Electric Cars and a User Charge

The Drum program on the ABC on November 23, 2020 discussed the proposed (in Victoria and South Australia and more recently NSW) electric car usage charge as a tax on kilometres of electric vehicle usage. After listening, I feel compelled to try and explain the proposal in a way that might be clearer than what we heard on various media outlets. 

The argument should be firmly rooted in two propositions - one to reflect the view that those who use the roads should pay for the benefit received, and the other to incentivise a young industry to grow its product given its environmental advantages over ICE engines that use petrol or diesel in the main and in which the latter currently contribute through fuel excise collected by the Federal government, although this excise is poorly correlated with user benefit and especially where we have congestion and high levels of emissions, both greenhouse gas emissions (CO₂) and local air pollution (e.g., CO, NOX, PMs etc.).

What we need to do is to look at all the current charges, fees and taxes such as car registration, driving licence, GST on car related outlays, fuel excise, and tolls as road specific charges, and ask how we might price the use of roads more efficiently and equitably. This is not a new debate, but now we have an overlay of a very serious alternative energy technology that we want to support. But if electric cars scale up, as we hope, then from a transportation point of view (in contrast being a manufacturing capability) we know they will cost less to purchase and far less to run (Hensher 2020)[1] even with clean fuel (ignoring the lifecycle emission stream in contrast to the end use emissions).

The way forward is to not simply assume a new charge on electric cars, but to revise all charges and align them with user pays. We have been arguing for many years that even before the soon to be exploding debate on the proposed electric car user charge, we should reduce fixed charges such as car registration and introduce a distance based charge; but to get buy in so as to ensure it passes the ‘hip pocket test’ so that people are not financially worse off, but that their outlays reflect the benefit better through the use of the roads. We can do this by reducing or eliminating vehicle registration charges, introduce for example, a distance based charge in peak times such as 5c/ km in congested areas[2] plus a1c/km for emissions which occur regardless of congestion. This could be adjusted to reflect the fact that electric cars are likely to grow in use given the lower cost of owning and using them compared to ICE cars, threatening the viability of public transport; and so we need to ensure that while emissions might be lower if not eliminated per car and per kilometre, there will be other negative externalities such as worsening congestion in some settings, and hence electric cars should pay according to the benefit received. So the proposed 2.5c per km in Victoria is, in my view, part of a sensible package opportunity to remix the suite of charges - fixed and variable.

Given it is an unlikely that governments will listen and act this way, then the best we can hope for is that the 2.5c per km might be hypothecated to a sufficient extent to support both a young industry and some amount of road improvement. This seems sensible since fuel excise has never anyway been enough to fully fund road maintenance and investment.

Footnotes

[1] The general position of experts is that the cost of an electric vehicle will be significantly less that a petrol or diesel car (the switching point is unclear, but many suggest in about 10 to 20 years), and that the cost of using such vehicles will decline. A taxi driver of a fully electric taxi in London said recently that his fuel costs have dropped by one hundred pounds per week or $Aud178 per week, or close to $Aud10000 per annum. This is substantial. In Australia, the EV Council suggests that an EV’s fuel cost will be 34.3 cents per kWh compared with average petrol cost of $1.36 per litre. This translates into 5.15 cents per kilometre for an EV compared to 14.39 cents per kilometre for an internal combustion engine using petrol, an average saving of $1,275 per annum on fuel costs alone.

[2] Our research suggests that halving car registration and introducing a peak hour distance based charge of 5c/km in Sydney will improve peak period travel times by between 6-10%, effectively equivalent to school holiday travel times.

Reference

Hensher, D.A. (2020) Electric cars – they may in time increase car use without effective road pricing reform and risk lifecycle carbon emission increases, Transport Reviews Editorial Series, 40 (3), 265-266 DOI: http://dx.doi.org/10.1080/01441647.2020.1709273.