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#studentviews: Should we still be subsidising electric vehicles?

Government subsidies have done their job at encouraging the take-up of electric vehicles. But it is now time for these cars and vans to stand on their own four wheels.

The early dream of electric vehicles (EVs) was to produce low cost, zero-emission cars for the masses. Why then, 20 years later, are the majority of EVs two-tonne behemoths that most UK citizens cannot afford, and which have a lifetime carbon footprint that rivals their petrol engine equivalents?

The reason is that sustained intervention by the UK government has skewed prices to the point where the EV is an opportunity for tax dodging rather than the saviour of the environment. In effect, EVs are underpriced for those that buy them.

Today, EVs account for nearly 20% of all new car sales and many of these are bought through company car schemes, according to data from the Society of Motor Manufacturers and Traders (SMMT). The business executive taking delivery of their new £60,000 Tesla will find themselves paying about £40 a month in company car tax rather than the £700 per month they were previously paying for their similarly priced diesel-powered car. This contrasts with lower income households who face rising motoring taxes and restrictions by using their older, polluting vehicles that fall foul of emission control zones.

Perhaps the most galling thing of all for the driver of the ten-year-old Toyota, who would love a new Tesla but cannot afford one, is the look of disdain on the face of the Tesla driver as they zip by, signalling their virtue as they pocket the subsidies driving a car they would happily pay more for. Evidence of this can be found in a recent Zap-map survey, which found that 91% of EV drivers were ‘extremely happy’ with their purchase compared with only 74% of petrol and diesel drivers. No wonder they are so happy: not only are the cars fun to drive but someone else is picking up the bill.

But it is not only company car drivers of EVs who get a great deal. Private buyers also get huge subsidies: massively reduced road tax, no excise duty on fuel, and VAT at 5% on kWh rather than 20% on petrol or diesel.

According to economic theory, subsidies work by encouraging consumers to change their consumption through artificially reduced prices, set by the government, for the benefit of society. Initially, EVs were pretty rubbish. You had to recharge them every 70 miles (which took four hours), there were limited charging points, and they were small. But EVs were ‘better for society’ because they emitted less carbon over their lifetime and improved local air quality in comparison with their petrol/diesel counterparts.

The average consumer was put off by these hurdles. And so, to make EVs more attractive, the UK government introduced large subsidies effectively to make them cheaper and therefore more desirable. But these hurdles no longer exist, so the subsidies shouldn’t either.

Take a Tesla, which is as fast as a Ferrari, as luxurious as a Jaguar and has a range of over 300 miles. We have socialised the costs through subsidy, but allowed Elon Musk, now the world’s richest man, to keep the profits. Tesla is now the world’s most valuable car company, despite selling only one million vehicles per year compared with the ten million cars sold by Toyota, their nearest rival.

Subsidies did a great job of ‘pump priming’ the market. But their usefulness has waned, especially since legislation has been introduced that will outlaw non-EVs being sold in the UK after 2030.

At some point, the tax take between diesel cars and EVs must close. At the current rate, the government is going to create a huge tax deficit as sales of diesel and petrol cars decline and those of EVs increase. Surely, it is better to start closing this gap now.

At the time of writing, the price of a litre of diesel is about £1.80. Of that price, 58p is excise duty and 30p is VAT. So, 88p is collected by the tax authorities.

Charge up an EV at home and the only tax collected is the 5% VAT on the cost of the electricity. An EV will cover an average of about four miles per kWh. With the current cost of a kWh at about 32p, HM Revenue and Customs collects about 0.04p per mile driven in an EV compared with 25 times more at about 1p for each mile covered by a diesel car.

No one is arguing that EVs don’t deliver a benefit in terms of emissions and greenhouse gases, particularly to air quality in cities. But surely the job of subsidies is largely done. No one who owns an EV wants to give it up.

It would be useful if car manufacturers started focusing on smaller EVs – cars within the cost aspiration of the ordinary citizen. It is time to stop skewing the market for EVs, start closing the tax gap, and start letting EVs stand on their own four wheels.

Author: Madeleine Rendell
Editor’s note: This article is from the University of Bristol’s communicating economics class of 2022-23.
Picture by nrqemi on iStock
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