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

Among the recommendations of the CCC’s 2022 report to parliament on progress in reducing emissions are a review of motoring taxation. Some form of road pricing should be introduced whereby drivers, of any vehicle type, are charged for how much they drive, as well as possibly when and where they drive, according to the report.

Tax expert Penny Simmons of Pinsent Masons said that it was “important that the report had highlighted the need for a comprehensive review of tax policy to support the net zero transition.”

“To date there has been limited discussion, particularly from the Treasury, about the role of tax policy in supporting the UK’s transition to a net zero economy. Decarbonisation is likely to have a significant adverse impact on UK tax revenues. We need a comprehensive and effective strategy to offset these losses,” she said.

“It is particularly helpful that the report acknowledges the need to introduce some form of road pricing to replace the fuel duty receipts that will gradually disappear as the transition to electric vehicles progresses. Previously, the government has alluded to the fact that new motoring taxes may be needed. However, given the current cost of living crisis, wider public discussion of a review of road pricing may be seen as politically unpalatable owing to the risk of a public backlash,” she said.

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

According to the latest Treasury estimates, 4% of total UK tax revenues were based on fossil fuel consumption in 2019-20. Fuel duty was the largest contributor, raising £21 billion in 2021. These revenues will reduce towards zero as the transition progresses. Without tax policy changes, the OBR forecasts (242-page / 2.73MB PDF) that the loss of tax receipts owing to decarbonisation could be £1.8bn in 2025-26.

“The significant fiscal risks of the economy’s net zero transition are not going away and need to be addressed. Any replacement to fuel duty needs to be simple and easy for the public to understand. Effective communication with the public will be key to the success of any new motoring taxes. Indeed, as the CCC highlights, a delay in developing a strategy and communicating options to the public may also be politically dangerous, risking greater public discontentment, since drivers could begin to assume that electric-vehicle driving will always be tax-free,” said Simmons.

The report also recommends that the review of taxation considers tax reliefs for the development and use of green technologies; the role of economy-wide carbon pricing to support and encourage decarbonisation; and the removal of tax distortions from fossil fuel subsidies, which can operate to penalise low-carbon technologies.

“The UK’s tax system has a varied and significant role in the decarbonisation of the economy– it must finance, incentivise and accelerate the net zero transition,” said Simmons. “Designing an effective tax policy for a net zero economy is vital and progress on this is needed without delay.”