How will Ireland fund essential services as dirty petrol guzzlers are replaced by electric cars?
As much as €3bn could be lost to the Irish Exchequer as low-emission vehicles become the norm by 2030, according to industry experts. Huge amounts of revenue used to fund essential services are generated by vehicle registration tax, motor tax and fuel tax and could largely disappear as the petrol engine is slowly consigned to history.
Almost €5bn – or 7pc of government revenue – is generated through Vehicle Registration Tax (VRT), fuel tax, tolls, motor tax and Vat, it is estimated. As yet, there is no clear plan as to how this money can be replaced.
A government taskforce has been set up to explore options to accelerate the uptake of hybrid, electric and other low-emission vehicles. It will propose a package of measures for inclusion in October’s Budget to promote electric vehicles in particular.
That, of course, is a laudable aim and fits with a pressing need for measures to mitigate climate change. Pictures over the past week from Houston and Donegal dramatically illustrate the good sense of this policy. Such measures are also absolutely necessary if Ireland is to avoid massive EU fines.
They will also help curtail the air pollution caused by the thousands of combustion engines that daily clog our towns and cities, damaging people’s health. Just 8,000 electric vehicles will be sold in Ireland by 2020. But as this figure jumps – as it must – it is far from clear as to just how big a hole will be blown in Exchequer finances over the next 10 to 15 years.
A range of support measures encourage the adoption of electric vehicles and other environmentally friendly forms of transport. Up to €10,000 worth of grants and VRT relief is available. While the grants are likely to be scaled back as the electric fleet grows, it will be politically difficult to reintroduce VRT on such vehicles, with the system now directly related to a vehicle’s emissions. In 2014 VRT generated €0.54bn.
Motor tax rates are also increasingly related to CO2 emissions. Motor tax generated €1.12bn in 2015 and was used to fund the country’s local authorities, but this funding stream will only decrease as motorists leave behind their petrol guzzlers. As the environmentally friendly fleet grows, the Exchequer will take an increasing hit and the biggest hit of all will come from a dramatic fall in the amount of tax collected from fuel.
In simple terms, how do you levy fuel tax on an electrically-powered vehicle that does not use fuel? In 2015 alone, the Exchequer received €2.3bn in diesel and petrol excise and carbon taxes, excluding VAT. Indeed tax accounts for 70pc of the price of a litre of petrol. Little wonder it is known as one of “the old reliables”. Not for long. As the huge fleet of petrol cars disappears in the next decade or so, the impact could be dramatic.
The big question that needs to be asked is how does this income stream for the State get replaced even as the country makes the absolutely crucial shift to low emission vehicles?
And it is not only an issue for motorists. Taxes raised by motoring pay for essential services right across society, such as health and education. Future governments will face some stark and difficult choices as they look to replace all of this lost income. Taxes on property, income and business may have to rise to fill the hole.
Indeed, in Norway, where subsidies and other measures saw the electric vehicle fleet grow to over 100,000 last year, the government has been forced to row back on some incentives due to their overwhelming success.
A more likely approach is the introduction of extensive road-user pricing. That is already implemented through tolls on motorways in Ireland and by congestion charging in cities such as London. But in its most developed form, this would see technology introduced to charge drivers per kilometre of road driven. For some drivers it could even mean a saving on the high level of taxation they face through other means at the moment, and it is the approach slowly being adopted right across Europe. But look at the debacle over new water charges to see just how difficult an issue this could become for any government operating in a four-year electoral cycle.
The Government should still accelerate its efforts to replace dirty, carbon-emitting vehicles as quickly as possible. But careful consideration is needed as to how the revenue this fleet generates is replaced, so that there is still cash to fund schools, hospitals and other essential services.
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