This is how Rachel Reeves should tax electric vehicles

 This move is long overdue. With 1.7 million EVs now on UK roads – around 5 per cent of the total – the question of how to tax them fairly and sustainably has become increasingly urgent.

A well-designed per-mile system could strike the right balance between supporting the green transition and safeguarding our public finances.

Fuel duty currently raises more than £29 billion a year – 2.5 per cent of total tax revenues or around 1 per cent of GDP. 

But these revenues are set to halve by the late 2030s and essentially disappear entirely by 2050 as more drivers switch to electric, which would leave a significant hole in public finances.

But this is about more than money. Although EVs don’t generate tailpipe emissions, EV drivers still cause wear and tear to our roads, risk accidents , and most significantly, cause congestion and delays to other road users – a tax on EV usage would compensate for all these costs.

Also, failing to tax EVs could lead to ‘Gridlock Britain’ with the annual cost of congestion to society potentially doubling from £120 billion in 2025 to £300 billion by 2050 as a result of more time wasted in traffic jams.

The Chancellor needs to act now to prevent worsening congestion and safeguard crucial tax revenues. The longer the Government delays reform, the harder it will be to act – with one in four new vehicles sold last month fully electric, it will become increasingly difficult to introduce a tax on EVs later on, as more drivers will have bought EVs on the basis that they would not be taxed.

How the government introduces road pricing matters. Limiting charges to EVs alone could backfire. Early evidence from New Zealand and Iceland – both of which imposed EV-only road charges – shows EV sales growth slowed sharply afterwards. 

If fuel duty rises next year and continues to increase with inflation, drivers of petrol and diesel  vehicles would pay about 1.6p more per mile by 2028 – roughly half the 3p per mile charge being discussed for EVs.

A better approach would be to replace the planned fuel duty rise with a universal per-mile charge for all drivers – starting at a lower rate of 1p per mile for cars and between 2.5p and 4p for larger vehicles, increasing gradually over time.

This would raise the same revenue, end the fiction that fuel duty rises annually (when it hasn’t gone up since 2011) and give both motorists and manufacturers certainty about the long-term system.

Collecting the charge at the annual MOT – when odometer readings are already taken – would also make the system simpler and straightforward. Those switching to electric would already understand how it works and would still benefit from lower running costs. Done properly, a per-mile charge would not punish drivers for going electric – it would normalise EVs as part of everyday road use.

The aim should not be to tax electric cars more heavily, but to tax all cars more fairly – based on how much they drive. With the right design and political courage, road pricing can provide a stable revenue base for the Treasury and a credible path to net zero.

____________________

James Browne is a Senior Policy Advisor for Economic Policy at Tony Blair Institute.

Isabel Atkinson is a Senior Policy Analyst for Economic Policy at Tony Blair Institute.

LBC Opinion provides a platform for diverse opinions on current affairs and matters of public interest.

The views expressed are those of the authors and do not necessarily reflect the official LBC position.

To contact us email opinion@lbc.co.uk