Transport tax reform needed to create a cleaner, fairer system and close fiscal 'black hole'

Wed 25 January 2023 View all news

A new report from the independent think-tank Green Alliance says that UK transport (and particularly aviation and shipping) is not paying its fair share for the emissions it produces. Without tax reform, it says, the move to electric vehicles will cut revenue from fuel duty by £28bn a year, threatening a 'fiscal black hole'.

Beyond its climate impacts, the report says, transport has other negative effects on society that also need to be reduced, including air pollution and congestion.

This report argues that tax reform can help create a cleaner, fairer transport system while providing a sustainable revenue stream to support government spending into the future.

Taxes applied to different transport modes do not reflect their different levels of greenhouse gas emissions. Nevertheless, taxes on transport raised £44 billion in the 2019-20 fiscal year (the most recent year largely unaffected by the Covid pandemic).

Without tax reform, the reduction in revenues resulting from the move to electric vehicles will reduce fuel duty revenue by up to £28 billion a year; the equivalent of almost the entire 2021-22 budget for the Department for Transport.

The report argues that tax reform can help to create a cleaner, fairer transport system and that taxation can also encourage changes in people’s travel behaviour that will be necessary to achieve a successful transition to Net Zero. Altering what is taxed is one tool that can be used to encourage the desired changes, and this can also replace lost tax revenue from the move away from high carbon technologies.

This is the first of two Green Alliance reports focused on the link between transport taxation and the Net Zero goal. This report sets out the case for transport tax reform, why transport taxes need to be considered together and why the work needs to start now. In an upcoming report, Green Alliance will present a menu of tax options for transport as we advance along the Net Zero transition.

The report calls for the Government to: 

  • start an honest conversation with the public about why transport taxes need reform;
  • develop initial options, for public discussion, around how the transport tax system should be updated;
  • create an independent commission to evaluate options and consider how they might be implemented;
  • ensure initial options for updating transport taxation fit with broader tax policy to support the Net Zero transition.

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