The Autumn budget this year will focus on how the Chancellor will fill the £22bn hole in the UK’s finances. For decades, fuel duty has been a significant contributor to the Treasury. However, as the government steers the UK towards an electric vehicle (EV) future, it faces a significant financial conundrum.
Currently, fuel duty contributes approximately £24.7 billion annually to the UK's public finances, and generates further income from the VAT, funding vital services such as road maintenance and also wider governmental spend. This is around 3 per cent of the UK’s total tax revenue, which is higher than many other countries including the US and Australia. But with the UK committed to a 2035 ban on the sale of new petrol and diesel cars, the government is set for a steep decline in fuel tax revenue.
The transition to EVs is integral to the UK's plan for achieving net-zero emissions by 2050, yet the financial void left by falling fuel duty needs to be filled. The challenge is to develop a road taxation system that ensures sufficient funding for road infrastructure without deterring the uptake of EVs or unfairly penalising drivers.
Options for road taxation in the electric era
Governments globally are exploring various methods to replace fuel duty. One of the most discussed options is taxing by the mile. This method involves charging drivers based on the distance they travel, using odometer readings or satellite tracking systems.
In Iceland, the Government has already implemented an odometer-based system that charges EV drivers based on their annual mileage. The programme has seen high compliance rates, with 97 per cent of EV owners reporting their mileage and 95 per cent paying their taxes on time. While Iceland’s small population and fleet size make this system manageable, larger countries might face more challenges in ensuring compliance and fairness.
The Netherlands is also moving towards a 'Pay by Use' system, which is set to be implemented in 2030. This approach will see all cars and vans, including EVS, taxed based on the distance they drive, regardless of where or when. While this system replicates traditional fuel taxation and is easy to understand, it does little to address issues such as traffic congestion or encourage a shift towards public transport.
Strategic Network Tolls
Another potential solution is the introduction of strategic network tolls. Many European countries already use satellite-based tolling systems, primarily for freight vehicles. These systems charge based on various factors, including distance travelled, time of day, and vehicle emissions. Extending such tolling systems to passenger cars could provide a means to fund road infrastructure while promoting the use of low-emission vehicles.
The UK could benefit from the mature tolling market in Europe, where satellite-based systems are already widely used. Implementing a tolling system for strategic roads – the major highways and motorways – could generate significant revenue to replace lost fuel duty. Over time, such systems could be expanded to include smaller vehicles and secondary road networks.
However, tolling comes with its own set of challenges. Charging vehicles for using certain roads might push traffic onto less suitable routes, increasing congestion in residential areas and potentially creating new infrastructure issues. Moreover, enforcing tolls on smaller, more complex road networks can be costly and inefficient.
Urban Network Tolls
In urban areas, where traffic patterns are more complex, road-user charging schemes have been used to improve air quality and reduce congestion. Cities like London, Birmingham, and Stockholm charge vehicles based on their emissions, with the revenue often reinvested in local transport projects. Extending these schemes could form part of a broader road taxation strategy, with urban tolls complementing mileage-based systems on strategic roads. However, these tolling systems often come at a high price due to the higher infrastructure costs associated with city environments. Additionally, these schemes must balance the need to raise revenue with ensuring fairness for residents and businesses who rely on road transport.
The Role of Technology
Technology could, and should, play a pivotal role in shaping the future of road taxation. Companies like Google are developing 'transport wallets' that allow users to purchase mobility services across multiple modes of transport through a single account. There is an opportunity for governments to jump on this innovation and apply it to road-user charging. It would reduce the roll-out costs and make the charging experience more traveller-friendly. But in doing so, they must mitigate the host of equity, competition, transparency, security and compliance issues which come with this approach.
The concept of the single user account will be key to the spread of road-charging systems – a single, easy-to-use gateway to all the systems a driver is likely to use, regardless of operator or service provider.
Ultimately, the UK must adopt a new approach to fund its road infrastructure needs as it continues to encourage the adoption of EVs. Mileage-based taxation, strategic and urban tolls, and technology-driven solutions all offer potential avenues for replacing lost revenue. However, the eventual solution will likely involve a combination of these approaches, carefully balanced to ensure fairness, efficiency, and continued support for the transition to a net-zero future.
Alistair Hunter is UKIMEA Roads and Streets Business Leader at Arup
Comment: How will we pay for roads without fuel duty?
Fuel tax has the advantage of encouraging more economical vehicles. It would be perverse if this feature was lost in any new system. We should be...