Electric cars will mean new motorist charges to fill exchequer hole

During the recent controversy on a proposed increase in tolls on Irish motorways – now delayed for six months – it emerged that Transport Infrastructure Ireland (TII) has been asked to examine multi-point tolling on these major roads, meaning motorists would face higher costs the further they travelled. This was presented as a longer term option. But as the State’s car fleet moves towards electric vehicles (EVs), a big hole will emerge in the State finances as the €5 billion raised in taxes on motoring is hit – and hit hard. After all, most of it is based on taxing fuels which will be used much less, or charging cars based on their emissions. How on earth might his revenue be replaced? The likelihood is that motorists will remain in the firing lines.

1. The size of the bill to the exchequer

It is impossible to estimate the precise cost to the exchequer as it will depend on the pace of change to electric cars. However, it will clearly be substantial. And the stakes are high, with the Parliamentary Budget Office (PBO) pointing out that the revenues from motor taxes represent more than half the annual budget of the Department of Education.

The recent Commission on Taxation estimated that if the Climate Action Plan target of having 840,000 electric vehicles on the road by 2030 were met, this would cost the exchequer €1.5 billion in lost VRT, motor tax and excise duty on fuels combined per annum. The PBO pointed out that when – or if – full electrification was achieved it would cost the vast bulk of the current revenues from the sector, around 8 per cent of total taxes. While some official studies estimate lower figures in the period to 2030 – and the forthcoming Climate Action Plan may tweak EV targets – everyone agrees this is a big issue for the exchequer, with senior Government officials writing in Tax Strategy Group papers that the move to electric vehicles will “severely challenge” revenue from the sector.

2. Where will the money be made up?

Motorists are buying electric cars for their green credentials but also as a long-term investment, particularly after recent fuel price rises. But the Commission on Tax recommended clearly that new measures be put in place to charge motorists to make up for the money the exchequer will lose. The rationale for doing this is to provide funds to repair and maintain roads, to recognise the environmental cost of making cars – and, of course, to replace lost exchequer income. Part of this would be achieved by reforming VRT and motor tax, now based on emissions, though the commission is not prescriptive in terms of what new basis should be used – it could be the value of the car, for example, or a flat charge. And of course remaining petrol and diesel cars would be charged a lot more. By the way, in the meantime, the commission recommends – as Government officials have proposed regularly as an option to ministers – that diesel excise be moved to the same level as petrol.

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3. Environmental charges

And there’s more. The commission also argues that in the longer term, the State should move towards a system of road usage charges – in other words you pay for your journey, and the further you travel the more you pay. The proposal TII is examining for motorways is a variant of this. The level of charge can also be based on location so, for example, rural motorists could be charged less, as one rationale of such a system is to cut congestion. It would also reduce emissions, at least until the whole fleet became electric. The technology to do this may not be fully available – it could be based on cameras and GPS chips – and there may be GDPR and confidentiality issues. However, some other EU countries are going down this policy road.

The commission recommends that while this is being developed, congestion charges be introduced in major cities, like those in London – where there is a £15 (€17.39) daily charge for cars entering central areas – Stockholm and Milan. Again, this reduces emissions by discouraging car journeys – as well as cutting the costs of congestion. And finally, it recommends additional parking charges in city centres, including those provided by employers to their staff.

The economic rationale here is to charge the motorist to recognise what are called “negative externalities” caused by motoring – the costs of pollution and congestion borne by the wider community, making motorists themselves pick up some of the cost. In turn this can reduce these polluting and congestion-causing activities. But clearly there are political issues here too!

4. The big costs of congestion

One interesting insight is the cost of congestion which, the commission points out, has a significant economic price – in delays – and hits quality of life, particularly for commuters. ESRI economist Barra Roantree, a member of the commission, recently tweeted European Commission estimates that this cost could amount to as much as 3.6 per cent of GDP. And a report by the UK Institute of Fiscal Studies presented 2015 estimates that the cost of congestion represented 80 per cent of total costs on society from motoring – though the increased importance of the environmental agenda in the meantime may change this calculus. Either way, there is an economic case to find ways to charge people for driving on the busiest urban roads at the peak times of day.

5. What about the politics?

Economic theory is clear on the ideal direction of taxing motorists. But the recent road toll controversy shows how politically sensitive this is. Systems of congestion charging, or in the long term charging for road usage, have the advantage of targeting – and for example can favour rural motorists who often have little option but to drive, as opposed to those who generally have access to pubic transport. Two big factors will push future governments to act – one is the loss of revenue and the other is the climate agenda and the fact that transport accounts for 20 per cent of all emissions. Nonetheless this is clearly a political minefield.