Electric Blues: Cost-Benefit of Taxing Electric Car Usage
By Prof. Janek Ratnatunga, CEO, ICMA Australia
Australia is Becoming the Poor Relation of Clean Technology Take-up
The news was both literally and metaphorically an electric shock to the clean technology industry in Victoria, Australia. Mr. Tim Pallas, the Treasurer of the State of Victoria announced a state budget initiative to start taxing electric vehicle (EV) owners from 2021 for every kilometre they drive.
The Reason? It will make road charging “fairer” for all motorists.
The Logic? Traditional motorists pay for the use of roads via the tax on petrol and diesel. EV users drive on taxpayer funded roads for free.
The Need? The state government now has ‘eye-watering’ debt and deficits because of the financing required to prop-up the economy during an extended 8-month COVD-19 lock-down period.
The state government’s new EV charge will levy 2.5 cents per kilometre driven by electric and other low emissions vehicles and 2 cents for plug-in hybrid electric models. It expects to raise A$30 million by the new charge, over four years, and claims that this will offset some of the A$45 million spending it hopes to undertake to boost the take-up of EVs, with charging points across the state and plug-in facilities in new buildings.[i]
The counter arguments are many: (1) that such a tax fails to account for ‘externalities’; i.e. the benefits of EVs to society – such as improved health outcomes; (2) that EVs will make a major contribution to improving our environmental scorecard for the benefit of future generations; (3) that taxing EVs ignores the fact that the fossil-fuel energy is already subsided to the tune of A$1,480 for every Australian per year; (4) that the State of Victoria will be one of the few places in the world with not only minimal EV incentives but actual disincentives; etc.
The Victorian EV tax scheme is not without its supporters. Large corporates, especially those making a profit out of road usage (e.g., toll-road operators) are heavy supporters of such a tax. Those providing taxation services are also supportive. KPMG tax partner David Sofra suggested: ‘‘In my view the new taxes ensure EVs make a fair contribution towards funding our public road system, and supported by the accompanying initiatives, are unlikely to disincentivise consumers and businesses from making the switch to electric.”[ii]
The reason for the support of the EV tax by tax accountants appears to be the possibility of the additional taxation services that arise in implementing any new tax. The only way that the government will be able to charge on a km usage basis is for the owners to provide logbooks and fill in quarterly tax returns. Large corporate users of EVs will get their accountants to undertake this task to ensure compliance. This will be an added cost to them on top of paying the EV usage tax.
As one can see, wading through the multiplicity of such opinions, assumptions and numbers will indeed be a challenge for management accountants!
Start-of-Pipe vs. End-of-Pipe Costs
The Electric Vehicle Council, the national body representing the EV industry in Australia, reported that the running costs of EVs are low compared to petrol cars – with virtually no engine maintenance – and electricity costs equivalent to less than 40 cents a litre of fuel.[iii] Whilst this is an opinion from a lobby group, there is no doubt that end-of-pipe ‘running costs’ are significantly lower in EVs. Also, with no carbon emissions coming from the tail of an EV, there are certainly no end-of-pipe greenhouse gas emissions.
The picture is quite different at the ‘start of the pipe’, however. While no greenhouse gases are emitted directly from EVs, they run on electricity that is – in Australia and many parts of the world – largely still produced from fossil fuels. Energy is also used to manufacture the vehicle at the start of the pipe – especially the battery. Around half of the emissions from battery production come from the electricity used in manufacturing and assembling the batteries. The other significant long-term concern is that the growing numbers of EVs present a serious waste-management challenge for recyclers at the end-of-life.[iv]
In a seminal paper[v] titled Carbon Business Accounting: The Impact of Global Warming on the Cost and Management Accounting Profession, the authors promoted the used of Life-Cycle Costing (LCC) techniques; and the need to include factors such as:
- how many years it took to develop the vehicles.
- how the material used was processed and how far these had to travel to get to manufacturing stage.
- how far auto workers travelled, and whether or not they used public transportation
- the energy used in manufacturing.
- the percentage of materials that can be effectively recycled.
- the percentage of labour produced by robots versus humans.
- variable estimated lifetime of components?
- cost of fuel used over an estimated lifetime of 150,000 kilometres.
- expected parts that would need to be repaired?
These lifetime costs, which include converting greenhouse gas emissions to carbon prices must be considered when comparing the greenness of hybrids and EVs – especially because of the high emissions linked to making batteries, and the significant costs of recycling at the end of its useful life.
There have been large uncertainties around the emissions associated with EV battery production, with different studies producing widely differing numbers. As battery prices fall and vehicle manufacturers start including larger batteries with longer driving ranges, battery production emissions can have a larger impact on the climate benefits of EVs. Also, producing batteries in regions with relatively low-carbon electricity or in factories powered by renewable energy will significantly reduce the lifetime emissions of greenhouse gases.
Do EVs Produce Less Greenhouse Gas Emissions?
Studies done 13-14 years ago found that, from a whole-of-life viewpoint, hybrids emitted more greenhouse gases than petrol cars. However, with the advances in the technology for the manufacturing and recycling of batteries, the results for both hybrids and EVs have been significantly positive in terms of ‘greenness’. One study found that emissions from EVs have emissions up to 43% lower than diesel vehicles. Another detailed that “in all cases examined, electric cars have lower lifetime climate impacts than those with internal combustion engines”.[vi]
A very recent and extremely comprehensive scientific study published in the journal Nature Sustainability found conclusively that plug-in vehicles emit less greenhouse gases than petrol and diesel models over a car’s lifetime. The study was based on ‘whole-of-life’ principles – that included the mining of metals or lithium for batteries, manufacturing, driving 150,000 kilometres and finally scrapping.[vii]
The report found that average lifetime emissions from EVs are up to 70% lower than petrol cars in countries like Sweden and France (which get most of their electricity from renewables and nuclear). According to lead author Florian Knobloch, of the Environmental Science Department at Radboud University in the Netherlands, “In most of the world, in countries accounting for 95% of road transport, EVs would reduce emissions compared to average petrol cars”.[viii]
There have, however, a few recent studies where the differences were not that significant. One recent study from a group of German researchers at the thinktank Institute for Economic Research (ifo) suggested that, “the CO2 emissions of battery-electric vehicles are, in the best case, slightly higher than those of a diesel engine”.[ix] It must be noted that, much of pro-diesel research is often funded by vehicle manufacturers, and can be subject to bias. It was well publicised how VW and other German car manufacturers used a ‘defeat device’ to reduce the recorded emissions of their diesel cars.[x]
These differences in results arise from the assumptions used by researchers. The results as to if the EVs or diesel vehicles technology comes out on top depends on a lot of factors including: (1) which specific vehicles are being compared; (2) what electricity grid mix is assumed; (3) if marginal or average electricity emissions are used; (4) what driving patterns are assumed; and (5) even the weather.
Australia – The Poor Relation of Clean Energy Policy
In contrast to what is happening in more advanced countries, without adequate incentives to buy EVs and without stringent fuel efficiency standards, Australia (especially Victoria) is destined to become a dumping ground for car manufacturers’ least fuel efficient, most polluting models that car manufacturers cannot sell in advanced markets.[xi]
The five cheapest electric models available in Australia cost between A$44,000 and A$64,000 and are expensive compared to the cheapest petrol models – which start at less than A$15,000. The cheapest EVs in the UK and US sell for about A$30,000 much more affordable than in Australia.[xii] An EV road tax will only exacerbate this problem of relative affordability, and drive consumers towards petrol and diesel models.
The US and EU and other markets have set a quota for the volume of carbon dioxide that can collectively be emitted across the fleet of a manufacturer’s internal combustion engine cars. This is not the case in Australia – meaning vehicle manufacturers could choose to run out their end-of-line petrol models here while they ramp up sales of EVs in more attractive markets.
According to the International Energy Agency (IEA), sales of EVs topped 2.1 million globally in 2019, surpassing 2018 – already a record year – to boost the stock to 7.2 million electric cars. EVs accounted for 2.6% of global car sales and about 1% of global car stock in 2019, registering a 40% year-on-year increase. As technological progress in the electrification of two/three-wheelers, buses, and trucks advances and the market for them grows, EVs are expanding significantly. Ambitious policy announcements have been critical in stimulating the EV rollout in major vehicle markets in recent years.[xiii] The results for 2020, are still to come, and the COVID-19 lockdowns will prevent any comparisons. However, future expectations are high, with Tesla building giant new Gigafactories under construction in Berlin, Shanghai and Austin, Texas, which could potentially increase production to approx. 2.1 million cars by 2025.
As a result, Tesla’s market valuation has increased 6-fold, from US$80 Billion to US$ 550 Billion in the space of 11 months in 2020. Tesla is now worth more than the combined value of VW, Hyundai, GM and Ford! Further, there are massive differences between the carbon footprint of manufacturing EVs. Tesla, for instance, uses clean solar power at its current Gigafactory in Nevada to assemble battery packs and reduce emissions. Around 50% of the battery lifecycle emissions come from the electricity used in battery manufacture and assembly, so producing batteries in a plant powered by renewable energy – as is the case for any Tesla factory – substantially reduces lifetime emissions.
An Equitable Solution
Returning to the issue of an EV usage tax, it would be far better to develop a more equitable system that ensures that all road users pay their fair share, not only of the cost of building and maintaining roads, but of the cost to society based on their choice of vehicle.
One quick solution is to reduce or stop government subsidies to the fossil fuel industry. The Australia Institute estimates that those in the fossil fuel business receive more than $10 billion per year in government subsidies, with the mining industry receiving the lion’s share. One of those subsidies is the enticingly named Fuel Tax Credit Scheme. It is worth more than $5 billion per year.[xiv] These subsidies can instead be diverted to plugging the COVID-19 related debt and deficits. There was a large public debate about giving the car industry $1.5 billion over four years prior to Australia walking away from its car manufacturing expertise; but there has been no debate on why the government is giving the mining industry billions every year. Had we retained our car manufacturing base; we perhaps could have been a contender for one of Tesla’s EV manufacturing Gigafactories.
Another solution is to re-visit the carbon price initiatives. These initiatives now have significant domestic and international support, always an importance consideration politically. The general populace and industry are realising that one cannot do business on a dead planet. Most credible scientific research support the conclusion that EVs help limit climate change by producing considerably less emissions because of the high efficiency of electric motors. Even an electric car run on coal-fired power is less polluting than a petrol one in most of the world except in nations such as India and Poland where drivers recharge batteries with electricity from high-polluting coal-fired power plants. A properly constructed price on carbon-based fuels would account for this fossil-fuel energy usage at both ‘start-of-pipe’ and ‘end-of-pipe’.
A price on carbon (e.g., via a carbon credit scheme or a carbon tax) was meant to ensure that drivers of all cars – petrol, diesel, hybrid and electric – paid their share of the costs associated using fossil fuels and the resultant environmental impact (i.e., global warming) of the emissions they produced.[xv] Such a scheme was in place in Australia (in fits and starts under different names) but Prime Minister Tony Abbott (a climate denier if giga proportions) repealed the final variation of a carbon pricing scheme in 2014. The main political reason for this repealing was Australia’s dependence on its coal industry. The very recent ban by China of coal imports from Australia on December 15, 2020, may be a blessing in disguise. It may force the Australian government not to be so dependent on the mining and exporting fossil fuels and instead reconsider introducing carbon pricing as a mechanism for developing and supporting the renewables and clean technology industries.
Whilst carbon pricing schemes are not applied universally, nowhere else in the world (not even in what used to be Donald Trump’s America) are EVs the subject of a special tax. In fact, even in Australia, the Australian Capital Territory (ACT) has said it will offer zero interest loans, stamp duty exemptions and two years of free registration for EV buyers.
Further, European countries have embraced government incentives for EVs. Prime Minister Boris Johnson (Conservative, UK) pledged that Britain will ban the sale of petrol and diesel cars by 2030, pledging to be the first G7 country to switch to EVs and fully decarbonise road transport.[xvi]
The attitudes of carmakers towards EVs are also changing. Carmakers Jaguar LandRover, Bentley and Vauxhall as well as the operator of the local Nissan plant all welcomed Boris Johnson’s pledge and said they would be ready for the ban.[xvii] Also, if you study the marketing of traditional carmakers such as Volkswagen, and its website for European countries for example – the new electric range is promoted front and centre.
Double Taxation of EVs
There is also a credible argument that the Victorian state government’s decision to introduce a user charge for EVs signals a dangerous step towards a privatised road user charge scheme in Victoria, where profit hungry toll-road operators and other transport related companies make inordinate profits at the expense of our climate.[xviii] Whilst it is not the purpose of this article to pursue the merits of such an argument; there must be some form of guarantees given by the government that money collected from such a tax is directly used on infrastructure for EVs; and that EV drivers will not be double-taxed, i.e. an EV use tax plus a road use tax paid to privatised toll operators (plus a fee for record keeping and tax reporting).
Full Disclosure:
I do not own an EV as yet. Maybe I will need to move interstate or overseas to do my part to mitigate the impact of climate change.
About the author
Prof. Janek Ratnatunga, CEO, ICMA Australia
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.
This article is republished from The Conversation under a Creative Commons license.
The opinions in this article reflect those of the author and not necessarily that of the organisation or its executive
[i] Noel Towell (2020), “Pallas zaps electric cars with road charge”, The Age, November 21,
https://www.theage.com.au/politics/victoria/pallas-zaps-electric-cars-with-road-charge-20201121-p56gp3.html
[ii] James Kirby (2020), “Are we asleep at the wheel on EVs?”, The Australian, 28 November, p. 35
[iii] Electric Vehicle Council (2020), “Compare the running costs of your type of car to an electric car” https://electricvehiclecouncil.com.au/
[iv] Gavin Harper, et.al., (2019), “Recycling lithium-ion batteries from electric vehicles”, Nature, Vol. 575, pages75–86.
[v] Janek Ratnatunga & Kashi Balachandran (2009) “Carbon Business Accounting: The Impact of Global Warming on the Cost and Management Accounting Profession” Journal of Accounting, Auditing and Finance, 24(2), pp. 333-355.
[vi] Zeke Hausfather (2020), “Factcheck How Electric Vehicles Help to Tackle Climate Change”, Carbon Brief, July 2, https://www.carbonbrief.org/factcheck-how-electric-vehicles-help-to-tackle-climate-change
[vii] Florian Knobloch, et.al. (2020), “Net emission reductions from electric cars and heat pumps in 59 world regions over time”, Nature Sustainability, Vol. 3, pp. 437–447.
[viii] Alister Doyle (2020), “Electric cars help limit climate change despite blackspots in India, Poland”, Climate Home News, March 23, https://www.climatechangenews.com/2020/03/23/electric-cars-help-limit-climate-change-despite-blackspots-india-poland/
[ix] WSJ Editorial Board (2019), “Germany’s Dirty Green Cars”, Wall Street Journal, April 23, https://www.wsj.com/articles/germanys-dirty-green-cars-11556057770
[x] Janek Ratnatunga (2019) “Why do corporations like Boeing and VW prematurely launch Killing Machines?”, On Target, ICMA Australia Newsletter, 23(2), March-April, pp.4-8. https://www.cmawebline.org/ontarget/wp-content/uploads/2019/04/On-Target-March-April-2019.pdf
[xi] Mike Foley (2020), ‘Dumping ground’ – Australia charged with discouraging electric vehicles, The Age, Nov. 13, https://www.theage.com.au/politics/federal/dumping-ground-australia-charged-with-discouraging-electric-vehicles-20201113-p56efr.html
[xii] Ibid
[xiii] IAE Reports (2020), “Global EV Outlook 2020”, International Energy Agency, https://www.iea.org/reports/global-ev-outlook-2020
[xiv] The Australia Institute (2020), “Why do we subsidise industry?”, https://www.tai.org.au/node/451
[xv] Petrol and diesel cars emitted mainly at the end-of-pipe; and hybrid and electric at the start-of-pipe in battery manufacturing.
[xvi] Latika Bourke (2020), “’Build back greener’: Boris Johnson to ban sale of petrol cars by 2030”, Sydney Morning Herald, November 19, https://www.smh.com.au/world/europe/build-back-greener-boris-johnson-bans-petrol-cars-by-2030-20201119-p56fwn.html
[xvii] Ibid
[xviii] Sam Hibbins (2020) “Electric vehicle tax a ‘dangerous’ step towards more privatisation”, The Age, November 29, https://www.theage.com.au/national/victoria/electric-vehicle-tax-a-dangerous-step-towards-more-privatisation-20201129-p56iut.html
