Wellian Weekly 29.06.2021

Energy Transition and Taxation

Before I start this piece, I am going to state that I have no knowledge that this will happen, no insight into the numbers (with no intent to look for them) and very happy to be shot down in flames suggesting my theory is wrong.

As a fund selector, over the last couple of years I have spent a lot of time with “traditional” fund managers putting an ESG spin to their existing portfolios. I’ve met with lots of managers who manage “sustainable” portfolios and I’ve been in the company of countless analysts, strategists, economists, geopolitical commentators and other experts that reliably inform me that to get to net zero, or to meet the Paris Agreement goals then the shift to electric and renewably generated energy is one of the major ways we can save our planet and get to 1.5 degrees.  I am not a believer in all the big political conspiracy theories and I’m siding with the scientists on this one. From a personal perspective, I’m doing my part too – we’ve had solar panels on our roof for almost a decade, I drive a hybrid car which we have owned for a couple of years, the electricity and gas in the house only comes from green sources and so on.

The other night, as I was plugging the car in, I got to thinking about government revenues.  At the end of the day money has to play a part and my mind started to go into overdrive…

Obviously, I’m not filling up the car as often as I used to (partly due to Covid, partly due to the car I now have is much more fuel efficient than my last car) and I started to realise the government isn’t making as much in tax from me as they used to.  I don’t have to pay for road tax. The efficiency of the MPG means less tax going to the government compared to historic norms. Although I don’t live in London, if I travelled there, I don’t have to pay for the congestion charge and so on.

I totally get that the energy transition towards electrification from the internal combustion engine needs to take place, and these “freebies” are a nice government incentive to make me want to change – it’s the old loss-leader approach.  But, at some point, the lost revenue is going to start to hurt.

So, what will happen?  How will the government recoup these losses?  Well, at some stage road tax will return for car owners, as will paying for parking and the congestion charge and other perks presently afforded the early adopters – these changes have to be a given. But how will it recoup the lost revenue from petrol sales when everybody drives a fully electric vehicle? We all know the vast majority of the price paid per litre of fuel is excise duty.

The present car tax system arguably is equitable – if you have a car, you pay tax on it. But, if there is a tax put on electricity to make up for the loss of tax revenue from petrol, is that fair? If you visit a petrol station, you are generally only filling the tank to make your vehicle move and it certainly doesn’t impact those without transportation. There are lots of things you plug in at home, not just your car and if the electricity tax is a blanket one, there will be many that will be unhappy with it; arguably the revenue generated by the government could actually be more than they were earning prior to the energy transition to electric.

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