The government is considering introducing a 3p-per-mile tax for electric (EV) drivers. What could this mean for EV uptake over the next ten years? Will it be enough to fill the gap left by the loss of fuel duty revenue? What could it mean for consumers? We turned to Energy Systems Catapult’s whole-system light vehicle modelling tool, ESME Transport, to find out.
Our ESME Transport model analyses costs, policies, vehicle performance and consumer behaviour to determine possible EV uptake rates and the associated infrastructure requirements. We gave it the task of assessing the impact of a 3p-per-mile tax on zero-emission cars.
There is pressure on the chancellor to find billions of pounds in additional revenue for tomorrow’s budget. With EV sales on the rise, fuel duty revenue from non-electric cars is likely to decrease significantly over the next five years. By 2030, fuel duty revenue may have decreased by £5.5bn. However, a 3p-per-mile EV tax is unlikely to plug this shortfall as our modelling suggests it could only raise £2.3bn in 2030.
Raising taxes on EVs is also likely to impact the uptake of these vehicles. Our analysis suggests that introducing a distance tax from 2028 for EVs could result in 5% fewer electric cars on the road by 2030, and 8% fewer by 2035. While this is a relatively small percentage, it would make the government’s carbon targets harder to reach, as this tax could lead to an extra 4 million tonnes of CO2 being released between now and 2035.
Fuel duty currently raises around £24bn a year. Looking further out, revenue from fuel duty could fall £13bn by 2035 with income from an EV mileage tax providing £3.5bn that same year.
Our modelling shows that the tax would likely slow the uptake of EV vehicles leading to a slight increase in fuel duty revenue from non-electric vehicles. However, other sources of revenue will be needed to offset these losses.
Figure 1: Comparison of revenue generated by fuel duty and a distance tax on EVs
Costs have consequences, and while there will always be consumers who passionately choose an EV regardless, many private vehicle owners and commercial fleet operators will be driven by the finances. As we move firmly beyond early adopters and into mass-market EV uptake, there is a risk that introducing this tax will hamper the decarbonisation of road vehicles.
We have looked at the cost of owning a vehicle over the course of its lifetime, known as the total cost of ownership (TCO). ESME Transport shows that both with and without the 3p-per-mile tax, owning an EV is likely to be cheaper over the TCO period of the vehicle, with the tax only adding around 4% to the overall costs.
There are currently around 1.5 million zero-emission cars on the road in the UK. Our modelling scenario used here suggests there could be around 9.5 million fully electric cars on the road in 2030, increasing to 18.5 million by 2035. However, a mileage tax on EVs could reduce this by 5% in 2030, representing 500,000 fewer vehicles, and 8% or 1.5 million fewer vehicles in 2035.
Despite this impact on EV car uptake overall we expect there could still be a rapid increase in EVs, reaching 9 million in 2030 and 17 million by 2035.
Figure 2: Potential electric car uptake with and without a 3p-per-mile tax
Figure 3: Potential reduction of electric cars on the road due to a 3p-per-mile tax
What if there are slightly fewer EVs? The UK government is legally obliged to meet five-year caps on emissions – called carbon budgets. Under the current carbon budgets, car emissions need to fall 66% by 2035. This equates to an annual reduction of 38.2 million tonnes of CO2 compared to 2025, with a cumulative saving of 215 million tonnes of CO2 over this time period. This is a difficult target to hit, and any slowing of EV uptake may risk us meeting it.
A 3p-per-mile EV tax may mean that in 2035 an extra 0.5 million tonnes of CO2 could be emitted per year compared to no tax being implemented. Between now and 2035, the total cumulative extra CO2 emitted due to the tax could be around 4 million tonnes. While these are significant amounts of additional emissions, they are relatively small compared to the overall carbon budget targets.
Figure 4: Cumulative emissions savings in carbon budget vs potential increased emissions from a 3p-per-mile tax
Our modelling shows the difficult position the government is currently in. Revenue from fuel duty is likely to decrease significantly over the next 10 years, leaving the government with around £13bn less in 2035. Adding a tax to EVs is a way to try and make up for this loss. The proposed 3p-per-mile tax would likely only go part of the way to addressing this loss but may also only slightly impact the uptake of EVs over the next ten years. Therefore, this tax may be a good balance.
Other policy and tax-based options could also be worth exploring. For example, a more sophisticated tax could incentivise flexibility from EVs, helping shift demand for EV charging to times when the grid is cleaner. Another, longer-term option could be to integrate road transport into the UK Emissions Trading Scheme, which would mean that a direct carbon price would be applied to fossil fuels used in transport. All of these options need to be considered carefully in light of any distributional impacts they may have on low income and vulnerable consumers and include compensatory measures.
While step wise changes to policy and taxes will have their place, could it be time for the government to take a more holistic view of the sector and bring together all the pieces of the puzzle? Road tax, fuel duty, VAT on fossil fuels, EVs, EV mileage tax, the UK Emissions Trading Scheme and energy pricing are where all these things do and could intersect and the picture for consumers and businesses needs to be clearer.
Would you like to assess the impact of other taxes, incentives or policy decisions on road transport decarbonisation? If you want to work with us on a project using ESME Transport or ESME Road Freight, email: transport@es.catapult.org.uk
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