The Effect of Electric Vehicles On International Fuel Taxes

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Carlos Kirby
Updated on Apr 27, 2022 · 4 min read
Fuel taxes have been imposed since the beginning of the 20th century. The tax levied, per gallon, was designed to channel revenue in order to fund transport infrastructures and limit the impact of
fuel pollution
Imposing gas taxes remained steadily effective because every vehicle used a gas-powered engine. With
electric cars
becoming a mainstay, international gas taxes are facing a large threat.
The advent of plug-in cars elicited positive reactions among many countries and international energy regulatory bodies. However, EVs present another challenge for governments: limiting gas tax revenue.
EV adoption is limiting the amount of revenue the government can make off of gas tax.

Governments’ initial support for electrical vehicle roll-out

The International Energy Agency (IEA)
released a report on governmental policies supporting electric vehicle deployment. In 2020, EV sales accounted for 4.6% of all global vehicle sales, thanks to policies supporting electric battery technology.
Over the past two decades, countries like the US, Norway, and China began providing fiscal incentives to push for the production of EVs and electric batteries. These measures included purchase subsidies and vehicle registration tax rebates that were aimed at bridging the price gap with gas-powered vehicles.
Electric vehicles need affordable and easy-to-access charging stations. Many countries addressed that by directly funding the development of EV charging stations or empowering EV owners to set up charging systems within their communities through incentives. Such policies have led to a significant increase in EV demand.

Electric car migration hurts fuel tax in some countries

In 2017, there were two million electric cars on the planet. Despite the COVID-related economic plunge and pricier electric
car insurance
, the count rose to 10 million in 2020. The implication of that is reduced fuel consumption. According to the
Wall Street Journal
, that has reduced fuel tax returns for many countries.
Countries impose gas taxes to meet two primary objectives. One is to cover any expenses due to the external road damages and global warming issues caused by driving. Second, it acts as a user fee because of the benefits the infrastructure provides drivers.
While motorists continue to incur significant fuel prices largely attributed to fuel taxes, their preferences for other fuel options are more likely.
Combine that with the fact that people felt more compelled to purchase electric cars. As a result, the implementation of fuel tax as a user fee is increasingly challenging and will become less effective in generating revenue.
In 2020,
La Salle University Digital Commons
conducted a study on the impact of lost gas tax revenue due to EV sales in the US. It proposed two solutions that are practical in the United States and other countries.
One of the solutions is to impose an annual or bi-annual EV surcharge. In the United States, only 21 states are implementing the EV surcharge, and they've managed to recoup their lost gasoline tax revenue. The EV surcharge is calculated by dividing the gross lost revenue by the numbers of EVs sold annually. By implementing the electric car surcharge, US states can reach their break-even point and return their gas tax revenues to their previous margins without needing to ban EV sales entirely.
Another possible solution would be to add a small fee to the proposed EV fees for states currently enforcing the break-even surcharge. That would result in a net revenue surplus that surmounts the losses incurred due to the increasing electric car sales.
As global warming remains a global concern, policies to boost EV demand are critical. While that leads to lost fuel taxes, imposing an annual EV surcharge can help countries recoup lost tax returns.
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