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The £27bn EV tax giveaway the media ignored

Image: Number 10

Given the government’s self-inflicted struggle to ‘cut the deficit’ and, ultimately to ‘balance the books,’ announcing an unfunded £27.6bn tax give away is something you might assume that they would not want to do.  Moreover, even in the so-called ‘silly season’ (when our MPs are on holiday) we might expect the mainstream media to pick up on such a massive announcement.  Well, the government did just that, and the media missed it.

I refer to the government announcement that Britain will ban internal combustion engine (ICE) vehicles from 2040.  In and of itself, the announcement was widely applauded.  After all, what is not to like about a switch from nasty, climate-change inducing petroleum to green, friendly electricity?  The government might even save some money.  As Anushka Asthana and Matthew Taylor in the Guardian suggest:

“The government warned that the move, which will also take in hybrid vehicles, was needed because of the unnecessary and avoidable impact that poor air quality was having on people’s health. Ministers believe it poses the largest environmental risk to public health in the UK, costing up to £2.7bn in lost productivity in one recent year.”

Of course, that £2.7bn saving will no doubt be used up paying additional old age pensions and social care costs to people who might otherwise have died prematurely from such unpleasant diseases as emphysema and lung cancer (so not really a financial saving).  Nevertheless, we have to do something about climate change, and in the absence of anything more sensible, switching everyone from ICE to electric vehicles is more politically acceptable than most.

Don’t get me wrong, I like electric vehicles.  If I were looking to buy a vehicle today (and assuming I could stump up the cash) I would not hesitate to buy one.  And insofar as we are going to be driving at all in future, it is preferable that we switch to them.  On the basis of today’s costs, I agree with the sentiment of Joe Svetlik in a recent article for BT:

“If there’s one thing that experts agree on, it’s that electric cars are the future, because they’re both cheaper to run and more environmentally friendly.”

We understand that electricity generated using gas, nuclear, solar and wind produces significantly less carbon dioxide than burning petroleum in our engines (although using public transport, walking and cycling are even better).  But where does the cost advantage come from?

Part of the cost difference is that ICE engines are less efficient than electric motors.  However, the big cost difference is in tax and subsidy arrangements.  To begin with, the government operates a grant scheme to pay 35 percent of the cost of a new electric vehicle (up to a ceiling of £4,500).  If the owners of all of today’s 37,760,000 ICE vehicles were to switch to electric ones, this scheme alone would cost £170bn.  This, however, would be a one-off cost to the taxpayer.  In the long run, the greater loss to the public purse comes from the 57.95p fuel duty that the government levies on every litre of petrol and diesel that we consume (together with the 20 percent VAT on top of that).  According to a 2016 paper by Thomas Pope and Tom Waters for the Institute for Fiscal Studies, this fuel duty brings in £27.6bn – the second largest indirect tax (behind VAT); 3.7 percent of the government’s income, and nine times the unemployment benefit bill.  It is largely by avoiding this fuel duty that electric vehicles are so much cheaper than their ICE counterparts.

The other hidden subsidy to electric vehicles comes from the various levies and price guaranties (such as the £92.50 guaranteed price to the operators of the Hinkley Point C nuclear power station) and above cost feed-in tariffs for wind and solar that account for a growing proportion of our energy bills.  In effect, every household that does not have an electric car is paying a proportion of the travel costs of every household that does.

The primary reason that electric cars are cheaper to operate than ICE vehicles is that whereas ICE vehicles are heavily taxed, electric ones are heavily subsidised.  It is as simple as that.  The two questions that this gives rise to are:

  • Is it reasonable to subsidise electric vehicles?
  • Is it reasonable to do it in this way?

My own view is that UK energy and resource shortages in the 2020s suggest that we need to revert to public transport.  As such, subsidies and tax breaks for any form of private vehicle ownership should be phased out.  Nevertheless, I acknowledge that a large part of the electorate still believes in the cornucopian happy motoring future in which we make a painless transition to electric vehicles.  Thus, it is more than likely that voters will be happy to elect governments that provide subsidies for electric vehicles.  Indeed, the subsidy regime is likely to become increasingly popular as the ban on ICE vehicles draws nearer.

The answer to the second question, though, has to be a resounding no.  With high energy costs undermining UK businesses, with around 3 million UK households experiencing fuel poverty and with rising energy bills already a political issue for millions more, there is no justification (economic or moral) for asking every business and household in the country to subsidise the motoring costs of those fortunate enough to be able to afford an electric vehicle.

In practice, the subsidies to electric vehicle owners are likely to be far greater than today because of the need to develop an entirely new grid infrastructure to accommodate the proposed ban on ICE vehicles.  Upgrades will be needed across the grid, from the main fuses in our houses through to the entirely new (over and above those already in the pipeline) power stations to provide the additional electricity to charge all of these new vehicles.  There are serious moral and political implications to simply adding these costs to the energy bills of all households irrespective of whether they benefit or whether they can afford to pay.

In fact, it is doubtful that the government has even considered these issues… most journalists certainly didn’t.  But in a recent article for the Financial Times, Peter Campbell and Patrick McGee interviewed the CEOs of some of Europe’s leading vehicle companies about the coming ban on ICE vehicles.  Their responses are telling:

“’I want to be very clear here,’ Carlos Tavares, chief executive of PSA, the owner of Peugeot, Citroën and Opel-Vauxhall, told reporters at the [Frankfurt Motor] show. ‘We are moving from a technology-neutral era into an instruction to go electric.’ He said interventions to get more electric cars on the road are an unwelcome intrusion. In short, politicians are attempting to pick winners in a world with several competing technologies, from hybrid and electric to fuel cell technologies. ‘If you have ministers in Europe who say they will forbid the use of internal combustion engines, then I have to comply and we will have to transform, re-engineer and retrain,’ he added. ‘But if electrification is not profitable in future, we all have a problem.’

“Governments have been making demands for cars to be cleaner, more efficient and safer, but if cars are going to be electric and self-driving, governments also need to step up their game to provide communications infrastructure so cars can understand the surrounding environment. ‘We think far more holistically than just the car. If the city cannot deploy infrastructure, then there is nothing for the car to talk to,’ says Thierry Klein, vice-chair of the board at 5GAA, an association that aims to bridge the gap between carmakers, IT providers and governments. Mr Klein says when he speaks to city and state governments about making investments in road technology that would enable cars to speak with each other, he gets blank stares. ‘All of a sudden people step back and realise they haven’t thought about it,’ he says.”

This latter point is no doubt true at the national level too.  I doubt very much that Philip Hammond’s forthcoming budget speech will include a pledge to simply not collect the annual equivalent of Britain’s total housing benefit spend after 2040.  Nevertheless, without some thought, it is difficult to see where the government intends finding that £27.6bn in lost fuel duty.  Nor is it easy to imagine the government getting away with handing out £170bn in electric vehicle grants while millions of households fall back on foodbanks to feed their children; still less adding the (probably eye-watering) cost of the new electric car infrastructure to the energy bills of households and businesses that are already struggling to balance their own books.

Like so much else in the so-called ‘green energy’ space these days, the most likely explanation for the lack of joined-up thinking is precisely that when challenged, “all of a sudden people step back and realise they haven’t thought about it.”

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