As consumers switch to electric vehicles, the shortfall in fuel tax revenues is likely to expose government budgets, particularly in lower-income countries, a new report published in Nature Sustainability has suggested.
According to the report, The electric vehicle transition and vanishing fuel tax revenues, by Bessie Noll and Tobias S. Schmidt of ETH Zurich and Florian Egli of the Technical University of Munich, global fuel tax revenues totalled around $920 billion in 2023, and as electric vehicle adoption rates increase, many countries will face challenges as a result of the shortfall in fuel tax revenues.
The study examined fuel tax transition exposure across 168 countries, and found that relative exposure, as a percentage of total government revenues, ‘varies substantially’ by income level.
Fuel tax revenue
In most countries, fuel tax revenue accounts for between 4% and 8% of total government revenue, however in lower-income countries, this is often higher than 9%.
‘This means that low-income countries face about three times the exposure to potential revenue loss from declining fuel taxes compared with their more affluent counterparts,’ the study noted, adding that many of the most-exposed countries are already experiencing debt distress, or lack the ‘institutional quality or organisational structure required to design new tax schemes’.
This ‘double exposure’ is evident in countries such as Yemen, Benin, Lebanon, Mozambique, Madagascar, Kenya, and Suriname, where fuel tax revenues represent a ‘large share’ of government income, debt burden is high, and institutional capacity is ‘too weak’ to compensate for potential revenue losses.
In other countries, such as Nigeria, Angola and Vietnam, each of which are major fossil fuel producers, increased adoption of electric vehicles could undermine both tax revenues and return on investments in oil and gas, the authors added.
‘In this unfolding narrative, challenges are distributed unevenly,’ they state. ‘Countries with a heavy reliance on fuel tax revenues and low institutional capacity face the greatest challenges. Should the global BEV [battery-electric vehicle] transition continue to unfold faster than anticipated, the international community may need to offer assistance for countries with this double exposure.’
Potential solutions could include carbon taxes, road tolls, tariffs on electric vehicle imports, or additional taxes on electricity, many of which are already being implemented in higher-income countries, but may prove harder to implement in lower-income markets.
Alternative revenue systems
As the authors note, support from global institutions such as the World Bank or UN Development Programme may be necessary to enable lower-income countries develop alternative revenue systems without limiting the uptake of electric vehicles.
‘Key factors include understanding how different taxation types can support or hinder the BEV transition, offer flexibility to manage negative externalities efficiently, reduce implementation barriers and prioritise fairness more readily,’ they state. Read more here.
