When every car is electric, what happens to fuel duty and the electricity grid?

An electric car parked at a charging point. With more and more cars like this, the demands on the electricity grid will grow. In the UK the Treasury will lose billions of pounds presently brought in by “road tax” and tax charged per litre of diesel and petrol. How can that lost revenue be found? And can the grid survive?

It’s always fun taking someone as a passenger in a modern electric car for the first time, because you know they’ll be surprised by two things. First: the lack of engine noise, so when you manoeuvre at low speeds, there’s no sound. Second: wild acceleration. Pressing the accelerator is like turning up a dimmer switch on a light: do it as fast as you like, the power’s there. It comes in a real push-back-in-the-seat way that always impresses.

What nobody usually remarks on: zero emissions. By not burning fossil fuels (at least, not at the point of use), you’re taking at least one step towards not making global warming worse. And more than anything, not making global warming worse matters more than ever.

The UK government has declared it will not allow the sale of new petrol or diesel vehicles after 2030, so everyone will be able to get the benefit of those experiences. This is a good thing. But this change will cause a lot of upheaval in the UK national budget, and in the electricity generation infrastructure and supply. And when I say “a lot”, I mean tens of billions of pounds in lost taxation, and a requirement of up to 20% more electricity generation.

That doesn’t mean we shouldn’t shift to EVs as quickly as possible. We just need to be clear what the problem looks like.

Budget holes in the road

First, let’s look at what this is going to do to the UK government budget. Taxes are raised from vehicle use in two ways: “vehicle excise duty”, otherwise known as “road tax”, an annual fee varying from zero to £2,070 depending on the vehicle’s carbon emissions, and fuel duty — a surcharge on each litre of petrol or diesel sold (though not levied on fuel used for farming).

For 2019, the latest date for which figures were offered, the Office for Budget Responsibility (OBR, a sort of independent advisor to the Treasury) reckoned that there would be about 37.5 million vehicles paying VED in 2019–20, at an average of £175, generating £6.5bn in taxes. (That’s 0.8% of all tax receipts, about £230 per household, about 0.3% of national income.)