Chancellor Rishi Sunak could lose almost a third of the revenue raised by car-related fuel duty within eight years because of the shift to green motoring, according to a new report.
The collapse in the sale of new diesel cars in favour of electric models could cause the Treasury’s annual fuel duty income from cars to drop from £16.4 million in 2019 to £11.4 billion in 2028, analysis by the RAC Foundation found.
This £5 billion decline is roughly equivalent to what is spent operating, maintaining and enhancing motorways and major A-roads in England each year.
Figures from the Society of Motor Manufacturers and Traders show battery electric vehicles made up 11.6% of the UK’s new car market last year, up from 6.6% in 2020.
Diesel-powered new cars accounted for 14.2% of all registrations in 2021, down from 19.7% during the previous year.
RAC Foundation director Steve Gooding said Mr Sunak faces a “dilemma” as the growth in electric cars is causing him to lose out on fuel duty, which is nearly 58p per litre for petrol and diesel.
Ministers must soon decide “how and from where they are going to plug the fiscal hole electrification will inevitably cause” as car-related fuel duty is “heading for terminal decline”, according to Mr Gooding.
The report stated that one possible option would be to raise fuel duty and other motoring taxes such as vehicle excise duty, but that would “hit poorest motorists hardest”.
Another possibility is road pricing, which would involve people paying based on the distance, time and location they drive.
That would be “complicated” and send tens of millions of motorists “into a nervous sweat”, the report warned.
Mr Gooding said ministers may “choose to regard a drop in yield from motoring taxation as the price to be paid for saving the planet”.
He added: “That is all well and good, but to give certainty to the individuals and businesses who buy the two million or so new cars sold in the UK annually, that begs a conscious policy decision communicated widely, not something we drift into by default.”
The RAC Foundation analysis is based on a “high take up” of battery-electric cars by 2028.