Electric-car shift drains fuel taxes in some countries

Governments around the world have long encouraged motorists to buy electric cars. Now they are starting to grapple with a consequence of the green drive: dwindling income from fuel taxes.

Several countries have sought to phase out gasoline and diesel cars by offering tax and other incentives to drivers who buy new electric vehicles, part of broader efforts to cut carbon emissions. But in places where more EVs are hitting the road, income from fuel tax, which often accounts for a significant chunk of public revenue, is falling.

In Norway, home to the world’s highest electric-vehicle uptake rate, lawmakers have scrapped tax breaks on electric cars as they try to plug a hole in tax revenue. In the U.K., where fuel taxes account for some 7% of annual income, lawmakers are studying a potential new levy based on how much people drive instead.

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Electric-vehicle uptake remains low in all but a few of the world’s wealthiest countries and the tapering of tax income is expected to be gradual. Still, the conundrum highlights the costs and challenges of decarbonizing the wider economy, with cutting emissions from transport seen as key to hitting global climate goals. How early-adopter countries handle the transition will likely be closely watched in places like the U.S., where lawmakers hope to boost electric-vehicle sales, partly through tax credits.

In Norway, more than two thirds of new cars sold so far this year have been battery or plug-in electric vehicles, according to research group Rho Motion. That compares with just 4.6% of all cars sold globally last year being electric, according to the International Energy Agency.

But a 40% drop in Norway’s revenue from car-related taxes between 2013 and 2021 prompted lawmakers in March to suspend exemptions from the country’s annual motor-vehicle tax for electric-vehicle owners. The government has also started work on a new, technology-agnostic system of car taxation it wants in place by 2025—the year Oslo aims to end the sale of internal combustion engine vehicles.

"I would definitely advise other countries to look at what’s happening in Norway with quite rapidly falling revenue and to be aware that there might be a consequence of tax incentives," said Magnus Thue, state secretary in Norway’s finance ministry.

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A finance ministry spokesman said the sharp loss in tax revenue was "difficult to foresee" when incentives were introduced in the 1990s and 2000s but that successive governments had kept them in place to reduce emissions. The hole in public finances has been partly filled by higher taxes elsewhere, he added.

Norway’s Labour Party, which is set to lead a new government after winning a national election earlier this month, favors taxing the purchase of emissions-free vehicles over the value of $70,000 and the introduction of GPS-enabled road pricing, its climate spokesman said.

Road pricing, under which drivers pay for the distance they drive depending on the time of day they are behind the wheel, is also being explored as a solution to lower fuel taxes in the U.K. and Australia. It already exists in several forms, like toll roads, self-declared payments and congestion-charge zones that use cameras to read license plates and charge drivers in cities including London and Stockholm. Singapore recently switched to a satellite-based road-pricing system.

In the U.K., 14% of new vehicles bought so far this year have been battery or plug-in EVs, according to Rho Motion, and the government plans to ban the sale of new gasoline and diesel cars by 2030.

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Anticipating a drop in fuel taxes, a parliamentary transport committee is currently running a consultation on how to make up the shortfall.

"A consequence of the transition to electric vehicles is a potential £40 billion [equivalent to $54.47 billion] annual fiscal black hole…something will have to change," said Huw Merriman, a lawmaker for the governing Conservative party who chairs the transport committee. The committee is set to issue recommendations this year, with the government expected to respond early next year.

All types of road-pricing options are among those under consideration for broader use in the U.K., a transport committee spokeswoman said, adding that lawmakers encourage companies to suggest technological solutions.

Advocates say road pricing reduces congestion and is fairer than current fuel taxes that don’t account for where or when road users are driving. Critics argue that such camera networks aren’t a practical solution across larger areas, and are also unfair to poorer citizens or those in rural areas that are more reliant on driving.

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Motor tax changes have often stirred controversy. The British government in 2007 shelved proposals to install satellite receivers in all cars amid public outcry over additional taxation and privacy concerns. In France, a proposed fuel-tax increase in 2018 to combat pollution sparked demonstrations from so-called Yellow Vest protesters.

While the U.S. lags behind some European countries in electric-vehicle uptake—EVs comprise 4% of new vehicles bought this year according to Rho Motion—President Biden signed an executive order this summer calling for sales of electric, fuel-cell and plug-in hybrids to account for 50% of car and light-truck sales by 2030.

Greater adoption of EVs would likely put further pressure on U.S. fuel tax revenues, which the Highway Trust Fund uses to fund America’s roads, and have been falling in real terms for years because of improving fuel efficiency and the fact that fuel taxes aren’t indexed to inflation. Between 2020 and 2030, the fund is projected to accumulate a funding shortfall of nearly $190 billion, according to New York-based think tank Peter G. Peterson Foundation, which lobbies lawmakers on issues related to deficit spending. Fuel taxes comprised about 1.3% of U.S. total tax revenue last year.

Road pricing has been implemented on a trial basis in the U.S., including a congestion-charge program in Santa Monica, Calif., while a similar program in Manhattan, N.Y., has been delayed because of the pandemic. The infrastructure bill that recently passed the Senate contains a provision that would allow for a national road-pricing pilot scheme.

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Analysts say the opposition that per-mile road pricing has faced from privacy activists and tax hawks could prevent its adoption, but say that few alternatives exist.

"Highway-funding frameworks in Europe were working well until technology disrupted them," said John Larsen, director of the Rhodium Group, a New York-based energy research firm. "Here, it’s already presenting issues and now electrification is going to take off. That will amplify the challenges."