Low Carbon Transport Set To Save Households £22 Billion In 2035 - But Policy Changes Are Needed To Ensure That Lower-income Households Get Their Fair Share

18th October 2024

Decarbonising Britain's transport will be challenging as it accounts for over a third of all UK emissions. But doing so effectively could save households £22 billion (£650 per household on average, in current prices) in 2035, according to new analysis from the Resolution Foundation published today (Thursday).

The report Getting the green light, funded by the European Climate Foundation, says that the next big step in Britain's net zero transition is to make travel (which currently accounts for 34 per cent of total UK emissions) carbon neutral.

But decarbonising transport needs to be approached carefully. With £1 in every £6 that families spend today going towards travel, any changes in its cost will have major impacts on household budgets. But the good news is that the bulk (60 per cent) of the savings associated with the overall net zero transition are due to cheaper transport, CCC figures show. If done properly, it could mean annual savings of £650 per household on average (in 2024 terms) by the middle of the 2030s

Cars are key to decarbonising travel, and the electrification of road travel is where the majority of potential savings lie. Cars account for two-thirds of transport emissions and 84 per cent of non-walking journeys. The new Government has inherited plans to add to the one million EVs already on UK roads, and, as these numbers grow, it will need to use different tools to encourage continuous uptake.

Recent falls in the price of EVs mean that the previous Government was right to stop subsidising new cars in favour of a sales mandate that puts the onus on manufacturers to bring more EVs to the market. However, generous tax breaks on new EV purchases still exist via salary sacrifice schemes, with higher- and additional-rate taxpayers benefiting most.

The vast majority of those in the richest tenth of households could benefit from a saving of 42 per cent or more on a new electric car, while minimum-earning thresholds exclude half of those in the poorest half of the population. This is a poor use of a subsidy and should be scrapped, says the Foundation, with the savings instead spent for the benefit of all EV users.

The report notes that EV drivers stand to benefit from the lower cost of electricity compared to petrol. But those without access to off-street charging - which is twice as common for poorer households - will miss out on the majority of these savings. This means the one-in-three households that have to use public charging will be left paying double the price to charge cars as those with at-home chargers.

The Foundation warns that to fairly share the benefits of the net zero transition, this ‘charging divide' needs to be addressed. Cutting VAT at public charging stations from the higher rate (20 per cent) to that for home charging (5 per cent) would be a quick and simple solution that should be announced in the upcoming Budget, costing the Treasury around £700 million. In the longer term, ministers need to break up local monopolies on public chargers, or even step in to regulate prices.

The report notes that while electrification is already making running cars cheaper, it won't have the same effect on public transport. This risks encouraging even more people into cars, and inadvertently driving up congestion. Policy makers therefore need to rethink the current provision of discounted rail and bus fares, so that they can target those who will miss out on electrification savings, such as those on lower incomes or without access to a car.

Finally, as we decarbonise other forms of travel, the report notes that aviation emissions will overtake those from surface travel by the late 2030s. With most flights taken by those on higher incomes, the Foundation recommends that people who choose to continue flying must do more to cover the costs of their emissions. The best way to do this is a system of flight pricing that accurately and consistently taxes carbon. The UK can take a lead here by extending carbon prices to flights outside the EU, which are currently taxed less than the energy families use to power their homes.

Jonathan Marshall, Principal Economist at the Resolution Foundation, said:

"If the UK is to reach net zero by 2050, we need to decarbonise travel, and fast. That's no easy task when it makes up a third of our carbon emissions. But the cash prize for doing so could be huge, with more than £20 billion of annual savings on the table by the mid-2030s.

"The transition to Electric Vehicles promises to reduce costs to motorists. However, the risk is that without further policy changes those savings could all go to richer households.

"But with universally affordable charging for electric vehicles, targeted discounts for public transport, and more comprehensive carbon pricing for those reluctant to ditch their frequent flights, a fair transition is very much within our reach."

Key findings
Travel is the second largest component of household budgets, accounting for £1 in every £6 spent, on average - and cars make up the lion's share of this, representing 84 per cent of all (non-walking) journeys made in the UK.

The financial benefits of the transition to net zero are concentrated in the transport sector, accounting for more than 60 per cent of all operational cost savings and worth more than £20 billion in 2035.

New electric car costs have fallen rapidly, with some models now affordable for households on middle incomes, even though upfront subsidies have been withdrawn. But significant and arbitrary tax breaks - often pegged to marginal tax bands - remain: three quarters of those in the highest-income decile could benefit from a saving of 42 per cent or more on a new car, while minimum-earning thresholds exclude the majority of those in the poorest half of the population from such discounts.

Once EVs are commonplace, poorer households will be more than twice as likely as their richer counterparts to rely on the public charging network, but the costs associated with this are much higher than for at-home charging, and have increased by 50 per cent in the past 18 months. This means, on average, spending £425 more per year on electricity than charging at home.

The cost of driving could fall by 60 per cent by 2050, yet public transport costs are expected to rise with inflation. Lower-income households are much more reliant on public transport - roughly doubly so – and risk missing out on these substantial savings without targeted discounts.

Aviation emissions are set to surpass those from surface transport by 2036. These emissions will be primarily driven by richer households: those in the top fifth by income are expected to be emitting more greenhouse gases through flying than the total of poorer households’ from homes, transport, flying and electricity use, combined.

Rad the full report HERE
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