Rachel Reeves has been warned of a £8billion black hole in the Treasury’s tax revenues in five years’ time as Brits make the switch to electric cars.
The Government’s climate advisers piled fresh pressure on the Chancellor to consider alternative levies to address lost receipts from fuel duty.
In a new report the Climate Change Committee (CCC) found, if fuel duty stayed at the same rate as today, revenues would be about a third lower in 2030 compared to 2023.
Fuel duty has been frozen for 15 years in a row with Ms Reeves joining previous Tory governments in keeping the rate the same at her first Budget in October last year.
But, with Labour pushing for a ban on the sale of all new petrol and diesel cars by 2030, the Chancellor faces a scramble to replace the revenue that fuel duty raises.
Ms Reeves is being urged to consider a ‘pay-per-mile’ scheme, which would see drivers charged for every mile they drive regardless of how they power their cars.
Iceland and New Zealand already have a pay-per-mile taxation policies in place for electric vehicles.
Elsewhere in its Seventh Carbon Budget, which recommends a limit for UK greenhouse gas emissions between 2038 to 2042, the CCC also warned holidaymakers of more expensive flights as Britain bids for Net Zero by 2050.
By Rhodri Morgan, Data Journalist
Sir John Armitt, the UK’s top infrastructure adviser, recently warned that road pricing was ‘inevitable’.
The chair of the National Infrastructure Commission (NIC), said it was time for a ‘proper public debate’ about the future funding of the road network amid the switch to electric vehicles.
But policy advisers are split as to what the possible toll could be, with the Resolution Foundation mooting a 6p-per-mile rate.
The Tony Blair Institute (TBI), meanwhile, has suggested cars and vans should be hit with a 1p-per-mile charge. Large goods vehicles and lorries should get a 4p-per-mile rate, it said.
These charges could snowball to 12p-per-mile by 2050, once income from fuel duty virtually evaporates.
analysis shows that adopting this heavier rate would have raised close to £30billion from cars and motorbikes alone in 2023.
It suggests the levy, unless it discourages drivers from the roads completely, could cancel out the missed fuel duty revenue.
The Department for Transport (DfT) estimates that cars, taxis and motorbikes drove 254.2bn miles in 2023.
The 1p-per-mile scheme would have generated around £2.5bn if it was in place last year.
With the average driver racking up between 6,000 and 8,000 miles a year, the TBI’s proposed initial fee would see them hit with an annual fee in the region of £70.
This could exceed £800 with the TBI’s heavier toll.
The climate advisers urged the Government to commit to a 17 per cent fall in aviation emissions compared to 2023.
Demand for air travel needs to be managed to curb emissions, with airlines taking responsibility for the costs of decarbonising through sustainable fuels, capturing carbon, and electric and hybrid plans, the CCC said.
That would push up costs, for example increasing the price of a return ticket to Alicante, Spain, by £150 and a round-trip to New York could be £300 more expensive by 2050, according to the report.
Fuel duty is levied on purchases of petrol, diesel and a variety of other fuels and currently represents around 2 per cent of all tax receipts – or £850 per household.
In 2023, the Treasury raised £25billion through fuel duty.
But the CCC report said: ‘If fuel duty remained at the same rate as today, falling demand for fuel for vehicles would result in revenues being about a third lower in 2030 than levels in 2023.
‘Without an increase in the rate of fuel duty, we expect to see fuel duty tax receipts decline rapidly, leading to a gap in revenue for the Exchequer.’
In its Seventh Carbon Budget, which recommends a limit for UK greenhouse gas emissions between 2038 to 2042, the CCC added the Government ‘will need to make plans to address the loss in revenue from fuel duty’.
It pointed to figures showing that environmental taxes represented 5 per cent of total UK tax receipts in 2023.
This consisted mostly of fuel duty (47 per cent), vehicle excise duty (15 per cent), renewable obligations (14 per cent), the UK Emissions Trading Scheme (11 per cent), and air passenger duty (7 per cent).
The CCC suggested the Government could hike fuel duty in future years in order to encourage Brits to switch to zero-emission cars and vans.
‘Environmental taxes such as carbon taxes could be used to incentivise households and businesses to shift towards low-carbon technologies,’ the report added.
‘This could leverage additional revenue in the short term, although if taxes are effective in shifting behaviour, then this revenue would not last.’
Last year’s mayoral election in London saw claims that Labour’s Sir Sadiq Khan is plotting a ‘pay-per-mile’ charging scheme for London drivers.
Sir Sadiq angrily denied he is planning to introduce a ‘pay-per-mile’ scheme as mayor and blasted Conservative ‘lies’ and ‘scaremongering’.
But the Tories compiled a dossier of 17 occasions a possible ‘pay-per-mile’ scheme has been referenced by Mr Khan or senior City Hall figures during his mayoralty.
This included Mr Khan writing in his book Breathe of ‘plans to introduce a new, more comprehensive road-user charging system, to be implemented by the end of the decade at the latest’.
The CCC report also said there needed to be around 1.5million heat pump installations a year in existing homes by 2035 – up from just 60,000 in 2023.
It added, in order to meet the country’s Net Zero ambition, three-quarters of cars and vans and two-thirds of heavy good vehicles (HGVs) would need to be electric by 2040.
At the same time, Brits should be shunning their cars to cycle and walk more, while eating 25 per cent less meat, the CCC stated.
Critics of Net Zero policies condemned the report as the committee’s ‘usual Marxist garbage’ and urged Prime Minister Sir Keir Starmer to ‘face down the zealots’ as his Labour administration scrambles for economic growth.
The Government is committed to reaching Net Zero – which means reducing greenhouse gas emissions by 100 per cent from 1990 levels – by 2050.
Under the committee’s ‘balanced pathway’ for reaching this target, the report found achieving Net Zero would cost around £110billion over the next 25 years.
At an average of £4billion per year between 2025 and 2050, this translates to around 0.2 per cent of GDP.
This was estimated to be front-loaded into the first half of the period, peaking at annual net cost of £33billion in 2029.
For the period between 2025 and 2040, the committee’s figures showed the drive to Net Zero would cost an eye-watering £320billion.
But the report added, from 2040, the annual net cost would become a saving due to falling technology costs and more efficient use of energy and resources.
This would lead to a net saving of around £35billion in 2050, it said.
In its latest advice, the committee urged the Government to commit to an 87 per cent cut on the UK’s 1990 levels of greenhouse gas emissions by 2040.
It set out what it said was a deliverable and cost-effective route to the greenhouse gas emissions cuts required from 2038 to 2042 to ensure the UK meets Net Zero by 2050.
Around a third of the emissions cuts in the period will have to come from action by households, mainly buying an electric car and a heat pump to replace an old gas boiler.
But personal choices on eating less meat and dairy, and flying, would play a ‘smaller, but important role’, the committee added.
To cut emissions from meat and dairy production – and free up land for tree planting to absorb carbon – Brits were told they would have to eat 25 per cent less meat by 2040 compared with 2019 levels.
According to the committee’s Dr Emily Nurse, the required reduction in meat is the equivalent of cutting down from eight doner kebabs a week to six.
The committee said its modelling showed that, by 2050, households would save around £700 a year on heating bills and another £700 on motoring costs, with a switch to electric heat pumps for home heating and electric vehicles.
The advisers also set out how there would need to be a six-fold increase in offshore wind power by 2040, together with a doubling of onshore wind power.
There would need to be a similarly dramatic increase in solar power over the same period, as oil and gas are phased out as electricity sources, the report added.
The committee’s chief executive Emma Pinchbeck said there was a ‘really good economic message’ in the recommendations, as well as a good message for households.
‘It’s been really hard for years for people, and a large proportion of that hardship has come from our dependence on volatile gas prices and the cost for people of heating their homes,’ she added.
‘And anything we can do to get these technologies into people’s hands and make the use of low-cost electricity, I’m well up for, on a cost-of-living basis.’
Professor Piers Forster, interim chairman of the committee, said: ‘For a long time, decarbonisation in this country has really meant work in the power sector, but now we need to see action on transport, buildings, industry and farming.
‘This will create opportunities in the economy, tackle climate change, and bring down household bills.’
But Tory peer Lord Mackinlay told the Mail: ‘As ever the CCC spouts its usual Marxist garbage attempting to control our lives.
‘The air travel restrictions proposed restrict choice and would see the UK isolated from its global position.
‘I’m not sure how further damage to our economy while China, India and others have thousands of new aircraft and tens of new airports in the pipeline helps anyone.
‘I doubt the CCC have considered global realities that within the biggest industrial economies Net Zero is dead.’
Tory MP Greg Smith said: ‘The key test for Net Zero has to be how people can still do the same things – fly, drive, heat their homes – just in a cleaner way.
‘Attempts to curtail flying is just bonkers when sustainable and synthetic fuels are a real thing and available.
‘Hiking aviation taxes is the worst form of green virtue signalling, hiding from the real technological solutions.’
Andrew Montfort, Director of Net Zero Watch, added: ‘If we are ever to get back to growth, the Labour Party is going to have to face down the zealots at the Climate Change Committee.
‘That looks unlikely to happen with Ed Miliband running energy policy, so Sir Keir Starmer has a decision to make.’
Sam Hall, director of the Conservative Environment Network, said: ‘Labour’s energy policies leave little chance of achieving the CCC’s vision.
‘The Government’s statist approach will only make electricity more expensive by squeezing out competition and paying whatever it takes to hit their arbitrary 2030 clean power target.
‘It risks exacerbating our nation’s woes, holding back our nation and Net Zero.’
The Government has to decide on the level of cuts it will commit to for the period 2038-2042, which is the seventh in a series of five-year ‘carbon budgets’, and put it to a vote in Parliament by the end of June next year.
Energy Secretary Ed Miliband said: ‘This advice is independent of Government policy, and we will now consider it and respond in due course.
‘It is clear that the best route to making Britain energy secure, bringing down bills and creating jobs is by embracing the clean energy transition.
‘This Government’s clean energy superpower mission is about doing so in a way that grows our economy and makes working people better off.
‘We owe it to current generations to seize the opportunities for energy security and lower bills, and we owe it to future generations to tackle the existential climate crisis.’