Are electric car owners getting a free ride on the taxpayer?

As more drivers switch to battery-charged vehicles, could the fuel excise revenue stream start to dry up?

Governments are seeking new ways to tax motorists as the rise of electric cars threatens fuel excise revenues.

They are seen as an important weapon in the battle against climate change, but could the rising popularity of electric vehicles put the brakes on a tax windfall for the Australian Government?

Fuel excises of about A40c a litre, depending on the fuel type, inject about A$16 billion a year into government coffers. As more drivers switch to battery-charged vehicles, however – and abandon petrol pumps – this revenue stream could start to dry up.

To date, the uptake of electric vehicles (EVs) in Australia has been slow, with minister for the Environment and Energy Josh Frydenberg recently estimating there are about 4000 EVs on the nation’s roads, equating to just 0.1 per cent of new vehicle sales.

To put that in context, sales of electric and hybrid cars represented more than half of new vehicle registrations in Norway in 2017, while EV sales are growing quickly in California and China. Nevertheless, the Australian Energy Market Operator forecasts that EVs could represent more than 18 per cent of all vehicles on the road in Australia by 2035.

Fuel excise taxes to fall

Paul Drum, head of policy at CPA Australia, says while there is a public perception that fuel excise revenue is pumped back into road infrastructure, the truth is that most of it goes into consolidated revenue for a broad range of government projects. He believes the potential loss of revenue as EVs become more popular highlights the need for holistic tax reform, including possible GST changes, rather than piecemeal changes to fuel taxes.

Related video: Uptick in electric cars prompts fuel tax review

“It gets back to the whole structure of taxes, commonwealth and state. It’s when issues like this come up that it demonstrates just how fragile revenue streams, which used to be relatively predictable, are becoming,” says Drum.

Electric vehicle tax dilemma

EVs present a dichotomy for Australian governments. On one hand, leaders can expect declining tax revenue as the sale of fuel falls if car buyers truly embrace EV vehicles en masse. On the other hand, they are under pressure to cut registration and stamp duties to encourage EV sales for environmental reasons.

Behyad Jafari, chief executive of the Electric Vehicle Council, which represents EV makers, has called on Australian political leaders to introduce subsidies to reduce the purchase cost of electric vehicles and home-charging infrastructure, and speed up the installation of public-charging infrastructure. He says it is a furphy that EV drivers are not paying their way given that their cars can cost many thousands of dollars more than equivalent conventional vehicles.

“Because their vehicles are more expensive, they’re paying far more tax than internal combustion engine drivers,” he says.

In line with his belief that taxes should contribute to beneficial outcomes for society, Jafari advocates different approaches to road-use taxes, including the option of charging more for driving on congested roads, which could encourage greater public transport use, and possible concessions for rural citizens who have to drive long distances and have less access to public transport. “So we can be a lot fairer with such a system.”

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Forecast jump in electric vehicle sales

New battery-powered cars such as BMW’s i3s are adding to the buzz about EVs around the world.

A report from financial services giant UBS predicts that almost one in six new cars sold around the world in 2025 will be EVs, while the share of new sales should be even higher in Europe at one in three cars. UBS forecasts 16.5 million global sales in 2025 for plug-in hybrid and full battery-electric vehicles.

As a way of countering the loss of fuel excises from EV drivers, some administrations have been backing road-user charging. In the US, for example, a number of states have moved to make up for lost fuel excises by imposing extra annual registration charges on EVs. At the same time, other states are providing rebates for drivers to go electric.

“So there’s a mixed policy response,” Drum says.

National strategy for electric vehicles

Jafari says Australia needs a national plan for EVs, otherwise it risks being a decade behind other countries in terms of technology rollout. “Do we let them get all the benefits of electrification 10 years before us, or do we get co-ordinated about it now?” he asks.

Drum believes potential road-user charges favouring EVs over combustion-engine cars could “open a can of worms”, with some groups – such as farmers or big trucking companies – inevitably calling for exemptions. He adds that the onus is on EV manufacturers to make their vehicles more competitive and desirable, rather the relying on subsidies to woo buyers.

“I get the argument about encouraging people to switch to electric cars, but the product has to be right in the first place.”

To that end, it will be crucial to develop improved EV model ranges and establish more access to public charging infrastructure. Will oil companies such as Shell and BP offer roadside charging stations, or could governments provide such facilities and gain a new revenue source to replace lost fuel tax revenue?

Answers to such questions will determine the outlook for electric vehicles in Australia and elsewhere.

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