How best to tax EVs in Africa

November 28, 2024

From the newsletter

Electric vehicles are taking centre stage. Governments are wary that they might lose revenue from fuel taxes. Some, like South Africa, are already planning ahead. This month, they launched a survey on road user charges for EVs. This is proactive. But is Africa's EV market mature enough to even generate good revenue?

  • Globally, many countries have long relied on fuel taxes to generate revenue for building and maintaining road infrastructure. But this is changing with EVs.  

  • In some countries, like Kenya and South Africa, fuel taxes account for about 25% of total fuel prices, generating billions in government revenue.

More details

  • The transition to EVs is taking shape, but it will bring varied issues that need to be addressed. The most obvious is the disposal and recycling of batteries. However, that's not the government's primary concern. Their main concern is the problem of taxation and revenue. Vehicles require paved roads, and paving is expensive. While there are some toll roads in Africa that drivers pay to use, most infrastructure is financed through fuel taxes.

  • Electric vehicles are on the rise and will use the same roads as fuel-powered cars. However, EV drivers won't be purchasing fuel, meaning they won't be paying fuel taxes. This threatens governments' income streams. As more people switch to electric vehicles and as conventional vehicles become more fuel-efficient, governments must find alternative ways to fund road infrastructure.

  • Developed countries with high EV adoption rates offer valuable lessons. In the USA, some states like California and Nevada are piloting road usage charges, where drivers pay per mile driven. Norway, a leader in EV adoption, chose a different path. By exempting EVs from road taxes for 25 years, they achieved an 82% EV market share in 2023, with new car registrations currently hitting over 90%.

  • This approach could be replicated elsewhere. However, what worked in Europe or the USA might not be directly applicable in Africa. Taxing EVs could make them prohibitively expensive, slowing down adoption. Not taxing means no revenue. Yet African governments need more revenue and must plan for the future.

  • South Africa is exploring a road user charge for EVs to address potential revenue shortfalls. To gauge public opinion, the government has launched a survey. The proposed system includes fixed and variable charges and would require tracking devices in EVs to monitor distance traveled. Vehicle owners would receive monthly invoices based on their road usage.

  • Various charging systems are under consideration, including vehicle license and registration fees, expanded toll roads, congestion charges for urban areas, a distance-based road-user charge, or a combination of these options.

  • Increasing electricity taxes is another option, but it might not be viable in Africa. Electricity is already expensive, and even with EV-specific tariffs, some countries like Egypt still have very high prices. This could hinder EV adoption.

  • It is too early to speculate on the potential revenue loss from fuel taxes. However, governments should prepare by planning for this eventuality.

Our take

  • African governments are at a crossroads. While EVs offer environmental and economic benefits, the potential loss of fuel tax revenue presents a significant challenge. Taxing EVs to maintain revenue streams could stifle the growth of this emerging sector. Instead, a realistic approach is needed for the nascent EV market. Road user charge waivers, subsidies, and more incentives will be crucial in encouraging adoption.

  • But African governments lack the financial resources to heavily subsidise EVs. While reduced fuel imports could eventually offset lost fuel tax revenue, this won't happen immediately. The market is far from substantial savings on fuel imports.

  • On the other hand, governments can leverage the EV transition to generate revenue for struggling national power utilities. Implementing targeted EV tariffs that are lower than standard electricity rates should be a priority, especially shifting demand to off-peak periods by lowering tariffs further. Taxing grid electricity could push more people toward off-grid solutions, which would be a missed opportunity for governments.