The ripple effects of electric vehicles - The Monday Briefing


Mass adoption of new technologies creates ripple effects across economies and societies, often in unexpected ways. British time had to be standardised across the country in the early nineteenth century to create national timetables. The car paved the way for America’s population to shift from cities to the new suburbs. Standardised shipping containers collapsed freight costs and helped spur the globalisation of the last half century.

The shift to net zero carbon emissions is the greatest transformation since the move from steam and animal power to electricity and oil in the last century. The effects are likely to be similarly pervasive.

The mass adoption of electric vehicles (EVs) provides a good illustration.

The pace of EV adoption is speeding up. The UK’s best-selling car last month was the Tesla Model 3 and one in six new cars sold were powered solely by batteries, up from 1 in 15 a year earlier.

The UK government plans to ban the sale of conventional petrol and diesel cars by 2030 and to ban new hybrids by 2035. By 2040 the government aims to eliminate sales of all other road vehicles that produce emissions, including motorcycles, buses and lorries.

As well as reduced carbon emissions the rise of EVs will have other, far reaching effects.

EVs cost more than conventional cars but have lower operating costs. The electricity to power a 100-mile journey in a Tesla Model 3 costs £5.59, about one-third the price of the petrol needed to drive a Ford Focus the same distance. (EVs can also qualify for cheaper parking and are more favourably treated in low-emissions zones, such as London’s.)

Modern history demonstrates that as goods and services get cheaper people consume more of them. With goods there tends to be some sort of upper limit. How many shirts, TVs or cars does even the richest person need? With services, such as health care or travel, demand is less constrained. If the marginal cost of motoring falls, as it will with EVs, we are likely to drive more.

The UK government estimates that congestion already accounts for almost 80% of the societal harm caused by driving one additional mile. In 2019 the delays, wasted time and welfare losses cost the UK the equivalent of 3.0% of GDP. On current policies EVs will increase these costs. According to the Department for Transport, a move to zero-emission motoring could raise traffic levels by 50% by 2050.

Mass EV adoption will also put a dent in the public finances. Fuel duty and vehicle excise duty (VED or road tax) generate £37bn in tax revenues every year. Taxes on EVs generate almost nothing.

As well as the loss of fuel duty and VED, buyers of EVs through company schemes receive income tax relief on the benefit in kind and are eligible for a £2,500 grant. The FT recently calculated that a higher rate taxpayer choosing an electric VW ID.3 as a company car instead of a VW Golf costs the Treasury £4,160 a year in lost revenues.

Filling the gap in government revenues created by a move to zero-emission driving would require significant tax increases, equivalent, for instance, to raising the basic rate of income tax from 20% to 26%. As the FT’s Chris Giles recently wrote, the chancellor now faces “the brutal maths of electric vehicles”.

There is an obvious solution. Charging drivers for road use would solve the congestion and the revenue problems. Dynamic or variable congestion charging would also allow far more efficient pricing of road space, charging more for congested roads and at busy times, much as Uber does for its taxi service.

For many economists the theoretical ideal is a zero-emissions vehicle fleet subject to dynamic road pricing. The practical side is difficult. Taxing road use is likely to be politically charged – witness the 2000 UK fuel protests that led to a lasting freeze on fuel duties or the gilets jaunes protests in France that have continued since 2018. There are distributional dilemmas too. It is generally wealthier motorists who can afford the higher cost of EVs; they then pay no fuel duties or car tax. The need to drive ownership of EVs is making the taxation of motoring more regressive.

EVs illustrate how the transition to net zero is bringing change and trade-offs. Policymakers want to drive take-up while limiting congestion, protecting the public finances and working with the grain of public opinion. Many other circles will need to be squared on the path to net zero. Getting there requires innovation and capital – but, as EVs show, it will also call for political skill and public consent.