Wednesday 19 December 2018

Colm McCarthy: Electric car incentives face rocky road

The whole system of Government revenue from road transport needs an overhaul, writes Colm McCarthy

PIONEERING: Elon Musk has led the charge towards electric cars with his range at Tesla. Photo: Bloomberg via Getty Images
PIONEERING: Elon Musk has led the charge towards electric cars with his range at Tesla. Photo: Bloomberg via Getty Images
Colm McCarthy

Colm McCarthy

If the Government persists in encouraging the switch to electric cars they will need to move beyond aspirational targets - they will have to get serious about the manner in which motoring is taxed and the economic and social road system costs recovered from users.

The Exchequer relies heavily on revenue from motoring in the form of purchase taxes, fuel taxes, annual taxes on vehicle ownership and road tolls. But there is a subsidy instead of a tax on electric car purchases, the fuel tax is avoided (electricity is even free at some charging points), there are discounts on annual taxes, reduced tolls and relief from benefit-in-kind tax for electric company cars. These policies should be seen as a publicity-seeking special offer designed to bring the new electric car option to public attention, rather like the once-only inducements to switch your credit card provider. If the policy succeeds it cannot be continued.

There are only 4,000 electric cars in Ireland but the Government is cheerfully targeting 500,000 (out of a national total of about two million) by 2030. If this figure is achieved, the current reliance on motoring taxes will become unsustainable. There is no shortage of confident predictions that all road vehicles, including trucks and buses, will be electric as early as 2040. Last year, the government of Denmark withdrew its generous tax deal on electric cars because it began to succeed.

A world in which petrol and diesel models (cars account for 80pc of the total road-vehicle fleet) begin to disappear is one in which the Government budget will have to look very different. Indirect taxes (including excise, VAT and carbon tax) on automotive fuels bring in about €3bn a year, with a further €2bn or so coming from the annual car tax and Vehicle Registration Tax, a special purchase tax, in addition to VAT, on new (or imported used) vehicles. Road tolls bring in several hundred million more.

When you pay €1.40 or so for a litre of petrol at the pump, about 85c goes to the government. Some of this is VAT, a general tax on consumer spending which applies to almost everything, but this accounts for only about 30c of the tax imposition. The rest is a charge directed at road users and intended to recoup the substantial costs of road maintenance, repair and traffic management. If you buy diesel it costs about 10c or 12c less per litre, mainly because the excise duty is lower.

Fuel tax and road tolls can, in principle, be defended on the grounds that they are related to usage: the public is paying for a facility otherwise provided free at the point of use. But the Irish version of the fuel tax is anomalous: there is no obvious justification for the discount on diesel and the amount of fuel consumed per vehicle is not easily related to the costs actually imposed. The road tolls are entirely arbitrary: there are two tolled bridges across the Liffey in Dublin but 11 are free. Around the country some new motorway stretches are tolled but many are not. A trip on the M3 from Dublin to Kells in Co Meath affords two opportunities to cough up, while the longer trips to Portlaoise or Kilkenny are costless. The ever-deserving citizens of Cork have been spared payment for using the Lee tunnel, but there is no such indulgence in Limerick. Truckers are well aware that a crafty detour off the motorway through Abbeyleix saves a few bob on the Dublin-Cork route. Limerick-bound truckers can avoid the toll and enjoy a fleeting visit to Borris-in-Ossory.

In Dublin, the under-utilised Port Tunnel has higher tolls than the overburdened M50 and is the only toll point in Ireland with differentiated charging by direction and time of day, cheaper when traffic is light. For some strange reason buses are free in the Port Tunnel, but must pay on the M50.

The anomalies in the road tolling regime are at least visible. It has not been designed to manage traffic but rather to extract revenue to pay for road improvements in more or less random fashion. Public acceptance appears to be based on the newness of the tolled sections - people seem to think a fine new road has to be paid for; it saves time so it's worth a few quid extra. In a more rational regime it is the congested roads, of whatever vintage, that should attract charges.

The weaknesses in the rest of the motor taxation system are hidden in a fog of resigned familiarity. There is no sensible reason for a standing annual charge on road vehicles independent of usage, however calibrated to engine size, fuel type or emission characteristics. If your car stands motionless in the driveway day after day, instead of racking up 50,000km a year as some motorists do, the tax is unaffected. You should face a greater disincentive if you drive just 10,000km at peak times on busy city streets rather than the same or a greater mileage on deserted rural roads. The standing annual charge cannot do this, nor can the once-off purchase tax.

The annual charge is moreover regressive - the shiny new model costing €25,000 faces the same annual charge as the identical eight-year-old version worth one-third the price.

It is 54 years since the British economist Reuben Smeed chaired an expert panel on road pricing which advised the UK government to abandon the haphazard taxation of cars and fuel in favour of an explicit system of congestion charging, designed both to raise the needed revenue and to manage traffic congestion. Smeed's suggested system has been endorsed by every succeeding technical evaluation and ignored by politicians, not just in Britain, but in most parts of the world. There are exceptions, Singapore being the most sophisticated example. But several European cities, including London, have introduced low-tech cordon charging and the Dutch government has embarked on a process which may result in a GPS-based system of user charging in the Netherlands.

It is the threat from electric vehicles that is finally spurring governments to action, it would appear, since it is simply not possible to tax electricity destined for automotive use at a rate higher than the electricity that lights your home and powers your fridge.

Not all of the diesel used in Ireland is burnt in road vehicles - there are off-road uses, notably in agricultural tractors. Through the simple device of dyeing the diesel green, the Irish authorities have been able to charge a lower rate of tax for non-road users. But there is no such thing as green electricity, except for marketing purposes - electrons are stubbornly colourless. So the advent of a high market share for electric cars would mean the demise of the fuel tax differential.

In October's Budget, the Government should level with potential electric car buyers and tell them that the generous array of incentives is temporary. They should also commence the removal of the excise discount on road diesel and initiate some serious studies on the introduction of a new system of congestion-related user charging.

Today's incentives for switching to electric vehicles can only survive if they fail to convince motorists.

Sunday Independent

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