1 Mar 22

As fuel tax revenue shrinks, road pricing becomes “inevitable”

Our governments have a problem. We’re doing what they ask of us – switching to EVs – but it’s costing them billions in lost revenue from fuel tax. So they’re looking for alternatives. Get ready for road pricing – the question is not if, but when.

Electrification is costing governments in two ways: by the incentives and tax breaks they use to promote the adoption of electric vehicles (EVs), and by declining revenue of taxes on petrol and diesel as we switch away from vehicles with internal combustion engines (ICEs). 

Radically redesigned

That is unsustainable. Sooner or later, mobility taxation will have to be radically redesigned. Some examples of the limitations of the current system:

  • In Norway, the world leader in EV uptake, car-related tax revenue has dropped by 40% between 2013 and 2021. To plug that hole, the government initially raised other taxes. But last year, it suspended the exemption of EVs from the annual motor vehicle tax. 
  • In the UK, a parliamentary committee raised the alarm over revenue loss due to electrification. Currently, vehicle excise duty and fuel tax bring in about £35 billion a year – or about 4% of the country’s entire tax revenue. 
  • In the U.S., the overall tax revenue from fuel was $52 billion in 2019, or about 1.3% of total tax revenue. That money is used for road maintenance, but due to better fuel efficiency and non-indexation of the tax, the amount is already falling short. Between 2020 and 2030, the total funding shortfall is expected to be $190 billion. 

Fuel tax may turn out to be one of those things you start missing only when they’re gone. Because say what you will about fuel tax, at least it’s ‘fair’ – you pay more in tax the more fuel you use. 

That kind of fiscal scaling is hard to replicate for EVs, as it is quite difficult to single out the electricity that’s used to recharge the vehicles for taxation. That would only work for public chargers – and taxing those would simply drive even more people towards home charging.  

Connected capabilities

Writing in Forbes, veteran tech journalist and editor of WhichEV James Morris sees the pivot from ICEs to EVs as a good opportunity to further increase the pay-per-use principle, and make mobility tax more equitable. 

He advocates road pricing – but done smartly, thanks to technology: “In general, the more you use the roads, the more you should pay to maintain and develop them. Modern cars (increasingly) provide (data on) current mileage. This could then be used to calculate a tax level, either via dynamic monthly payments or annually.” 

“A mileage-based system is the only fair way to replace the current fuel tax revenue as it disappears along with the cars that pay it. Let’s hope governments see sense and realise that while EVs collapse fuel revenue tax, their connected capabilities could enable an alternative that might work even better – and be fairer too.”

In principle, vehicle telematics makes it fairly easy not only to capture, calculate and charge for distances driven, but also to factor in the time of day when driving. This second element makes it possible to penalise driving during peak hours, thus creating a fiscal instrument to combat congestion. 

Yellow Vest protests

Forms of road pricing are already in use as toll roads (e.g. in France) or camera-enforced congestion charge zones (e.g. London or Stockholm). A pilot scheme has operated in California, and Singapore (pictured) recently switched to satellite-based road pricing. Faced with rapid electrification, governments everywhere – including across Europe – are considering applying the principle more broadly. Even in the U.S., the infrastructure bill that recently passed the Senate provides for a national road-pricing pilot scheme.

It is not unlikely that Norway once again becomes the pioneer country leading global change. The Norwegian government is contemplating the introduction of GPS-based road pricing by 2025. 

However, as many governments have experienced to their detriment, drastic changes in mobility taxation can cause strong negative reactions with the public. 

  • In 2007, the UK government shelved a proposal to install satellite receivers in cars amid public opposition to extra taxes and concerns over privacy.
  • In 2018, the French government proposed increasing fuel tax to combat pollution – unleashing the now-infamous Yellow Vest protests. 

Few alternatives

While road pricing has many advocates – who say it is fairer than fuel tax and can be used to combat congestion – others say a generalised technology-based tax system would be impractical and a potential breach of privacy rules. Some also point out that the pay-per-use principle could turn out to be unfair for those living in rural areas, forced to drive longer distances.  

However strong the opposition to road pricing may turn out to be, the fact remains that experts see few alternatives for an equitable tax on mobility to replace the fuel tax in the age of (near) full electrification. 

Or as Toby Poston, Director of Corporate Affairs at the British Vehicle Rental and Leasing Association (BVRLA) said to the Transport Select Committee of the House of Commons in Westminster: “The longer we leave (road pricing), the more people will get used to the idea of having very low-cost transport… and it will then come as a shock to them.” In the same session, he called road pricing “inevitable”. So it’s not if, but when…

Image: Road pricing is generalised – and satellite-based – in Singapore (Shutterstock)

Authored by: Frank Jacobs