finance

Sunak faces the brutal maths of electric vehicles


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The past week’s acute fuel shortages in forecourts across Britain demonstrate that range anxiety is not just an affliction for electric vehicle owners. Motorists waiting hours for fuel are bound to consider the costs and benefits of greener vehicles.

For UK consumers, the great news is that going green no longer costs more. Over 90 per cent of new cars are acquired using finance rather than outright purchase and the lower expected depreciation of electric vehicles offsets higher list prices.

Take two popular, equivalent and new models currently in stock — a petrol-powered Volkswagen Golf and an electric VW ID.3. The average monthly leasing cost for a private buyer is £50 higher for the ID. 3, but that is almost exactly offset by the cheaper costs of charging it, rather than filling it with petrol over a four-year lease. Naturally, it’s difficult to be precise here — we do not know the exact future cost of fuel or electricity and this could tip the balance one way or another. But the maths for the consumer is clear. Electric vehicles now cost roughly the same.

For company car drivers, the same comparison is almost a no-brainer. Such is the generosity of the government’s income tax charges for benefits in kind on electric vehicles that the Golf owner would pay 13 times more income tax over four years in respect of the company car than the ID. 3 driver.

Economics teaches us that people respond to incentives and, not surprisingly, the big switch in motoring is happening. Electric vehicles represented 11 per cent of all new car registrations in August, close to double that of a year ago. The speed of the transition is far exceeding expert opinion and Norway’s experience suggests electric vehicles will be getting close to the majority of new sales by 2027, when current official forecasts suggest they might account for roughly a fifth of sales.

So far, the story of the electrification of Britain’s vehicle fleet is one of environmental gains and happy consumers. But this does not take into account the cost to taxpayers and other road users of the switch. Compared with a VW Golf driver, the ID. 3 owner benefits from a £2,500 plug-in grant for the new car, a 5 per cent value added tax rate on electricity, no fuel duty and no annual vehicle excise duty. In addition, company car drivers benefit from much lower income tax on their benefit in kind, in effect giving them a few thousand pounds of additional (almost) tax-free income.

For a private buyer choosing an ID. 3 over a Golf, I calculate the Treasury loses roughly £1,250 a year in revenues. The net loss rises to £2,780 for a basic rate taxpaying company car driver and £4,160 annually for a higher rate taxpayer.

So, for higher-rate taxpayers, every million people who switch to an electric vehicle currently comes with a £4bn annual exchequer cost. That is enough to wipe out a third of the tax increases on earnings that Rishi Sunak has just imposed to bail out the health service and social care.

Driving petrol cars is unsustainable for the environment, but this level of subsidy for switching is just as unsustainable for the public finances. It should not and will not last. For company cars, the implicit cost of carbon abatement is simply absurd.

The hope is that as the cost of producing electric vehicles falls, so will the subsidy rates. But the Treasury will still be significantly short of revenue because it cannot easily find a substitute for the £30bn it currently raises annually from road fuel duties.

The government urgently needs to start explaining why road user charges are needed alongside the switch to electric vehicles to help the public finances. It should also reintroduce congestion pricing. Otherwise, driving electric might save our lungs, but will choke up our roads instead.

chris.giles@ft.com



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