Raising the barriers to electric vehicles

Last week, the UK Government announced that battery electric cars would be subject from 2025 to the annual road tax from which they were previously exempt.  The amounts involved are not huge in the context of the purchase price or annual operating costs for a car - £165 for cars with a list price under £40,000 and £355 for more expensive cars.  However, there has been a vocal outcry from consumers and some parts of the media, as this was a measure that had not been leaked to the media in the days running up to the official announcement as the UK Government attempts to re-establish credibility after the recent chaos.  Preferential tax rates for business users will not change until 2025, when they will be increased by 1% each year in the following three years.  These measures will not make a huge contribution to the £50 billion gap in the UK Government budget, but they are significant as the first step in normalising the tax treatment of electric cars.

Across Europe, the take-up of electric cars has been incentivised by all governments, partly to compensate for the higher initial cost, but also to overcome consumer concerns about the practicality of electric cars.  These incentives come in many forms, from straight discounts on the purchase price through to exemption from annual license fees, road tolls and other charges.  Electricity as a fuel is also charged at lower tax rates than fossil fuels in most markets.  Many early adopters of EVs saw them as a lower cost form of motoring, particularly if they could charge at low cost from off-peak electricity rates, solar, or free charging points.  That is now changing, exacerbated by the rising cost of electricity in the wake of the Russian invasion of Ukraine.  For users of public charging points, the ‘fuel’ cost for an EV can now be the same as for a petrol car, and for those who use high speed chargers with typically higher prices, the cost can already exceed that for petrol.  A far cry from when I had my Tesla with free supercharging…

However, this should not come as a surprise to anyone – with the exception of the rise in electricity prices generally.  The total tax take in the UK from fuel duties and other forms of tax on car usage has been estimated at £35 billion per annum, and similar numbers will apply in other markets.  That’s around 1.5% of GDP, so around three times the total UK foreign aid budget and not far off the 2% target for defence spending set by NATO for member countries.  It was always clear that governments would have to remove incentives and generate similar amounts of taxes from the EV parc as they have done in the past with petrol and diesel cars.  The process has been under way in Norway for some time, as the proportion of EVs in the new car sales mix now approaches 80%.

It is therefore inevitable that over the next few years as the 2035 zero emissions sales mandate looms closer, European governments will be walking the tightrope between incentivising EV sales and recovering lost tax revenue.  It would be nice to think that there would be some joined-up thinking between governments and industry in order to align reduced incentives and a growing tax burden with the evolution of product cost, where there is still an expectation that EV product costs will reduce in real time as the result of growing volumes and improving technology.  However, as in the example last week from the UK, it seems far more likely that changes will come without notice and in increments that will feed a succession of negative news in the media influencing consumers’ attitudes to an EV purchase.

This will put challenges on the industry as a whole.  Manufacturer forecasts and dealer targets will always be subject to correction as tax regimes change, and manufacturers will need to be fast to react to changes by reallocating production to markets where demand has not been weakened by sudden tax changes.  Dealers need to sell EVs on their intrinsic merits, rather than on any operating cost advantage that is dependent on continuing government incentives.  This will also feed through into the used market for EVs, where values will be influenced not only by the performance drop-off and how this compares with newer technologies, but also by the shifting sands of incentives and operating costs.  Life will continue to be challenging.

Picture Daily Express