How will Canada replace $8-billion in gas tax revenue?

It is, by most people’s measures, a positive development. But the rise of electric vehicles raises one very important question: what’s going to replace the Canada gas tax revenue once we’re all driving electric cars?

The Canadian government is on target to lose out on a major source of revenue: gasoline taxes, which in about five to ten years are expected to plummet as electric vehicles take over the auto industry.

Last week, the federal government announced its plan to create a zero emission vehicle strategy to boost the number of battery electric, hybrid and fuel cell cars on Canadian roads. Aimed at reducing greenhouse gas emissions, the initiative comes with $120 million for Natural Resources Canada to set up the charging and refuelling station infrastructure needed for zero emission vehicles (ZEVs).

“We understand Canadians’ concerns about the environment and are developing an aggressive strategy to tackle climate change by taking actions to reduce greenhouse gases and air pollution,” said Minister of Transport, Marc Garneau. “By putting more zero emission vehicles on the road, we are investing in the future of cleaner transportation for all Canadians.”

But while helping Canada to meet its international commitments on climate change, the push for more electric vehicles will soon mean a drop in revenue, as experts now predict gas-guzzlers will be phased out within the decade.

A recent study by Stanford economist Tony Seba concludes that in eight years, electric cars will cost less and be ten times cheaper to maintain than cars running on fossil fuels, not to mention the savings in fuel costs and a life span five times that of cars with internal combustion engines (IC-Es). “What the cost curve says is that by 2025 all new vehicles will be electric, all new buses, all new cars, all new tractors, all new vans, anything that moves on wheels will be electric, globally,” says Seba.

Automakers agree.

Renault, which makes the Zoe electric car, has a time line of the early 2020s for the price of electrics to come out ahead. “We have two curves,” said Gilles Normand, Renault’s senior vice president for electric vehicles, to Bloomberg News. “One is EV technology cost reductions because there are more breakthroughs in the cost of technology and more volume, so the cost of EVs will go down. And ICEs are going to go up as a result of more stringent regulations especially regarding to particulate regulations.”

But how much of a revenue hit will this entail for Canadian governments? Currently, gas taxes are taken in by the provincial, territorial and federal governments in the form of excise taxes, GST and provincial and territorial sales taxes. Some cities also charge their own transit tax on fuel, and carbon reduction programs in BC, Alberta and Ontario add further to the cost for some residents. Overall, prices vary across the country but about one-third of the cost of filling up is paid in tax.

In total, the federal government takes in about $7 to $8 billion a year from fuel taxes, a small but significant piece of an overall revenue haul in the range of $270 billion. But considering that fuel taxes go to paying for roads and transportation infrastructure (and these will still have to be maintained going forward), there will be a need to attract different revenue sources once fuel taxes dry up.

One approach the government may take is adding on more road user fees, such as highway tolls and congestion charges, says David Duff, Professor of Law and Director of the Tax LLM pro-gram at the Peter A. Allard School of Law at UBC.

“I could see governments making a switch to more explicit road pricing arrangements, which are a good idea even with gas taxes, as they can reduce congestion by getting people to drive less and/or not at peak times,” says Duff. “Lots of governments around the world have implemented road pricing systems and local governments have considered these in Canada.”

The numbers are actually higher, according to the Canadian Taxpayers Federation, whose Gas Tax Honesty Day report states that once provincial and transit authority taxes are added, total revenue from fuel taxes for the year 2016 came to $20.5 billion. That’s going to amount to a real problem for all orders of government when electric vehicles take over, says Aaron Wudrick, federal director of the Canadian Taxpayers Federation.

“Our concern would be that the government will look for other sources of revenue to replace the tax losses rather than cutting back on expenses, which is what they should be doing,” says Wudrick. “It’s not unreasonable for the government to want to respond to the transition to electric vehicles but we would like to see that it’s a market-driven process rather than something tinkered with by government,” he says.

In California, which is home to half the electric vehicles in the United States, a new tax will be ushered in in 2020 to attempt to pull the money lost from gas taxes from EV owners. And, according to PBS Newshour, states as far away as Maine are considering the same thing. Maine State Representative Andrew McLean says electric vehicle owners aren’t paying their fair share.

McLean says he wants to “begin a conversation about how hybrids and electrics are not contributing to our highway fund like other cars. It will bring in a little more money because we are not going to fill that gap with just one solution.”

But others say this kind of tax is extremely poorly timed, arguing that we should be creating incentives for people to drive electric vehicles.

“This doesn’t make sense at this stage in the growth of electric vehicles,” says Ottawa-based environmentalist Michael Graham Richard. “While EVs are not a new technology (they were actually invented before gasoline cars), the modern crop of EVs is still very young and immature, and they need encouragement to reach the next phase of their evolution as fast as possible (lower prices, longer driving ranges, more mainstream appeal). But the only way to get there is to get through the awkward adolescent phase, and incentives can either help us push through that as fast as possible, or slow us down and lengthen the domination of fossil fuels for transportation.”

So, for Canadians, the debate comes down to road tolls or taxes on electric vehicle users. Oh, and there’s one other question: what about those snow removal bills?

More from Cantech Letter Cleantech