Unfair VAT on EV charging is the tip of a very big iceberg

Who should pay to power electric vehicles?

The late American politician Donald Rumsfeld famously stated there are ‘known knowns’ and ‘known unknowns’. So - we know we must go electric to decarbonise transport and meet climate change targets. We also know the transition must be paid for. But we do not yet know who will pay for it and how to make it fair.

Take VAT. Motorists fortunate enough to have home chargers currently pay 5% VAT for the electricity to charge their EVs. But power at public charging stations is rated at 20% VAT, on top of tariffs that are way more expensive than at home. This clearly favours relatively affluent early adopters who can afford EVs, home chargers and have smart meters to access cheap time-of-use tariffs.

But the VAT issue pales into insignificance compared with the big ‘known unknown’ – how can a government desperate for revenue reconcile compelling people to adopt EVs with a massive loss of income from fuel and road tax, derived from internal combustion engined (ICE) vehicles?

UK TAX CHASM

The UK treasury currently harvests £37 billion (1.7% of national economic output) per year from vehicle excise and fuel duties. That’s roughly £1,320 for each of Britain’s 28 million households. But EVs do not currently pay road or fuel tax. So how will the revenue gap be filled, when there will be an estimated 11 million EVs by 2030 (up from around 600,000 now) and the numbers keep rising as the ban on new ICE vehicles bites?

Chancellor Rishi Sunak announced in October 2021 that there will be new taxes ahead to pay decarbonising Britain – but he did not say on whom and what. And when he made his announcement, the full impact on households of forthcoming energy and national insurance rises was still over the horizon.

Given that we absolutely must go electric to decarbonise transport, the question is how to manage the transition as fairly and affordably as possible. The answer has to be a difficult balance of carrots and sticks. So what are the options?

CARROTS & STICKS

Around 85% of new car sales in Norway are EVs (under 19% in Britain), because the government has made them cheaper to buy and run than ICE cars. An electric VW Golf is cheaper to buy than a petrol version, because the latter attracts heavy carbon taxes, which are used to fund the nation’s electric ecosystem. EV drivers also benefit by law from minimum of 50% discounts on ferries, bridge tolls and parking. And local governments are mandated to install charging points pretty much everywhere.

Norway uses swingeing carbon taxes to pay for transport electrification. Carrots for EV drivers, hefty sticks for carbon emitters. That works in a country where wealth is distributed fairly evenly. It may be more problematic in Britain, where many people will be unable to afford buying an EV any time soon – and the political impact of taxing to the hilt old fossil-fuelled bangers (as well as gas and coal) could be unacceptable.

An additional problem is that an estimated eight million UK motorists live in flats and houses without the option for off street parking and a home charger – many of them less well off. Will they be forced to rely on expensive public chargers that may be a long way from where they live?

THE BALANCING ACT

Taxing fossil fuels even more heavily to pay for greener alternatives would have a devastating effect on poorer consumers, unless it was mitigated by measures to help them. Loading the cost onto general taxation is also an option. And so is borrowing even more money to add to our £2 trillion public debt, which would ultimately be paid by future generations.

But the unavoidable truth is that decarbonisation is going to be expensive – and we will all have to pay in the end.

Britain already has an increasingly vociferous lobby, proclaiming that the cost of meeting decarbonisation targets is too much and will cause more economic damage than climate change itself. These are two more ‘known unknowns’ – everyone knows that climate change is a threat and that tackling it will be economically challenging. But nobody has a definitive answer on how to balance the two.

REASONS TO BE CHEERFUL

Meanwhile, we are among the innovators delivering technologies which enable electricity grids to adapt to the new era of EVs and greener sources of power. And there are many positive ‘known knowns’. We know that distribution systems designed decades ago must adapt to radically different patterns electricity generation and consumption – without the unacceptable costs of rebuilding the whole national infrastructure. And we increasingly know how to do that.

The bottom line is that the UK already has many of the technologies to decarbonise transport with the mass market adoption of EVs. The economic and political questions of how to make it happen are yet to be answered.