Treasury consults on duty incentive for "greener" cars

Proposals to reform vehicle excise duty (VED) to encourage sales of cleaner and more fuel-efficient cars have been issued by the Treasury. 1 The rate for new petrol cars will be determined mainly by their emissions of carbon dioxide - but the treatment of existing cars and diesel vehicles is likely to prove controversial.

The UK is the only country in Europe with a flat VED rate for all cars. The current annual rate is £150. Other states relate VED to engine capacity, power output, weight, age of vehicle or fuel type. The annual duty for large petrol cars rises steeply to over £600 in Ireland and Denmark - while in the Netherlands large diesels attract a fee of £980.

In the last Budget, the Chancellor announced plans for an "environmentally graduated" VED system for cars.

He proposed a £100 rate for "less polluting" vehicles and an increase for "less environmentally friendly" cars (ENDS Report 278, pp 3-4 ).

A consultation paper issued in November puts forward more detailed proposals with the aim of providing "a clear and easily understandable additional signal to purchasers and manufacturers." This will complement the existing fuel duty escalator and the EC strategy on reducing CO2 emissions from cars (ENDS Report 282, p 48 ).

However, the document says nothing about the possible rates of VED. A relatively steep graduation may be essential to offer any significant incentive for "greener" vehicles - but the prospect of hefty VED increases for larger cars will arouse vocal opposition from the motoring lobby. The Chancellor will announce new duty rates in the next Budget, with the aim of implementing the revised scheme in 1999.

The main thrust of the proposals is that VED should broadly reflect a car's CO2 emissions, although the mechanisms for achieving this would vary for new and existing vehicles. The system would be fine-tuned to reflect emissions of other pollutants - chiefly fine particles and nitrogen oxides - of particular concern for their impact on local air quality:

  • New vehicles: The Treasury plans to use actual CO2 emission rates as the main basis for setting VED for new cars. Detailed information on emissions from new vehicles is now available - indeed, from 2000 manufacturers will be required to provide such data by EC legislation.

    Most new cars currently emit 150-250g/km of CO2, with an average of 185g/km. The EC strategy aims to reduce average emissions to 120g/km, and European manufacturers recently reached a voluntary agreement to cut their fleet average to 140g/km by 2008 (ENDS Report 282, p 48 ). A few models already meet the latter standard.

    The Treasury proposes four bands of VED, with possible cut-offs at 150, 170 and 200g/km. This system would be simpler to administer than the alternative approach under which VED could vary continuously with CO2 emission rate.

    Such a system would tend to reward diesel cars which have lower CO2 emissions than petrol cars of the same engine capacity. However, the paper suggests that, because diesels have higher emissions of particles and NOx, a VED supplement of perhaps 10% should be added to the rate determined on the basis of CO2 emissions alone. Conversely, a discounted VED rate could apply to vehicles powered by cleaner gaseous fuels.

    Finally, the paper suggests that VED discounts could be used to encourage early introduction of vehicles which meet future EC emission standards. In practice, this would apply mainly to new models capable of meeting recently agreed EC standards which will apply from 2000 and 2005 (ENDS Report 281, p 48 ).

  • Existing vehicles: Data on CO2 emissions are not readily available for most existing cars. The Treasury therefore proposes to use engine size as a proxy.

    The paper offers four illustrative VED bands, with cut-offs at 1,250, 1,600 and 2,000cc. Alternatively, VED could vary more or less continuously with engine size.

    The Treasury is equivocal on the case for a VED supplement on existing diesels. It notes that existing diesel engines are "typically much larger than petrol engines offering similar performance" - and it is "at least arguable that there is no need for an additional VED charge."

    As with new cars, the Treasury floats the option of modifying the basic VED rate to reflect a car's ability to meet EC emission standards. However, it notes that "the case for doing so is, perhaps, less strong than for new cars since the existing cars have, by definition, already been purchased."

    Moreover, emissions from existing vehicles are not currently recorded on the vehicle registration database. The Treasury suggests that a vehicle's age could be used as an "imprecise" mechanism for determining its emissions performance. But it plans to retain the existing VED exemption for the 300,000 "historic" vehicles which were registered before 1973.

  • Light goods vans: Some 3 million vans currently attract the same £150 VED rate as passenger cars. No CO2 emission data are available on a model-by-model basis, and there are no plans to require testing of new vans. The Treasury therefore suggests that manufacturers could voluntarily test vans' CO2 emissions to the same procedure as passenger cars. Alternatively, VED for new vans could be based on the engine capacity regime proposed for existing cars and vans.

  • Motorcycles: The VED structure is already graded by engine capacity. There are no plans to collect environmental information on motorcycles via a type approval process. However, the proportion of large, fuel-inefficient bikes has been steadily increasing.

    The Treasury proposes "a more environmentally sensitive duty band structure" in which the capacity threshold for large bikes is increased from 250cc to 400cc.

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