The Rise of Electric Vehicles: How Can Africa Prevent Fuel Duty Losses Experienced in the West?

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With the sale and production of electric vehicles (EVs) taking-off globally due to improvements in technology and the declining cost of lithium-ion batteries, the African continent now has better opportunity to unlock the full potential of electric mobility.

To-date, Africa’s limited infrastructure and heavy dependence on used car imports, in which 40% of global exports of used light duty vehicles are directed to the continent, has constrained the shift towards EVs. South Africa is considered to be the largest EV market in Africa, yet only 1,000 out of more than 12 million vehicles are electric. In global contrast, projections show that by 2025, 22% of international vehicle sales are expected to be electric with figures rising to 35% by 2030.

The opportunity for African countries includes key lessons learned from the sharp rise in the procurement of EVs in the U.S. and Europe. National policies can be accurately informed by these lessons, so as to optimally facilitate a clean energy transition, while avoiding the pitfalls of phasing out internal combustion engine (ICE) vehicles. One such pitfall is the issue of fuel subsidies: earlier this month, it was flagged that Great Britain will start to lose approximately $6.8 billion per year in fuel duty within eight years, owing to its transition to electric battery vehicles. As fuel duties comprise about a third of annual revenues in the country, this poses a major threat to tax income used to operate, maintain and enhance motorways, with electric vehicles already representing more than 10% of the domestic market.

Similarly, fuel taxes also serve as a major source of state revenue for several African countries. In Ghana, for example, at least seven different taxes on fuel comprise $0.40 of the price of fuel, per liter. These include an energy fund levy, sanitation and pollution levy, price stabilization and recovery levy, road fund levy, energy debt recovery levy and a special petroleum tax. As a result, fuel costs are significantly higher for Ghanaian consumers at approximately $1.14 per liter, compared with neighboring Nigeria ($0.619), Togo ($0.91) and Ivory Coast ($1.076). Reduced fossil fuel consumption through the proliferation of EVs, therefore, would result in reduced tax income, which would need to be recovered by other means.

A key recommendation for this includes raising the fuel duty and other motoring taxes, such as vehicle excise duty. Road pricing schemes have also been proposed, in which motorists pay based on the distance, time and location traveled. This “pay-per-mile” scheme would serve to reduce road congestion and pollution, in addition to off-setting the fiscal dent created by EVs. While both proposals would increase fuel tax revenue, the risk factor is disproportionately affecting low- to middle-income households that depend on ICE vehicles for transportation, as well as communities without adequate public transportation. Finally, some U.S. states have proposed an “electric fuel” levy for EVs which taxes the actual electricity used to charge electric cars as fuel, although this proposal has been criticized as being inconsistent with the underlying principle of a gas tax and failing to encourage the adoption of clean vehicles.

Conversely, in other sub-Saharan countries, reduced fuel consumption could mean freeing up state spending. To protect consumers against the rising cost of global oil prices, African governments heavily subsidize fossil fuels, at an average cost of 1.4% of Gross Domestic Product, rendering fuel prices cheaper than in other countries, but at a cost of heavy fiscal debt. The Federal Government of Nigeria, for example, has spent over $30 billion on fuel subsidies in the past 15 years, which has resulted in a significant budget deficit. If EVs can gain traction in these countries, government spending could be diverted away from fossil fuel subsidies and toward poverty alleviation measures, COVID-19 economic recovery reforms and/or clean energy development, amongst other national priorities.

Whether implementing fuel subsidies (e.g. Nigeria), fuel taxes (e.g. Ghana) or a combination of the two (e.g. Ethiopia), African governments must consider in their national policies the impact of reduced fossil fuel consumption on state revenues, as demonstrated by the fiscal concerns accompanying rapid deployment of EVs in the West.

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Grace Goodrich

Grace Goodrich

Grace Goodrich is a Publications Editor at Energy Capital & Power, where she writes about the intersection of energy, policy and global finance in sub-Saharan Africa's fastest-growing economies. Grace produces our Africa Energy Series investment reports in Angola and Equatorial Guinea (2019), as well as co-authored African Energy Chamber: Road to Recovery (2021).

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