Carbon gains from company car tax reform

Reform of company car taxation has delivered a 0.5% reduction in carbon dioxide emissions from road transport, with more on the way, according to a review by the Inland Revenue.1 The reforms have encouraged the use of more efficient cars, a dramatic shift to diesel and a significant drop in the total number of company cars.

The company car tax rules were overhauled in April 2002. Company cars make up around half of the 2.6 million cars sold each year, and a large part of the second-hand car market.

The main thrust of the reform was to shift the basis for company car tax from engine size to a car's CO2 emissions performance and to remove the discounts for higher business mileage (ENDS Report 302, pp 19-21 ).

According to the report - based on over 2,000 interviews, information from the Vehicle Certification Agency and data from tax records - by removing a "perverse incentive" to travel more, the reform reduced business mileage by 300-400 million miles in 2003/03.

The reform is also said to have played a "significant" part in reducing the average CO2 emissions of new company cars from 196 grams per kilometre in 1999 to 182g/km in 2002. Firms are now encouraged to consider emission levels in their purchasing decisions.

Much of the improvement in fuel efficiency stems from a dramatic switch to diesel, despite a 3% premium on company car tax for cars that do not meet Euro IV emission standards. About 40% of company cars now run on diesel - and the figure is expected to increase to 50-60% next year. The reform has had much less impact on alternative fuel vehicles, which hold some 1% of the market.

The Inland Revenue also claims that the reforms have helped reduce the number of company cars on the road from 1.6 million to 1.35 million. However, some of this reduction would have happened anyway due to "significant increases" in employees taking cash alternatives to company cars.

Overall, the reductions in company car numbers, lower mileage and improved fuel efficiency have reduced CO2 emissions by "up to" 200,000 tonnes, the report says. The reduction is equivalent to 0.5% of all CO2 emissions from road transport.

The Inland Revenue says that reductions will be "significantly greater than this in the long term" as companies renew their fleets, emission standards tighten and employees become more aware of the benefits of driving cleaner vehicles. Total reductions are "on target" to be "between 0.5 and 1 million tonnes of carbon per year in the long run."

However, there are some important questions over the claimed successes of the reform. The improvement in average CO2 emissions of new company cars to 182g/km looks less impressive when compared to the average 172.8g/km for all new cars sold in the UK last year (ENDS Report 351, pp 10-11 ).

One thorny question is how much of the reduction attributed to company car tax reform may count towards car manufacturers' commitment to reduce average emissions from new cars sold across the EU to 140g/km by 2008/09 (ENDS Report 349, p 60 ). This target was supposed to be met by technical improvements rather than fiscal reforms - but manufacturers appear to have their eye on the savings (ENDS Report 351, pp 10-11 ).

The reform may also have failed in its aim "to reduce levels of local air pollutants". The report admits that the increased proportion of company cars running on diesel may have the effect "of increasing emissions of some local air pollutants" - most notably NOx and particulates, the two most troublesome pollutants. No estimate of the impact on emissions is provided.

Finally, the reduction in the number of company cars and in business mileage needs to be seen in a wider context. The number of cars registered in Britain rose by 3.9% over the last year - and car traffic continued its steady rise, increasing by 2%.

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