Switch to electric motoring could punch €5bn hole in public finances

Of all the tectonic shifts needed to limit global warming, the electrification of transport appears the most straightforward. The technology is already there. Mercedes has just this month unveiled an electric car that it claims can travel more than 1,000km on a single charge, almost double the distance of a fully charged Tesla Model S.

The shift is baked into the industrial strategies of most carmakers. Volkswagen says it plans to invest $100 billion (€88 billion) in low-emissions battery technology over the next five years in a bid to become the world’s leading EV (electric vehicle) manufacturer.

These companies aren’t greenwashing their messaging with meaningless net zero targets – they’re well past that – they’re in a race to capture EV market share.

Industry buy-in makes European Commission proposals to cut vehicle emissions by 55 per cent by 2030 and by 100 per cent by 2035, a target that involves a complete ban on the sale of new internal combustion engine cars within 13 years, a realistic proposition.

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Announcing the commission's revised climate targets last year, the EU's climate chief Frans Timmermans said the car industry's approach had "changed completely" with the sector investing billions in new EV technology.

The biggest headache for governments is how to replace the tax revenue from carbon-based transport.

A recent report by the Parliamentary Budget Office (PBO) here suggests the switch could punch a hole of €4.5 billion to €5 billion in the public finances, equivalent to half the education budget for 2022 (€9.3 billion).

Calculated

The largest single component is the €1.5 billion collected in excise duties on petrol and diesel. Motor tax and vehicle registration tax (VRT), which are calculated based on emissions, net the exchequer a further €2 billion, while the remainder comes from VAT and carbon taxes.

“Full electrification of the national fleet of vehicles will put a signification proportion of these revenue streams at risk unless there are changes to the structures of these taxes,” the PBO’s report concludes.

Some economists advocate moving to a system of road pricing – instead of using duty on petrol and diesel as a proxy for kilometres driven – with drivers given electronic number plates, which would signal to electronic gantries, not unlike how the M50 toll currently works.

The installation of a state-wide system is likely to be complex and costly, however. In the interim, governments appear to be favouring congestion charges, Singapore being a prime example.

“The technology used there is relatively simple: vehicles are required to contain an ‘in-vehicle unit’, which can be detected by radio frequency identification (RFID) when they pass under gantries that are located along the most congested routes, along with a pre-paid card from which payment is deducted,” a recent report by the Institute for Fiscal Studies in the UK explains.

“Predetermined fees vary by route and time of travel and cars are charged each time they pass under a gantry; the charges range from zero to the equivalent of £3.50 and are frequently reviewed and updated,” it says.

Its introduction saw an immediate reduction in cars in the city’s central business district and a rise of average traffic speed by 22 per cent.

The congestion tariff applying to central London is more complex and more costly but zero-emission vehicles such as EVs and hydrogen fuel cell vehicles are exempt.

You could imagine a system in Dublin that might impose a charge on motorists entering the city’s canal cordon or on vehicles coming off the M50 for the city centre.

The Irish capital is consistently ranked among the most congested cities in the world by analytics companies TomTom and Inrix.

Reducing emissions

While reducing greenhouse gas emissions and improving air quality are motivations, the greatest social cost to driving is the hours lost to the economy from people sitting in traffic.

A European Commission study from 2019 estimates the total external costs of road transport in the Republic amounted to about €14.3 billion or 5.7 per cent of GDP a year, primarily due to congestion in Dublin. Wage growth since then means the figure is almost certainly higher now.

The ultimate endgame of congestion tariffs and road pricing, if successful, will be fewer cars on the road and more people using public transport. It may be that greener motoring implies less tax revenue from transport whichever way you swing it.

So should governments be looking to something other than motoring to replace the lost revenue, particularly if the social cost of burning fossil fuels is removed?

While Government tax receipts swelled to a record €68 billion last year – aided by strong out-turns in income tax, VAT and corporation tax – demands on the public purse from an ageing population, the green transition, as well as planned investment in housing and health are considerable. The revenue implications of shifting away from combustion engines poses a real difficulty.