A turbo-charge statement for electric vehicles

This week’s Autumn Statement brought some good news for proponents of electric vehicles. With lower than expected tax receipts and a worsening economic outlook due to Brexit, the Chancellor did not have much cash to give out. The new spending that he did announce was focused on infrastructure, a long-term approach that he hoped would be rewarded by increased tax revenues in the future.

This is intended to tackle one of the fundamental weaknesses of the UK economy that the Chancellor rightly identified in his speech: Poor productivity growth. ‘Productivity’ measures how much economic value is created from a fixed period of labour. Strong productivity growth signals long-term wage rises and economic growth. Concerningly, under this crucial metric, the UK lags well behind Germany and the US by some 30 percentage points. Infrastructure investment helps to improve productivity. For instance, investment in transport can reduce workers’ journey times, freeing up space in the day for more economically productive activity.

The Autumn Statement measures

This is where electric vehicles come in. As part of the £23 billion National Productivity Investment Fund, £390 million of funding over the next four years will be spent on developing future transport technologies. This includes £80 million for electric vehicle charging infrastructure and £150 million of support for low emission buses and taxis.

In addition to this new spending, there were several tax changes to incentivise uptake of electric vehicles. Companies will be given 100% first-year capital allowances for investments in new charging infrastructure until 2019, allowing businesses to deduct the cost of new charge points from their corporate tax bill. And although the Chancellor heavily pruned back salary sacrifice schemes in his statement, the perk was retained for schemes supporting electric vehicles. There were also changes to company car tax, creating lower bands for electric vehicles.

What should come next?

Bright Blue has two further policy recommendations that would drive uptake of electric vehicles, at little additional cost to the Treasury. First, the current plans for five Clean Air Zones in Derby, Nottingham, Birmingham, Leeds, and Southampton should be expanded. Earlier this week, the Government was told by the High Court it had until April 2017 to draw up a new draft air quality plan, as the previous one took too long to bring the UK into compliance with the legal limits.

We recommend devolving more funding and powers to city councils to enable all of them to set up Clean Air Zones where pollution is a problem. As well as charging the most polluting vehicles, Clean Air Zones will give preferential access to city centres to electric vehicles, such as priority at traffic lights and designated parking spaces. Academics have found that, in Germany, where there is a national network of over 70 low emission zones, owners of older, polluting vehicles have traded them in for cleaner ones. So a network of Clean Air Zones could stimulate the electric vehicle market in the UK too.

Second, this week’s Autumn Statement extended the lifetime of the UK Guarantees Scheme until at least 2026. Under this policy, the Treasury guarantees loans to private sector investors, giving them access to capital to fund new infrastructure. Since it was launched under the Coalition Government, it has given out £1.8 billion of guarantees, supporting over £4 billion of investment. We believe these loan guarantees could also be offered to drive investment in a network of charging points for electric vehicles.

Why is this important?

Accelerating the electric vehicle revolution offers many potential benefits, in addition to improving air quality. The Government is currently drafting its Emission Reduction Plan, which will set out how the legally-binding carbon budgets will be met. Transport now has the highest carbon emissions of any sector in the economy. What’s more, these emissions have actually risen for the past two years. Electrifying the car fleet would help the government make progress in decarbonising this stubbornly high-emitting sector.

Boosting electric vehicle uptake is also likely to be a key plank of the Government’s forthcoming industrial strategy. The UK is already the largest market for electric vehicles in Europe. Nissan, for instance, has invested over £420 million in the UK to build its electric vehicle, the Leaf. In 2015, the number of electric cars on the roads globally surpassed a million, more than doubling the total in 2014. This was also the year when electric vehicles’ market share of new purchases in the UK rose above 1%. Electric vehicles are a major economic opportunity for the UK to seize.

Electric cars are still near the start of their journey. But, as a result of the Chancellor’s measures this week, they have moved a few miles further towards the destination.

Sam Hall is a researcher at Bright Blue

Accelerating productivity investment

Theresa May’s new government has an unprecedented opportunity to reshape the UK economy and it should not be wasted. Now is the time for Government to review its role in helping to finance productivity enhancing capital investments.

Lost confidence due to Brexit uncertainty and persistently weak productivity growth, the ultimate driver of long-run economic growth, are major concerns and new supply side investments and reforms are urgently required. While the amount of financing available is returning to pre-crisis levels, the length of loans and the cost of capital have not. Financing is available for too short a period of time and is too expensive, which results in many potentially profitable and productive investment opportunities failing to go ahead.

Given the massive difference between long-term UK government borrowing costs and those available to private investors, it would make sense to pass on some of this difference in capital costs and length of loans to those making productivity enhancing investments in social, physical, technological, and human capital.

An approach could be based on existing instruments created since 2010, namely the UK Guarantees Scheme for Infrastructure (the Scheme) and the UK Green Investment Bank (the GIB). Both of these policy instruments were created to help unlock financing for infrastructure, but both are severely constrained - largely because of the need to comply with EU State Aid rules.
State development banks in other European countries, such as KfW (originally Kreditanstalt für Wiederaufbau) in Germany, have block exemptions from these requirements as they were established prior to the EU existing and were folded into EU treaties and directives.

Now that we are committed to Brexit, the Scheme and GIB should be similarly unshackled so they can provide concessional finance. Providing low cost finance to sectors (as opposed to specific companies or ‘national champions’) through fair and competitive tendering processes can boost growth, without unfairly and counter-productively ‘picking winners’.

Such a reform would allow lower cost capital to be invested in assets able to improve long-run productivity. Concessional finance can be disbursed through tenders, or by allocating funds to banks or asset managers operating in selected sectors. This would be an important public policy tool able to accelerate investment in key areas. It could also improve the UK government balance sheet: interest would be charged on finance provided and these rates would be above the government’s own cost of capital, but below market rates.

Priorities for financing could include energy efficiency or capital improvement loans for households and small businesses – dramatically improving the attractiveness of borrowing to invest for those groups. Projects eligible for Contracts-for-Difference (CfDs) - which underpin power generation investments - could also receive the option of low cost loans, which also have the benefit of reducing their overall cost. Other priorities could be energy intensive industries – providing low cost finance for new technologies that improve the resource efficiency of industrial processes – and the deployment of a new national electric vehicle charging network. An offer of low cost capital could unlock the construction of an ambitious new UK electric vehicle charging network that would be privately owned and operated on a commercial basis.

Investments that are more resilient (for example, those future-proofed against flooding) and supportive of multiple government objectives (such as pollution and biodiversity) should be prioritised. HM Treasury and the new Department for Business, Energy and Industrial Strategy (BEIS) should determine these win-win opportunities together with the independent Committee on Climate Change and Natural Capital Committee. The creation of BEIS is a significant opportunity for a joined up approach to supporting investment.

The government can enable important productivity enhancing investments, while minimising the direct role of the state, the impact on the public finances, and the risks of ‘picking winners’. A majority Conservative Government can deliver this and get the appropriate balance between positive intervention and counter-productive market distortion.

Ben Caldecott is an Associate Fellow of Bright Blue and author of Green and responsible conservatism: embedding sustainability and long-termism within the UK economy

This article first appeared on BusinessGreen.