Replace fuel duty with road pricing scheme, say researchers

IFS says a new road pricing scheme should be introduced to recoup the loss of revenue from fuel duty once EVs become the norm

M6 motorway traffic

Once electric cars have replaced petrol and diesel models, drivers should be charged under a road pricing scheme to replace fuel duty, researchers at the Institute for Fiscal Studies (IFS) have suggested.

Motoring taxes raise around £40 billion for the Government each year - roughly five per cent of its annual revenue and equivalent to around £750 per UK adult. The majority of this is fuel duty, which is expected to bring in £28 billion in the 2019-20 financial year, as well as an additional £5.7 billion from the VAT on that fuel duty.

• UK petrol and diesel prices: February price rise ends three months of cuts

With the sale of new conventional petrol and diesel cars set to be banned by 2040, though, and the Government’s commitment to net-zero carbon by 2050, this major source of revenue will dry up in the coming years.

In order to recoup this £28 billion loss, the IFS has called on the Government to implement a road pricing system, with charges varying depending on time and location of travel. It suggests that the first step in moving to this policy could be the introduction of a flat rate mileage tax.

The IFS argues that the revenue from this and other motoring taxes, such as Vehicle Excise Duty, will still be necessary following the electrification of cars as issues such as congestion will remain.

The researchers also say that road pricing should be introduced sooner rather than later, as it will be much harder to sell to the public after large numbers of people have purchased electrified vehicles with the expectation of saving money by not paying fuel duty.

• Electric vehicles cheaper to own than petrol or diesel cars

Rebekah Stroud, research economist at the IFS, said: “Cuts to fuel duties over the last two decades have contributed towards revenues being £19 billion a year lower than they would have been.

“Another 2p cut, as reportedly mooted by the Prime Minister, would cost a further £1 billion a year. The bigger challenge is that revenues are now set to disappear entirely over coming decades as we transition to electric cars.

“The Government should set out its long-term plan for taxing driving, before it finds itself with virtually no revenues from driving and no way to correct for the costs – most importantly congestion – that driving imposes on others.”

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