Rachel Reeves is facing warnings about an impending £8 billion gap in Treasury revenues within five years, as Britain’s shift to electric vehicles undercuts fuel duty receipts.
The Government’s independent advisers on climate change (the Climate Change Committee, or CCC) have piled pressure on Ms Reeves to consider new tax measures—potentially including a ‘pay-per-mile’ system—to replace falling proceeds from petrol and diesel.
According to the CCC’s latest report (the Seventh Carbon Budget), if fuel duty remains frozen at its present rate, total receipts by 2030 could be one-third lower than today. Fuel duty, which has been held at the same level for 15 consecutive years, raised £25 billion in 2023—or about 2% of the UK’s total tax haul. With Labour championing a ban on the sale of new petrol and diesel cars by 2030, Ms Reeves is under pressure to come up with a fresh approach to offset lost revenues.
Among the solutions is a “pay-per-mile” scheme that would charge drivers for each mile travelled, regardless of the vehicle’s power source. Iceland and New Zealand have introduced similar taxes on electric cars, though the idea remains controversial in the UK. Critics of such schemes warn they penalise drivers unfairly, while supporters maintain they encourage more responsible road use and help fill the gap left by dwindling fuel duty returns.
The CCC has also recommended a 17% cut in aviation emissions from 2023 levels, suggesting flight costs could rise to cover the expense of climate-friendly changes, such as adopting sustainable fuels and rolling out carbon capture technologies. This could mean a return ticket to Alicante becoming up to £150 more expensive by 2050, and a round trip to New York costing an extra £300.
The Government is committed to reaching Net Zero emissions by 2050, cutting greenhouse gases by 100% from 1990 levels. Under the CCC’s proposals, further steps include:
• Installing 1.5 million heat pumps annually in existing homes by 2035 (up from 60,000 in 2023)
• Ensuring three-quarters of cars and vans, plus two-thirds of HGVs, are electric by 2040
• Encouraging people to drive less and walk or cycle more, while also eating 25% less meat
According to the CCC’s modelling, once fully implemented, the cost of meeting Net Zero is expected to peak at around £33 billion per year by 2029, then begin generating net savings by 2040 as technology costs fall and energy use becomes more efficient.
Critics, including Conservative peer Lord Mackinlay, slammed the CCC’s recommendations as “Marxist garbage,” claiming tighter rules on flying would damage the UK’s global links. Others, such as Tory MP Greg Smith, questioned whether imposing higher taxes on flights is the correct approach when sustainable aviation fuels and electric planes are being developed.
Net Zero Watch’s Andrew Montfort urged Labour to “face down the zealots” if it wants to reignite economic growth, while Sam Hall of the Conservative Environment Network cautioned that a “statist approach” to energy risks driving up costs and stifling competition.
Energy Secretary Ed Miliband, responding to the CCC’s advice, insisted the Government is committed to a “clean energy superpower mission” that ensures Britain leads the way on decarbonisation without compromising economic growth. Proponents of the CCC’s proposals argue that accelerating the transition to electric heating and transport would reduce reliance on volatile gas prices, potentially lowering household bills in the long run.
Whether Ms Reeves chooses to introduce new levies such as “pay-per-mile” remains to be seen. But with fuel duty set to decline and Net Zero targets looming, the Treasury appears to be on borrowed time to devise a taxation framework fit for an era of electric mobility.
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Chancellor warned of £8bn shortfall as electric cars prompt rethink of fuel duty