The biggest implication is the global one: this proposal will reduce British greenhouse gases by a material amount. That is good news for those concerned about global warming.
Furthermore, the scheme is self-reinforcing, without placing impossible burdens on manufacturers. It is self-reinforcing because of the revenue neutrality condition: as emissions from cars fall, the charge per gram of carbon emitted will rise, in order to ensure that the government collects the same amount of revenue. At first sight that appears unfair, but we need to remember that the point of taxing cars is to pay for the roads, and that cost has not fallen.
That is why it is legitimate for the government to aim for revenue neutrality in the medium term. All we are doing is parcelling out that charge in a way that incentivises lower carbon cars. As cars become more efficient, car firms that have not reduced emissions will see the prices of their cars rise, implying lower profits and smaller market shares. Car firms will know this, and will always have a reason to try to go further, and faster, than their rivals. That is exactly the competitive dynamic we wish to release. This is not a question of ticking a box or satisfying a regulator, it is about having a permanent, on-going automatically recalibrating system that delivers a strong incentive for every manufacturer to reduce emissions for every car, in every cost effective way possible, but not in ways that are not cost effective. As such we can simultaneously drive down emissions and the cost of motoring.
With increasing charges for emissions over time, Britain is likely to become and remain at the forefront of low emission petrol and diesel cars. This is a useful place to be: the global sales of such cars are likely to remain extremely high for years to come.
Although the incentive to reduce emissions will rise, firms will not be forced to make uneconomic changes to satisfy a regulator who misjudged the ability to cut emissions. Nor are manufacturers
prevented from selling “gas guzzlers” to those who are willing to pay for them. The right to buy a Bentley remains legitimate in this proposal. This is not about the politics of envy, simply about giving everyone the incentive to move materially but easily to a lower carbon future.
The policy delivers revenue neutrality per car. We need to understand exactly what this does and does not mean. It means that the average car sold in 2012 would pay the same charge under this proposal as under the current system. It does not mean that the government will raise £5-6bn a year. We typically sell 2.5m cars a year, so this proposal yields around £4.2bn a year in normal times, and around £3.4bn with current sales levels.
The reason that this proposal yields less than current revenue is that it accepts as given the falls in future VED revenues that are already locked into the system because of the improvements in emission levels that have taken place in recent years. If no change to the VED system occurs, receipts will fall to somewhere in the range £2-4bn a year in the future, as the existing stock is replaced. This proposal does not reverse the future losses that are already in the system, but prevents further revenue losses.
In the short term the government would increase revenue significantly, since it would gain the first registration charge in full on new cars, while continuing to receive VED on existing cars. In accounting terms this improves the deficit, although it does not alter the underlying fiscal position, since the government is simply collecting money that it would get sooner or later. The government can either bank that money towards reducing the debt, or use it to boost this economy, as it believes is appropriate.
The proposal delivers broadly stable revenues per car sold, with any short term fluctuations able to be corrected by altering the pivot point and rate in order to deliver stable revenues per car. It does not, however, deliver stable revenues each year. Instead revenues will rise and fall with car sales. In the recent recession car sales have fallen from around 2.5m to around 2m. A fall of this magnitude would lead to a loss of government revenue of around £0.8bn. There are two ways to look at this. On the one hand this will increase the deficit (bad) on the other it props up consumer demand in the economy generally by acting as an automatic stabiliser (good).
In reality £0.8bn is small beer in the context of what happens to government tax revenues in a recession: so long as government knows about the effect, it can plan accordingly.
In the short run the government will, of course, raise additional revenue, since new cars will be assessed under the proposed system, while the existing stock of cars will continue to pay VED under the existing system.
The proposal will not, of course, deliver stable fuel tax revenues.
On the contrary, since the aim is to reduce carbon emissions, fuel sales and fuel tax revenues will fall. At current fuel duty rates a car will pay around £6,500 in duty over its lifetime.89 A twenty per cent cut in fuel use will therefore cost the exchequer around £1,300 per car, or around £4bn in total.90 This is a sizable sum, but the effect will happen gradually over 15 years, giving the government ample time to prepare.91
This fall in fuel consumption will have an effect on the balance of payments. Although the effect would be slight initially, the long run effect is an improvement of around £2bn.92 Given that the UK had a balance of payments deficit of £29bn in 2011 this should be seen as a useful rather than revolutionary contribution to our international economic position.93
The proposal is progressive. People who buy cars brand new and sell them when they are nearly new are generally more affluent than average. In contrast those who buy second hand cars are generally poorer. Clearly this is not always true, but simply walking around an affluent and a poorer area will show a far greater preponderance of new cars in the more affluent area. Assuming cars continue to depreciate as at present in percentage terms, those who buy their cars new and sell them when they are around three years old will pay around half the total charge, taking into account changes in second hand car prices. This is more than they would pay under the current system. Those who buy their cars second hand will pay a little more for the car, but the absence of annual VED means that they will pay less overall. This is why the scheme is progressive.
We should note that in the case of the lowest emission cars, which
89 57.95p per litre, 40mpg, 100,000 miles
90 Fuel duty currently raises £26.9bn, but this includes duty paid by trucks, motorcycles, etc.
www.ifs.org.uk/bns/bn09.pdf, Table 1
91 There would be a further loss to the government because fuel is also subject to VAT. That said, consumers will spend the money on other items in lieu, and those items are likely to be subject to VAT. For that reason we do not count the VAT loss on fuel as a likely net loss.
92 100,000 miles @40 mpg implies lifetime fuel use of 71 barrels of oil equivalent. A 20% saving is therefore 14 barrels, with a value of £900 or around £60 a year. With 31m cars on the road this implies a reduction in imported oil of £1.84bn a year. Insofar as British oil is used for British cars, the oil not used can be exported, and so the effect on the overall balance of payments is maintained.
93 www.ons.gov.uk/ons/rel/bop/balance-of-payments/4th-quarter-and-annual-2011/stb-bop-4th-quarter-and-annual-2011.html
attract a subsidy, the first purchaser will again receive about half the benefit. It is appropriate that the person who makes the decision as to which car should be produced in the first place should be the biggest gainer or loser financially.
The proposal also has the perception to change the way society views cars. We have a love-hate relationship with cars. Cars can bring a real freedom to individuals, as well as convenience. Against that, they cause significant levels of CO2 emissions, as well as killing and injuring what should be unacceptable numbers of people. They also cause local pollution, in the form of emissions such as NOx and similar, and in terms of noise. Finally, they cause congestion. This proposal – particularly with the extensions to cover other emissions, and safety standards – could change the way we see cars.
The lowest emission mainstream diesel cars are already carbon-competitive with diesel trains. For example, a BMW 3 series ED has CO2 emissions per passenger seat km of 27.5g, lower than that of an Intercity 125, or Virgin Voyager diesel train if both are full.94 The Association of Train Operating Companies reports that the average train has just 20 people on it, and at that rate the CO2 emissions per passenger km are 69g for diesel trains and 51g for electric trains. As an order of magnitude, therefore, 2 people in an efficient diesel car have the same level of emissions as if they travel by train.95
If we can improve best practice and – more importantly – bring the average much closer to current best practice then an important element of many people’s dislike of cars will have been removed.
If we can do the same for local pollutants, and for injuries caused by cars, then we will have gone further in making the car more acceptable. The industry – spurred on by this proposal – may well be able, therefore, to reposition the car within society. At least until we have decarbonised all electricity production, all powered transport will harm the environment. But this proposal – and car makers’
ingenuity – holds out the prospect of making normal everyday cars as low impact as almost any other form of powered transport.
If this proposal is as successful as we believe it can be, then the UK government would be in a strong position to argue that others should copy this proposal. The obvious first target market would be other European economies, who start from a similar place, and have reasonably similar environmental objectives. It will clearly be
94 We define the BMW as a 4 seater – few people use the fifth seat for long distances.
Diesel train emissions: www.guardian.co.uk/environment/datablog/2009/sep/02/
carbon-emissions-per-transport-type
95 www.atoc.org/clientfiles/File/publicationsdocuments/nps6E1F_tmp.pdf
harder to sell the idea to the United States, although incentivising the production and sale of lower emission – but just as usable – Golfs, Focuses and the like has a bigger environmental payoff in the United States than elsewhere, given the low fuel efficiency base from which they start. Petrol prices have been high in the US recently by US standards, so it is possible that a scheme such as this, that promises to incentivise firms to offer cars with high fuel economy, would be more popular than we might initially believe.
In addition to environmental attractions, including improvements in local air quality, countries like China and Brazil are likely to see this approach as desirable because it increases living standards for people for whom fuel cost represent a significant expense. Further, as we noted, the policy reduces oil consumption, and therefore supports the balance of payments position. This is likely to be an effective argument in the case of all oil-importing nations. (In the case of oil exporting nations, adopting this policy would free up more oil to export).
: 15 – Conclusion
This report argues that the government should replace the annual vehicle excise duty – car tax – with an upfront first registration charge for all new conventionally powered cars. This replicates the successful approach used in many countries. The average car would pay the same initially as it would pay over its lifetime under the current system. The change is therefore revenue neutral for both consumer and government. The system is, however, designed to stabilise charges and revenues at current levels, ending the decline in revenues inherent in the current system.
We show that it is reasonable to expect that a charge of £50 per gram of CO2 above 94g, combined with a subsidy of £50 per gram of CO2 below 94g would be revenue neutral in the first year. These figures would be adjusted each year in the light of improvement in emissions of cars bought the previous year. A £50 per gram charge gives consumers a £500 upfront incentive to choose a car with emissions 10g lower than they would otherwise choose. We show that there are a wide range of technical solutions that cost less than
£500 to fit that cut emissions by 10g or more. Car firms often fit these on “green” versions of a car, but not to all models. Under this proposal fitting these items would reduce, rather than raise, the final price of the car, and as such they will be adopted widely.
We estimate that these changes, combined with small changes in consumer behaviour at the margin, will reduce new car emissions by around 20% compared with the current trajectory. This is sufficient to reduce UK greenhouse gas emissions by about 2.6% as the stock of cars is gradually replaced. This greater efficiency also reduces the cost of running a car – by around £2,600 over the course of the car’s lifetime. Thus the proposal is good for consumers and thus for the car industry. A rise in the price of new cars of around 8% is directly compensated for by an equivalent saving from not having to pay annual vehicle excise duty. The gain to consumers from lower fuel costs is therefore a net gain to the consumer.
The proposal will also reduce emissions of local pollutants such as NOx and particulates, which are proportional to fuel use.
Furthermore, we show that the proposal can be extended – on a revenue neutral or revenue raising basis – to incentivise lower emissions of other pollutants as well. We can also make cars quieter and safer using the same approach.
This proposal is easy to implement and would be expected to work very quickly. It is hard to imagine a more painless way to reduce CO2 emissions in any sector of the economy. Were other countries to follow Britain’s lead the effects would be greater still.
: Appendix
Table 1 (page 74) shows the effect of the scheme by manufacturer, assuming that the cars sold in 2011 remained unchanged. This means both the manufacturers offered exactly the same ranges, with the same emissions, and that purchasers did not alter their behaviour. This table has been calibrated to be revenue neutral in aggregate for the government, compared with applying the current system of VED.
The first column shows the change in the initial price as a result of adopting the proposal. The second column shows the change in tax over the cars lifetimes. As we can see, the first column shows a lot of variety, whereas the second column shows much less variety.
The cars produced by more than 50% of manufacturers would see either a fall in the lifetime cost, or a rise of less than £80 over the car’s lifetime. Only the six supercar manufacturers see a moderate rise in the lifetime running costs of their cars – and even then, frankly, a 60p a day rise in the cost of a Ferrari is unlikely to be a major deterrent.
As is explained in the text (pages 57-58), these figures are in some way an irrelevance, since the whole point of the proposal is to create incentives for both manufacturers and consumers to change their behaviour. Calculating the effect if neither change is not a good guide to the future.
Table 2 (page 75) is described in detail on page 58. Manufacturers receive scores, from 0 to the best score of 100, based how they might be affected. The first column is based on the price changes shown here in Table 1. The second relates to manufacturers’ ability to offer lower emission versions of each car that they sell. The final column adds up these two numbers and expresses the result as a percentage of the highest score. Analysis is given on page 59.
Table 1: Change in initial and lifetime car taxes by manufacturer
Change in initial price Change in lifetime car tax
SMART -£331 -£378
Table 2: Comparison of short-term effects by manufacturer