Encouraging the introduction of energy efficient and lower carbon road vehicles through carbon-based taxes at purchase

Neil Wallis, Low Carbon Vehicle Partnership

Keywords

road transport, climate change, environment, carbon dioxide, vehicles, taxation, CO2, environmental taxes, energy efficient vehicles, low carbon vehicles

Abstract

Road transport is responsible for about a quarter of Europe's total emissions of carbon dioxide, and the sector's share of the total has been growing. Policies designed to reduce road transport's contribution to climate change, and to meet Kyoto targets, are an important focus for decision-makers. (Targets are likely to be legally binding following Russia's expected ratification of the Kyoto Protocol.)

European car-makers have made voluntary commitments to reduce average new car fuel consumption by around 25%, but success in reaching this target - and exceeding it - is partly dependent on market demand for lower carbon vehicles. Appropriate tax incentives are an important part of the policy mix for encouraging sales of environmentally-preferred products. The point of purchase is the most important moment for exerting influence on consumer decisions.

There is no consistent system in European countries for levying differential carbon-based taxes on vehicles at purchase. Car producing countries including France, Germany, Italy and the UK do not have significant purchase taxes, charging only VAT at sale. However, Austria and Portugal, for example, integrate fuel consumption or CO2 emissions as a component in vehicle purchase taxation. Some economic studies have shown that such schemes can encourage significant environmental improvements with low economic and political costs.

This paper aims to describe the existing national systems for vehicle purchase tax across Europe, identifying the most promising routes for achieving environmental, economic and social objectives.