Review of UK tax system needed to support net zero transition, report says

“It is particularly useful that the report recognizes the need to introduce some form of road pricing to replace fuel duty receipts which will phase out as the transition to electric vehicles progresses. Previously, the government has hinted that new car taxes may be needed. However, given the current cost of living crisis, a broader public debate on a road pricing review may be seen as politically unpalatable due to the risk of public backlash,” she said.

The report recommends that a variety of options for road pricing systems be explored, ranging from a simple charge per mile driven, levied on the basis of annual odometer checks; to more sophisticated systems that vary the charge based on time of day or location or type of road used, based on vehicle tracking technologies.

According to the latest Treasury estimates, 4% of total UK tax revenue was based on fossil fuel consumption in 2019-20. Fuel tax has been the biggest contributor, raising £21bn in 2021. These revenues will shrink to zero as the transition progresses. Without a change in tax policy, the OBR Forecast (242-page / 2.73MB PDF) that the loss of tax revenue from decarbonisation could amount to £1.8 billion in 2025-26.

“The significant fiscal risks associated with the economy’s transition to net zero are not going away and need to be addressed. Any fuel tax replacement must be simple and easy for the public to understand. Effective communication with the public will be key to the success of any new car tax. Indeed, as the CCC points out, a delay in developing a strategy and communicating options to the public can also be politically dangerous, risking greater public discontent, as drivers might begin to assume that the driving electric vehicles will still be tax exempt,” Simmons said.

The report also recommends that the tax review consider tax breaks for the development and use of green technologies; the role of economy-wide carbon pricing in supporting and encouraging decarbonization; and the removal of tax distortions linked to fossil fuel subsidies, which can have the effect of penalizing low-carbon technologies.

“The UK tax system plays a varied and important role in decarbonising the economy – it must fund, encourage and accelerate the net zero transition,” Simmons said. “Designing effective tax policy for a net zero economy is vital and progress in this area is urgently needed.”

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