1bn ($37.9bn) in 2018-19, but have failed to reach that level since, following the Covid-19 pandemic, during which the figure plummeted to £21.2bn ($28.6bn).
The British authorities anticipate that the road tax redesign will impact around 5.6 million vehicles in its first year of operation. Coupled with related budget measures, Britain could see 120,000 fewer EV sales between 2025-26 and 2030-31, a figure equivalent to 2% of anticipated sales during that period.
A Global Reckoning for Road Tax
The UK is far from the first jurisdiction to grapple with the challenges posed by the electrification of driving, nor will it be the last.
New Zealand extended its existing Road User Charge (RUC) system to cover EVs and plug-in hybrids in 2024, requiring drivers of those vehicles to pre-purchase passes in 1,000 km blocks to help fund road and infrastructure maintenance and construction.
Meanwhile, a number of American states have introduced a fee for the registration of an electric vehicle, levied on top of the standard fees that apply to all new cars.
One of Britain's closest neighbors, France, is likewise grappling with troubling fiscal projections stemming from its own pursuit of low-carbon policies.
A 2023 report produced by the French Treasury estimated that the growing adoption of electric vehicles by the public could result in annual energy-tax revenue losses of €13bn ($15.1bn) by 2030, a figure that could soar to as much as €30bn ($34.8bn) by 2050.
However, the French government is yet to finalize a strategy for dealing with the foreseen dip in finances.
