Energy Transition Faces A Fuel Taxing Problem

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  • OBR projects annual loss of emissions-related tax revenue in UK at $47 billion
  • Platts Analytics says plug-in EV sales globally were up 61% year-on-year in April

Energy transition is on a collision course with tax. The decline of tax revenues from fossil-powered cars, with no obvious replacement, threatens to blow a hole in the balance sheets of industrialized economies racing to decarbonize. Action on a new tax settlement for a low-carbon future is urgently required, reports Platts.

Carbon taxes and pricing

The UK’s Office of Budget Responsibility highlighted the scale of the problem in its latest Fiscal Risk and Sustainability report, released on July 7. The OBR — which acts as a watchdog of the British government’s economic stewardship — projects the loss of emissions-related tax revenues could be equal to GBP39 billion ($47 billion) annually. The loss of fuel and vehicle taxes, as more consumers switch to electric vehicles, would account for over 90% of these potentially lost revenues.

Westminster says it will make up for these lost revenues with new levies, including carbon taxes and pricing, or higher taxation for motorists, but the OBR still warns that public debt could rise to a staggering 267% of GDP in 50 years if these revenues aren’t successfully replaced. Timing is key. Introduce new taxes, or withdraw subsidies too soon on electric vehicles, and the energy transition slows down. Move too slow and watch the public debt mountain climb in line with the OBR’s forecasts.

The stakes are high. The UK says it will ban sales of new internal combustion engine vehicles from 2030. Across the channel in Brussels, the EU plans to enforce a similar ban on its member states five years later, but details on the fiscal impact to the economic bloc’s balance sheets are vague.

Need for energy security

Russia’s invasion of Ukraine has added urgency to the need for energy security and reducing dependency on fossil-fuel imports. Almost 40% of all energy consumption in the UK — the world’s sixth-largest economy — is met by oil and petroleum products. About three-quarters of these liquid products are transport fuels, according to official figures.

However, instead of raising taxes on fossil fuels, the impact of sanctions on Russia and oil prices trading above $100/b has forced major consumer countries to move in the opposite direction by either subsidizing the cost of transport, or by cutting taxes on fuel sales. Meanwhile, rampant inflation has given policy makers a taste of the future if they increase emissions-related taxes on fuels, with public demonstrations spreading across Europe against the high cost of filling up.

To be fair, high oil prices and taxation aren’t solely to blame for cost of fuel. Refiners have been adding to the problem globally. Global pump prices have soared to record levels in recent weeks as a dearth of available refining capacity and low stocks pushed oil product cracks to new highs.

Although products cracks have softened in recent weeks as refining capacity returns, Platts Analytics estimates ARA gasoline cracks stood at $33/b July 1, while ARA ULSD and jet cracks were at $52/b and $41/b, respectively, all well above historical norms. Higher pump prices have made it politically impossible for governments to increase punitive emissions taxes.

Solidifying tax plans for the future of low-emissions transportation

At the other end of the scale, runaway EV sales have also added to the urgency for governments to solidify tax plans for the future of low-emissions passenger transportation. According to Platts Analytics, plug-in EV sales globally were up 61% year-on-year in April and monthly sales are about eight times higher than they were in the same period of 2017.

Of course, some institutions argue governments have room to move quicker on raising fuel taxes to help phase in low-emissions transport. In 2019, the World Bank estimated globally that fuels were under-taxed by $5.2 trillion, equivalent to 6.5% of total GDP. Motor fuels, the bank said, accounted for 40% of all these post tax subsidies — the amount that fuels were under-taxed.

Based on the World Bank’s math, removing these subsidies and raising fossil fuel taxes would probably be enough to cover the cost of decarbonizing large swathes of the global economy, but governments are still hesitant to act. Until they do, taxation will remain energy transition’s biggest problem.

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Source: Platts

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