About the author
Tim Leunig joined CentreForum in January 2011, from the London School of Economics. As well as his academic work, he co-authored a research paper for the Eddington Review on transport and the economy, was a plenary speaker at the OECD International Transport Federation conference, and has written widely in the press and for think tanks on planning, housing, transport, pensions, university access and economic issues more generally.
Acknowledgements
The author would like to thank The Society of Motor Manufacturers and Traders for generously supplying data, and is especially grateful to Adam Corlett at CentreForum for his contributions to this paper.
Copyright 2012 CentreForum All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of CentreForum, except for your own personal and non-commercial use. The moral rights of the author are asserted.
: Contents
Executive summary 4
1. Introduction 7
2. UK actions to reduce car emissions 9
3. The EU emissions regime 18
4. Cars in Britain 21
5. Green taxes and car taxes 25
6. How to reform VED 29
7. Consumer responses 33
8. Manufacturer responses 37
9. Other emissions 45
10. Noise 48
11. Safety 51
12. Tyres 54
13. Effects on car makers 57
14. Wider implications 66
15. Conclusion 71
Appendix ` 73
: Executive summary
The government announced in the 2012 Budget that it would review vehicle excise duty (VED), or “car tax” as it is better known. Recent falls in car emissions mean that annual VED receipts are likely to fall by £2bn or more over the next decade. There is concern that yields from VED may fall dramatically in future, as car emissions fall. This report argues for the current, inefficient system of annual VED to be replaced for all future car purchases by a simple up front first registration charge. This would be paid at the point of purchase or importation. The academic literature shows that this approach is more effective at incentivising the purchase of lower carbon car emissions.
The proposal is designed to be revenue neutral, and to incentivise lower carbon versions of existing cars. Each year the government would set an emissions ‘pivot point’ equal to the emissions of the best performing 1% of cars the previous year, measured by sales.
The first registration emissions charge would apply only above this level, at a rate per gram calibrated to ensure that the yield from the charge remained constant over time, eliminating financial pressure on the government. Cars below this level would receive a subsidy, at the same rate per gram – hence the term “pivot point”. Having a simple charge per gram gives all manufacturers an identical incentive to cut emissions.
Over time, car firms will cut CO2, both because technology is improving, and because this scheme gives them an incentive to do so. As a result, the threshold above which the charge will be payable will fall in future – creating a ratchet effect whereby the cost of “doing nothing” increases over time. This is exactly how a market works: when one firm innovates, the others must follow, or be left behind.
The Society of Motor Manufacturers and Traders has kindly provided data to allow the scheme to be calibrated. We found that the rules outlined above mean that, had the scheme been introduced for
2012, it would take the form of a £50 charge per gram of CO2 over an allowance of 94g. Cars emitting less than 94g of carbon would receive a subsidy of £50 per gram below this level. 94g is therefore the “pivot point”. The highest emission car on sale, the Aston Martin one-77 would pay a charge of £23,050, while the lowest emission car available at the time of writing, the Toyota Yaris, would receive a subsidy of £750. Because cars become more efficient over time, more than 1% of cars would be eligible for a subsidy each year.
This scheme gives every manufacturer an incentive to make every car more economical, and gives every individual an incentive to buy a more economical version of the car they were planning to purchase. We calculate that this would yield emissions reductions of around 20% over three years, in addition to the likely 12%
reduction that will occur on current trends in any case. The policy improves fuel efficiency by around 10 miles per gallon. We therefore hypothesise that we can reduce carbon dioxide emissions from new cars to around 93g within three years. This policy alone will reduce total UK carbon emissions by around 2.5%. That gain will not be immediate – the existing stock of cars will be with us for some time – but the gain will grow steadily in the 15 years from the policy’s introduction, as cars purchased under the new regime become an ever more important part of the stock of cars on our roads.
Although this proposal will increase the up front cost of most cars, it is worth commenting that it will reduce the lifetime cost of ownership. In the first place, the first registration charge is calibrated to equal the sum of the previous VED payments that would otherwise have been due. In some cases the first registration charge will be lower than the annual VED payments, while in other cases the first registration charge will be higher. Broadly speaking the lowest emission cars will do better under this scheme, and the highest emissions cars will pay more. Since the charge will be impossible to evade, honest motorists will gain at the expense of tax evaders. Most importantly, because this scheme will reduce average fuel use, it will also reduce petrol costs. We estimate that this policy will lead the typical car to use 450 fewer gallons of fuel over a 100,000 mile lifetime. This translates into a saving of around
£2,700 for the motorist.
Reducing fuel use also means pro rata cuts in emissions of carbon monoxide, nitrogen oxides, hydrocarbons and particulates. All of these are harmful to human health, and reducing them will have considerable benefits. Furthermore, the government could consider an additional first registration charge to further incentivise specific
cuts in each of these emissions. There is currently considerable heterogeneity in emissions of each of these pollutants, suggesting that manufacturers may well be able to reduce these emissions relatively easily, given an incentive to do so. This additional charge could either be revenue raising, or revenue neutral. If it is revenue neutral, the tax on the worst cars would be balanced by a subsidy on the best cars. Similar systems could be introduced for noise, and for pedestrian safety.
The government could also complement this scheme with a similar system for tyres, to give all motorists an incentive to purchase tyres offering lower rolling resistance, less noise, and better wet weather adhesion. Lower rolling resistance reduces emissions, while better wet weather adhesion reduces the probability and extent of collisions.
Finally, we show that the proposal is progressive. Cars do not depreciate linearly over time, but instead lose value relatively rapidly initially, and more slowly later. This means that a disproportionate share of the cost of the first registration fee will be borne by the first owner, with smaller shares borne by later owners. For sure, the price of second hand cars will rise, but not by much, and those who buy second hand cars will be clear winners, since they will not have to pay for the annual tax disc.
It is hard to imagine that we can reduce CO2 by a less painful method.
This proposal will increase the cost of a typical new car by less than 10%, while reducing the lifetime cost of car ownership by around
£2,700. There will be positive effects on the local environment as local pollutants fall, and Britain will be on course to cut carbon emissions from cars by 20% more than would otherwise be the case, equivalent to a 2.6% cut in overall UK wide carbon emissions from all sources.
: 1 – Introduction
In his 2012 budget, the Chancellor George Osborne announced that he would be reviewing the operation of vehicle excise duty. VED, or
“car tax” as it is commonly called, is an annual payment made by motorists for the right to drive their car on the roads. The annual tax liability ranges from nothing to £475, according to the car’s official CO2 emissions.
The budget red book states that “The Government will consider whether to reform VED over the medium term to ensure that all motorists continue to make a fair contribution to the sustainability of the public finances, and to reflect continuing improvements in vehicle fuel efficiency.”1 The concern is that as cars have become more efficient, the tax take has fallen. In this context it is legitimate for the Treasury to consider whether to reform the vehicle excise duty system in such a way as to either preserve current receipts, or to restore receipts to their previous level. It should also be noted that as cars have become more fuel-efficient government receipts from fuel duty have also fallen.
This report sets out a new and coherent way to reform vehicle excise duty. It is calibrated to yield the same revenue as the current system in the first year, and to limit future falls in revenue automatically. It is also relatively simple for the government to adjust the system in order to eliminate any future falls in revenue or to reverse recent falls if it believes that that is appropriate given the current fiscal situation. Nevertheless, reducing, eliminating or reversing recent falls in revenue is not the primary aim of the reforms proposed here. Instead, the primary aim of the reforms advocated in this report is environmental. Cars emit significant levels of carbon dioxide and last for a long time. Therefore our choices of cars today affect Britain’s emissions for more than a decade ahead.
As we shall see, it is straightforward to devise a new system that creates good incentives to move to a more carbon efficient car fleet.
1 Budget 2012 (HC 1853), paragraph 2.148. Available at cdn.hm-treasury.gov.uk/budget2012_complete.pdf
The system outlined here creates a strong incentive for manufacturers to produce cars that are more efficient. This is true in both the short run and the medium run. It also gives individuals a strong incentive to purchase a low emission vehicle. The aim is not to try to persuade an Aston Martin driver to buy a Toyota Prius, but rather to nudge everyone to drive a slightly more efficient car. That is a sensible and deliverable aspiration.
It is worth being clear at the start that the system proposed in this report applies only to new cars. Dramatic changes to the existing system of vehicle excise duty for existing cars would not be appropriate. People have bought the cars that they have bought in the reasonable belief that the tax system will treat them fairly.
Sudden and significant rises – or falls – would be an example of the government moving the goalposts after the game has started. This brings the system of tax into disrepute. In contrast, it is legitimate for the government to change the tax system significantly for cars that have not yet been bought. Indeed, as we shall see, it is possible to deliver significant environmental benefits by changing the system of vehicle excise duty dramatically, and it is therefore not only legitimate for the government to change the tax system, but entirely appropriate that they do so.
This report covers cars that are powered by either petrol or diesel fuel. It does not cover “plug in” electric only cars. These currently receive a £5000 subsidy from the government at point of purchase, in addition, these cars are not required to pay vehicle excise duty, and they pay no fuel duty because they use no road fuel as conventionally defined. Clearly if electric cars ever become universal it will not be possible for this type of car to receive this sort of treatment from the taxpayer. That said, plug-in electric vehicles accounted for under 0.1% of new car sales last year. The number sold is so low that it is not worth bothering about the fact that their current tax status would be unsustainable were they to be more popular. Battery technology has a long way to go before we need to worry too much about the appropriate fiscal regime for electric only cars.
This report also excludes motorbikes, vans and trucks. That said, the principles that underpin the system proposed here clearly apply to these types of vehicle as well. Were the government to implement the system proposed here for cars we would recommend that they worked on extending the scheme to cover these other categories of vehicle in due course.2
2 EU law contains minimum duty levels for HGV VED.
: 2 – UK actions to reduce car emissions
There are four ways in which the UK government aims to reduce emissions from cars. First, it uses the vehicle excise duty system to incentivise lower carbon cars. Second, fuel duty creates an incentive to buy a fuel efficient car, and to drive it in a fuel efficient manner. Third, the income tax treatment of company cars favours low emissions vehicles. Finally, the government subsidises the purchase of plug-in electric cars with a £5000 grant. We concentrate here primarily on VED, before discussing the role of fuel prices and tax rules for company cars. We do not discuss the plug-in electric car grant as the focus of this report is on conventionally powered vehicles. In any case, the number of plug-in electric cars sold is so low that the effect on emissions is negligible.
The British government divides cars sold since 2001 to 13 different categories for vehicle excise duty, according to their official carbon dioxide emission ratings.3 The most efficient, those that emit less than 100g of carbon dioxide per kilometre driven, are classified as
“A”, with the bands increasing with the emission levels. Cars with the highest level of emissions, more than 255g of carbon dioxide per kilometre driven, are classified as “M”.
The band determines the level of vehicle excise duty. Vehicle excise duty is levied annually, and in 2008 a new system was implemented in which the rate payable in the first year was different to those payable in subsequent years. The current rates are given in Table 1 (overleaf).
3 Cars sold prior to this date have VED based on engine size, while cars made before 1973 are exempt from VED altogether, as are police cars, ambulances, fire engines, snow ploughs and various other categories of vehicle.
Table 1: Current bands and rates of VED
Tax band CO2 emissions (g/km)
First year rate Standard rate
Band A Up to 100 £0 £0
Band B 101 - 110 £0 £20
Band C 111 - 120 £0 £30
Band D 121 - 130 £0 £100
Band E 131 - 140 £120 £120
Band F 141 - 150 £135 £135
Band G 151 - 165 £170 £170
Band H 166 - 175 £275 £195
Band I 176 - 185 £325 £215
Band J 186 - 200 £460 £250
Band K 201 - 225 £600 £270
Band L 226 - 255 £815 £460
Band M Over 255 £1,030 £475
We can see from Table 1 that the first year rate is effectively a more pronounced version of the standard rate. Thus when the standard rate is low, the first year rate is very low, and when the standard rate is high, the first year rate is very high. There is no rationale for the particular bands or rates, and certainly not for the connection between bands and rates. We can see this in Figure 1, which shows the first year and annual tax penalty for increasing emissions by 1g and thus entering a new band.
The system can fairly be characterised as deeply incoherent.
The government investigated the effect of CO2-related VED shortly after its introduction. The investigation had both qualitative and quantitative aspects. The qualitative element of the research concluded that “graduated VED scheme has had minimal impact on the UK car industry”.4 The quantitative part of the research came to the same conclusion: “those who have bought a car privately after March 2001 [i.e. when VED began to be related to CO2] say
4 ‘Assessing the Impact of Graduated Vehicle Excise Duty - Qualitative Research’, Department for Transport, http://webarchive.nationalarchives.gov.uk/20090512102340/http:/www.dft.gov.
uk/pgr/roads/environment/research/consumerbehaviour/assessingtheimpactofgraduate3816?
page=2
that it was not part of their decision making process”.5 The failure of the graduated VED system to make an impact was reiterated in the King review of low carbon cars,6 and in the Mirrlees Review of taxation, which stated that “the case for an annual tax such as this [VED] is perhaps unclear”.7 Academic research on the effect of VED-style annual CO2 related charges in Germany and Sweden have also found very small effects.8 The differential initial rate was introduced because the graduated system of annual VED had no effect on people’s decisions as to which car to buy, and thus would have no effect on the cars offered by manufacturers.
5 ‘Assessing the Impact of Graduated Vehicle Excise Duty - Quantitative Research’, Department for Transport, webarchive.nationalarchives.gov.uk/20090512102340/http://www.dft.gov.uk/
pgr/roads/environment/research/consumerbehaviour/assessingtheimpactofgraduate3817?pa 6 ge=2‘The King Review of low-carbon cars Part II: recommendations for action’, webarchive.
nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/bud_bud08_king_review.htm 7 J Mirrlees et al., ‘Tax by Design: the Mirrlees Review’, Oxford University Press, 2011, p. 280.
Available at www.ifs.org.uk/mirrleesreview/design/ch12.pdf
8 Thomas Klier and Joshua Linn, ‘Using vehicle taxes to reduce carbon dioxide emission rates of new passenger vehicles: evidence from France, Germany and Sweden’, mimeo, 2012.
Figure 1: The financial penalty from entering the next VED band
0 50 100 150 200 250
Annual VED First year tax
M L K J I H G F E D C B
£
We can see the continuing failure of the system to incentivise lower carbon cars when we look at the (lack of) connection between producing low carbon cars and increasing market share. Figure 2 plots the 2011 carbon emissions on the x-axis and the change in market share between 2004-2011 on the y-axis. For visual clarity we exclude “supercar” manufacturers, defined as those with 2011 CO2 emissions greater than 300g/km but include all other car firms present in the market in both years.9
We can see immediately that there is no obvious relationship between producing low carbon cars and increasing market share.
The four lowest carbon producers all lost market share in this period, while three of the four highest carbon producers also lost market share. The lack of connection between carbon emissions and output is confirmed by simple regression analysis, which shows that carbon emissions in 2011 are not a statistically significant determinant of changes in market share between 2004 and 2011.10
9 This means car makers with average CO2 emissions higher than Porsche.
10 Unweighted OLS regression on the data presented in the figure. The t-statistic is -1.86, which is not statistically significant at the 5% level. The adjusted R2 is 0.06.
Figure 2: Have producers of low carbon cars increased market share, 2004-2011?
100 150 200 250
-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0
2011 CO2 emissions (g/km)
Change in market share 2004-2011
-100%
100%
Source: SMMT
Nor is it the case that companies that have reduced emissions fastest over this period have gained market share at the expense of companies that failed to do so. Again, we present the evidence in Figure 3.
Again, we can see that there is no correlation between cutting carbon more rapidly and gaining market share. For example, Chrysler and Hyundai reduced emissions by a quarter, but Hyundai sales more than doubled, while Chrysler’s fell by more than 80%.
The firm that reduced their carbon emissions most dramatically (Lexus, which has adopted hybrids extensively) has seen their market share grow only fractionally, and by less than its obvious rivals, BMW and Mercedes, who reduced emissions by 20-30%.
Statistical analysis confirms this finding: the change in emissions in the period is not correlated with the change in market share.11 VED is supposed to have one further advantage: in theory it ensures that all cars are insured and have a valid MOT certificate,
11 Unweighted OLS regression on the data presented in the figure. The t-statistic is -0.85, which is not statistically significant at any conventional level. The adjusted R2 is -0.01, meaning that the variation in CO2 reductions cannot explain any of the variation in market share.
Figure 3: Have car companies that cut carbon most gained market share, 2004-2011?
60 80 100 120
-100 -80 -60 -40 -20 0 20 40 60 80 100 120
2011 CO2 emissions as a percentage of 2004 CO2 emissions
Change in market share (%)
Source: SMMT
since both have to be presented in order to renew the VED tax disk.
Yet the reality is somewhat different. Those who do not wish to pay for insurance or an MOT simply decide not to pay for their car tax either. The Government estimates that there are around 250,000 cars on the roads that do not have a valid VED disk, representing around 0.7% of the total stock of cars, and costing the government around £40m a year.12 Cameras equipped with automatic number plate recognition are much more effective at reducing the number of cars without MOTs or insurance.
VED raised just over £5bn for the Treasury in 2010, the latest year for which data are available. As figure 4 shows, revenues have generally varied within a range of £5-6bn per year, in real terms.
At first sight, Figure 4 should not give the Treasury too much cause for concern: yields are broadly stable, although it is worth noting
12 assets.dft.gov.uk/statistics/releases/vehicle-excise-duty-evasion-estimates-2011/ved-2011.pdf
Figure 4: VED Receipts 1987-2010
0 1 2 3 4 5 6 7
Revenue
2010 2005
2000 1995
1990 1987
£ billion
Source: VED receipts (ONS series CMXZ) deflated by RPI (ONS series CHAW), http://www.
dft.gov.uk/statistics/tables/tsgb0125 and www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/
march-2012/cpi-and-rpi-detailed-reference-tables.xls
that this is in the context of the number of vehicles rising by 50%.13 The Office for Budget Responsibility (OBR) predicts that yields will remain stable in nominal terms until 2016-7, when their predictions stop.14 This implies a fall in real terms from £6.0bn in 2010-11 to
£5.2bn in 2016-7.15 What is worrying for the Treasury is that new cars have much lower emissions than cars sold in earlier years.
As a result, VED yields will fall dramatically in future, because the stock of cars on the roads has already changed, and will continue to change. We can see this by looking at Figure 5, which shows the average VED charge for 2012-13 according to the year in which the car was first sold.
Figure 5 shows that cars first registered in 2004 – the first year for which we have good CO2 data – paid an average of £202 in Vehicle Excise Duty in 2012-3, while the equivalent figure for cars sold in 2011 is just £113. The most common VED band for cars sold in 2004 was G, and cars in that band or higher accounted for two thirds of all cars sold. Today cars in bands G and above make up a quarter of new car sales. In 2004 only 15 cars sold were in band A, but by
13 www.racfoundation.org/assets/rac_foundation/content/downloadables/fuel_for_thought- johnson_et_al-150512.pdf Figure 4.7
14 cdn.budgetresponsibility.independent.gov.uk/March-2012-EFO.pdf Table 4.7
15 www.racfoundation.org/assets/rac_foundation/content/downloadables/fuel_for_thought- johnson_et_al-150512.pdf Table 4.1
Figure 5: Average VED liability in 2012-13 by year of first registration
0 50 100 150 200 250
2011 2010 2009 2008 2007 2006 2005 2004
£ per car
2011 the figure had risen to 69,000. The reverse is true at the other end of the scale: sales of Band M cars have fallen by 90% between 2004 and 2011. In due course the 2004 cars will wear out, and at that point will be replaced by much lower emission cars. This would be true even if there were no further improvements in emissions.
The OBR has used this data and projections for future car efficiency to make some estimates of the likely VED yield to 2030. They predict that by that date VED receipts will have fallen from their current level of 0.37% of GDP to between 0.12-0.19% of GDP.16 Broadly speaking this equates to a £3-4bn cut from today’s yield of around
£6bn. The OBR suggest that by this point 85% of new cars would be exempt from VED – which is surely fiscally unsustainable.17
VED is not the only reason why car manufacturers may wish to reduce emissions. Another reason is the cost of fuel, which is high in Britain and Europe more generally compared with (for example) the United States. The difference in fuel costs is the primary reason why the same car often comes with a different engine in the US and in Europe. For example, the cheapest VW Golf comes with a 1.2 litre petrol engine in Britain, and 2.5 litre petrol engine in the US. The US car has around 30% higher emissions.18 The US car also emits 23% more emissions than the European 1.4 Golf – which is almost as powerful as its 2.5 litre American counterpart.
The effect of high petrol prices on economy must not be underestimated. The US Ford Focus comes with only one engine, and official US fuel economy tests claim that the Focus will do 37.5mpg.19 In contrast the most efficient Focus available in Britain has an official economy figure of 83.1mpg.20 At the time of writing, US gasoline costs around 64p per litre ($3.60 per American gallon), while UK diesel costs around £1.40.21 Assuming that real world driving delivers economy figures of three quarters of the official figures in both cases implies that the fuel costs of driving a mile in the US and UK are 11.3p and 10.11p respectively. In this example, low fuel prices in the US do not translate into lower costs per mile.
Rather, high fuel prices persuade manufacturers to offer much more efficient car engines in Europe than in the US. For this reason
16 budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf Chart 4.5 17 budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf Paragraph 4.39
18 The 140 HP diesel is available in both countries, which allows for a clear comparison of different engines despite different emissions testing regimes in each country.
19 Corrected to British Gallons, and that the US test system typically returns 10% higher mpg than the European equivalent. www.unep.org/transport/gfei/autotool/approaches/information/
test_cycles.asp, http://www.ford.com/cars/focus/specifications/engine/
20 www.ford.co.uk/Cars/Focus/Performanceandefficiency 21 www.eia.gov/petroleum/gasdiesel/
high fuel prices remain an important part of delivering a low carbon economy.
Finally, the government incentivises “user-chooser” company car recipients to choose a low carbon vehicle. As a general rule, the taxable value of a company car to the recipient is equal to the list price, multiplied by a percentage that is related to the CO2 emissions.
Broadly speaking that percentage is 10% for cars with CO2 emissions of 99g or below, rising by 1% for every 5g rise, up to a maximum of 35% for cars with CO2 emissions of 220g or higher. There is a 3%
supplement for diesel cars, and lower rates for qualifying electric vehicles. Thus a person receiving a petrol company car with rating of 139g will be defined as receiving an annual benefit of 18% of the list price. That value will then be subject to tax at their marginal rate.
This gives company car recipients a big incentive to choose a lower carbon car. For example, specifying the 1.0 100HP Focus in lieu of the 1.6 100HP model cuts emissions from 136g to 109g, and reduces the monthly payments for a 40% tax payer by a third, from £97 to
£66. Similar differences would apply for other cars.
: 3 – The EU emissions regime
The European Union has begun to regulate car emissions. The EU states that every car manufacturer must have 65% of its cars emitting less than 130g by 2012, rising to 100% meeting this standard by 2015.22 There are, however, two significant exemptions.
First, producers of heavy cars are given a higher level of permitted CO2. Mercedes, for example, is allowed 143g given its overall range of cars, while a company that just produced the Mercedes S-class would be permitted to emit 172g of CO2 per km driven.23 Second, small firms are exempt, having instead to meet agreed individual targets with the EU, which generally involve reducing emissions by a quarter.24
Companies that fail to hit the target will be fined. The fines are €5 for the first gram over target, €15 for the next, €25 for the third and then €95 for any CO2 above that level. From 2019 the fine will be €95 for all CO2 above the limit. From 2020, the limit will fall to 95g.
This system is having an effect, but it is by no means perfect.
First, all companies have their own targets. Once a manufacturer hits its target, it has no incentive to reduce emissions further.
Second, companies who produce cars that weigh less than 1372kg have an incentive to make them lighter, which lowers fuel consumption and reduces emissions. That is a good thing. But producers of cars above that weight have ambiguous incentives, since allowed emissions are higher for cars above this weight.
This was widely seen as successful negotiating on the part of the Germans, keen to defend the German large car sector. Since weight saving is an important way to reduce emissions, it is troubling that the EU has at least weakened incentives to reduce weight.
22 eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0001:01:EN:HTML 23 Permitted emissions for heavier cars are = 130 + 0.0457 × (weight in kg – 1372)
24 uk.autoblog.com/2012/01/26/2012-CO2-target-is-out-of-reach-and-manufacturers-aren-t- worried/
Third, companies can pool emissions. Fiat can pool Fiat and Ferrari cars, because they own Ferrari. Since Fiats have low emissions because they are small, the average of Fiat and Ferrari is under 130g, and therefore no improvements are required from Ferrari. The same is true for Bugatti, Lamborghini and Bentley (all VW group), while Rolls Royce benefits from being part of BMW. Aston Martin is the only supercar maker without a “get out of jail free” card. This in turn has led Aston Martin to invent their own “get out of jail free”
card – they give a small Toyota a luxury leather interior and rebadge it as an Aston Martin Cygnet. If they can sell one Cygnet for every regular Aston, they will cut their CO2 emissions by a third – enough to meet the EU target for small firms. Yet a moment’s thought tells us that the Cygnet – which Autocar describe as a “clever corporate CO2 strategy” is not really reducing emissions at all.25 No-one will buy a Cygnet in lieu of a regular Aston. Cygnets are almost certainly second cars, and will therefore replace other relatively low emissions small cars.
Finally, the proposal to move towards a 95g target may not happen, and therefore lacks credibility now. There is strong lobbying against it by the industry, supported by the EU industry minister.26 As we have seen, without the credibility of a further target, nine manufacturers already have no incentive to reduce emissions further.
In addition to regulating emissions by manufacturer, the European Union is also responsible for designing the official fuel efficiency tests used to assess fuel efficiency here. This system for measuring fuel economy has come in for criticism, with most drivers discovering that they are unable to match the official figure for miles per gallon.27 All cars are tested under the same regime, known in Europe as “New European Driving Cycle”. This tests cars in urban and non-urban settings, and gives results that are about 10% worse than the US method of testing, but 10% better than the Japanese testing system.28
The system tests a car under very generous conditions. The car is physically warm to begin with, and gets to accelerate very gently, unladen, on a rolling road, with no wind resistance or hills. Clearly this is not realistic, but so long as it is equally unrealistic for all cars,
25 Autocar, New Car Listings
26 www.autocar.co.uk/car-news/industry/eu-could-reconsider-CO2-emissions-targets 27 This is not a universal finding, however, with Which? Magazine’s test of the 5 door BMW 1
series diesel finding that the quoted fuel efficiency of 62.8mpg exactly matched their own result in real world driving.
28 www.unep.org/transport/gfei/autotool/approaches/information/test_cycles.asp
it will still give a fair reflection of the relative efficiency of one car with another.
There is concern that car manufacturers have been “engineering to the test”, that is, producing cars that have improved measured fuel economy, but no better real world economy.
The government should talk to large fleets about the data that they have. Many companies own large numbers of cars of different types, and will record fuel consumption for internal purposes. It should be possible for government and firms to work together to better understand the relationship between official and real world fuel consumption. For example, is it the case that officially fuel efficient versions of particular cars actually deliver better economy and lower emissions, or is it all smoke and mirrors? Is it the case that fuel efficiency tests are more accurate for petrol or for diesel cars?
For light cars or heavy cars? For cars that pound motorways day in, day out, or for cars that do more mixed driving? It is likely that there are enough fleets with enough information – including averaging out good drivers and bad – that collectively we should be able to investigate these issues. The results of such a study could be used as the British governments input into the EU’s recently announced plans to revise the New European Driving Cycle towards the end of this decade.
For now, however, we should see the official fuel economy and emissions estimates not as predictors of actual emissions, but as a reasonable guide to the relative emissions of one car versus another. Those figures have been taken as a good enough basis for policy until now, and this report therefore proposes to use them in future.
: 4 – Cars in Britain
There are approximately 31 million cars on Britain’s roads, a number which has been broadly stable for some time. 75% of households now have access to a car.29 Of the remainder, three groups are readily apparent. First, many people in inner-city areas do not own a car. A combination of good public transport and severe limitations on parking mean that owning a car does not make sense. Second, a significant number of households are too poor to be able to afford to run a car. Third, there remain a reasonable number of primarily single person elderly female households who do not own a car because the person concerned cannot drive.
There is much to be said for owning a car. Cars are a very flexible means of transport. It is perfectly possible to travel 1 mile in a car, or 1000 miles. In general you can travel from your front door to the exact place that you wish to go. By and large you can leave at a time of your choosing, and have at least some idea of when you are likely to arrive. Cars are profoundly liberal, in that it is the individual who chooses the type of car, the journey to be undertaken, and the time of departure. In contrast, public transport always involves a much more significant level of state planning. Almost every affluent household owns a car, suggesting that cars are things that people like. It is much better for politicians to think about taming cars, rather than persuading people to use forms of transport that people like less.
That is not to say, of course, the cars are perfect, or to deny that they inflict significant and serious costs on society. Although the number of people killed per mile driven has fallen by a remarkable 95% in the last 60 years, it still remains the case that around 1900 people are killed on our roads every year. We should never forget that each of these 1900 deaths is genuinely tragic and ultimately avoidable.
Cars also produce other negative externalities. In addition to killing
29 www.dft.gov.uk/adobepdf/162469/221412/221531/223955/32274311/NTS2008.pdf
more than five people a day, collisions injure many more, often significantly, and sometimes in a way that ruins someone’s life.
Cars also create significant levels of pollution. This comes in two forms: pollution that has local effects, and pollution that has global effects. Local pollutants include those that exacerbate breathing difficulties, while carbon dioxide and other greenhouse gases have global effects. Cars are also noisy, and both minor and particularly major roads can create significant physical barriers within local communities. Finally, of course, roads themselves take up significant amounts of space and are rarely thought of as aesthetic. There are sensible policies that can be used to reduce the extent of all of these externalities, and we shall discuss some of them towards the end of the report.
In addition to all of these externalities inflicted by motorists on others, motorists also inflict congestion on other motorists. Although London has a congestion scheme, and some countries apply tolls to some roads, the fact remains that nowhere is very effective at pricing congestion in a dynamic way that varies according to the actual degree of congestion caused by the particular motorist.
Perhaps one day we will reach that economists’ nirvana, but this economist at least is not holding his breath.
During the recession car sales in the United Kingdom have been a little below 2 million, well below the 2.5 million that prevailed prior to the recession. Since cars do not last forever it is plausible that we will see a significant rise in the number of cars sold when the recession ends. This makes it particularly critical that we put in place an effective system for vehicle excise duty before the recovery begins in earnest. Until now cars have typically lasted for 13 years, but improvements in reliability and protection against rust mean that it is plausible that new cars purchased today will last on average for 15 years, and that significant numbers will still be on our roads in 18 or 20 years’ time. The decisions that purchasers make today will therefore affect Britain’s emissions between now and 2030. It is self-evidently important that we get this right as soon as possible.
The Society of Motor Manufacturers and Traders (SMMT) has generously provided CentreForum with their dataset that gives information on the 1.94m cars sold in Britain in 2011. In total 48 manufacturers are represented, ranging from giant car firms such as Ford and Vauxhall, to companies with relatively few sales, such
as Maybach and Lamborghini.30 Between them, these companies produced 335 different models, such as the Ford Fiesta, or VW Golf, with a total of 7984 different variants, such as the Fiesta 1.4 Edge, or the VW Golf GTI. Notice that not all of the models and variants would have been on sale at any given date within the year, since some models are replaced within a year, or revised.
Over 99.9% of the cars sold were powered by conventional petrol or diesel engines, including hybrids such as the Toyota Prius whose batteries are powered by the petrol engine. Around 1100 were plug-in electric vehicles, such as the Nissan Leaf or Reva G-Wiz. We exclude these cars from our analysis, as they are not assessed for VED in the conventional way.
The number of cars sold in each VED band varies dramatically. Three of the thirteen VED bands, C, D and E, which cover cars emitting between 111 and 140g of CO2 account for more than half of the cars sold in Britain. The six bands, B-G, which cover cars emitting between 100 and 165g CO2 account for more than four in five cars sold, with the remaining seven bands, A and H-M, accounting for fewer than one in five cars. Virtually no new cars sold today are in band M, the highest polluting band. It is easy to believe that Porsches, Range Rovers and the like are ruining our planet, but the reality is that even if we persuaded the owners of all band M cars to swap their cars for bicycles, the CO2 emissions from cars would fall by only a token amount.
We can see this in more detail in Figure 6 (overleaf), which shows the distribution of sales and CO2 emissions by VED band. Band E is the most popular, and although these cars typically produce less than half as much CO2 as a Band M car, together they emit far more CO2, because they are far more numerous. The sheer number of cars sold in mainstream CO2 categories explains why good policy needs to target improvements in these cars, rather than concentrating on reducing the CO2 of a handful of supercars, or replacing a small number of cars with zero-tailpipe-emission plug-in electric vehicles.
30 The SMMT data do not break out sales from small “kit car” firms, such as Westfield, Caterham, Ariel, and the like. We therefore exclude these from our analysis. We also exclude
“quadricycles” such as Aixam and G-Wiz, which can be driven on a motorcycle licence.
Figure 6: Sales and emissions from new cars, by VED band
0 5 10 15 20
M L K J I H G F E D C B A
Registrations Total CO2
Percent of total
: 5 – Green taxes and car taxes
Economists believe that most taxes are distortionary. It is straightforward to show that – theoretically at least – taxes distort an individual’s decision to work, firms’ decisions to employ people, the ratio of machinery to workers in the economy, the use of debt and equity as financing mechanisms, and so on.
An exception to this claim that taxation is generally distortionary is green taxation. Green taxes, if correctly calibrated, correct the market, rather than distorting it. The classic example is a factory that, as an inevitable part of its workings, pollutes a stream, which reduces profits for a fishery by £1000. This is what economists call an “externality”. A well-designed green tax would give the factory an incentive to cut that pollution, thus “internalising the externality”.
This means that although the factory does not care about the fishery, it cares about cutting its tax bill, and therefore behaves as though it does care about the fishery. In this case the factory will cut pollution if it can do so for less than £1000 – otherwise it will pay the tax, which the government can use to compensate the fishery.
Green taxes, so long as they are correctly calibrated, are strongly supported by economic theory. Not only do they correct the market, but they are more efficient than simple regulations. In the above example, the government could ban the factory from polluting the river. But that might force the factory to pay £10,000 to alter its production techniques. Since the fishery is only £1,000 worse off from the pollution it makes no sense to force the factory to pay
£10,000 to avoid damage valued at £1,000.
The final advantage of green taxes is that they lead firms to seek cost minimising ways to cut pollution. There are many ways to cut emissions from cars, for example. Car firms can use lower friction oils, or more aerodynamic under body shields, or more efficient air-conditioning compressors, and so on. An effective green tax system would give car firms the incentive to use the lowest cost
method of cutting emissions, including developing new methods that have not yet been devised.
Green taxes serve two purposes: to compensate, and to change behaviour. Some activities are innately polluting, but that pollution is “worth it” when the value of the activity that causes the pollution is very high. In those cases a green tax that acts as a transfer to those who suffer can be seen as a form of compensation. Building new houses can increase traffic congestion, so the council often requires the developer to make a payment to cover additional road space, or better public transport, or to provide other benefits in lieu, when neither of the first two is practical. The idea is not to reduce the amount of development, but to ensure that – at least in aggregate – the community is compensated for the downsides caused by development.
Equally, other green taxes are clearly designed to change behaviour.
The classic case was the small premium on leaded petrol compared with what was then a relatively new and untested product, unleaded petrol. This induced people to ask their garage whether their car could run on unleaded, and, if not, whether it could be easily and cheaply adjusted to run on unleaded. The result was that a lot more people moved over to using unleaded petrol much more quickly than would otherwise have been the case. It is widely seen as a textbook example of a successful green tax.
The Coalition Agreement committed the government to increasing
‘the proportion of tax revenue accounted for by environmental taxes’.
The Treasury has recently defined an environmental tax as one which fills all of the following criteria:31
: the tax is explicitly linked to the government’s environmental objectives;
: the primary objective of the tax is to encourage environmentally positive behaviour change; and
: the tax is structured in relation to environmental objectives, for example: the more polluting the behaviour, the greater the tax levied.
According to the government, Vehicle Excise Duty is not an environmental tax under this definition as its ‘primary’ objective is considered to be revenue raising. Fuel Duty and Air Passenger
31 HM Treasury, ‘Definition of environmental tax published’, 16th July 2012, www.hm-treasury.
gov.uk/press_60_12.htm
Duty are also excluded. This leaves only £2.5bn of revenue from
‘environmental taxes’ in 2010/11, or 0.5% of total revenue; estimated to rise to 1% by 2015. This is much less than under previous definitions: the Institute for Fiscal Studies calculated a figure of around 8%,32 and the Liberal Democrats called for a target of 10% of total tax revenue by 2015.33
With intelligent reform, Vehicle Excise Duty could be an effective green tax. It should be designed above all to change behaviour, rather than as a compensation system. As we have already noted, the Mirrlees Review of taxation stated that “the case for an annual tax such as this [VED] is perhaps unclear”.34 It went on to say that
“A tax on car purchase, differentiated by car size of level of CO2 emissions, might have an effect”. This, the authors said, would be “by virtue of its visibility and timing”. This conclusion built on the findings of the King Review, which found that consumers give much more weight to the purchase cost of the vehicle than to future costs for fuel and other items. The IFS 2011 Green Budget (Green in this case meaning provisional, rather than environmental) also noted that VED would be a greener tax if it related more closely to emissions.35
There are other countries that have annual car taxes that relate to CO2 emissions. Ireland and Denmark have annual charges that are higher than those prevailing in Britain, while France has a tough annual CO2 charge for company cars. Finland, Germany, Luxembourg, Portugal and Sweden also have CO2 related annual car taxes, although these are levied at lower rates than in the UK.
France also has a very low annual CO2 related tax for non-company cars, which is zero for all but the biggest gas guzzlers, whose owners are required to pay around £150 a year.36
In contrast many other countries levy a first registration charge that relates to CO2, roughly akin to the UK first year VED payment. Some of these are very high indeed – the owner of a 300g CO2/km car must pay a charge of over €50,000 in the Netherlands.37 These charges are high – over €10,000 in some cases – in the Netherlands, Norway, Portugal, Finland and Austria, although international comparisons
32 The IFS came to a green tax figure of 7.9% for 2009/11, with fuel duties being by far the most significant. http://www.ifs.org.uk/budgets/gb2011/11chap11.pdf
33 www.libdems.org.uk/economy_detail.aspx?title=Green_Taxation_-_carried&pPK=351de428- 542d-4d18-802c-b11c297e174b
34 www.ifs.org.uk/mirrleesreview/design/ch12.pdf, p. 280 35 www.ifs.org.uk/budgets/gb2011/11chap11.pdf, p. 247
36 www2.oecd.org/ecoinst/queries/MotorVehicleCO2.htm, figure 5. The figures in the text refer to petrol cars; similar results apply to diesel cars.
37 www2.oecd.org/ecoinst/queries/MotorVehicleCO2.htm, figure 1
are made more complex by some schemes basing the tax on a combination of CO2 and the purchase price. Broadly speaking the following countries levy a higher tax on high emission vehicles than does the United Kingdom: Austria, Belgium, Denmark, Finland, France, Ireland, Netherlands, Norway, Portugal, Slovenia, South Africa and Spain.38 As well as levying up front charges on high emission vehicles, Belgium, Denmark, Israel and Norway also gives subsidies for conventional cars with low emissions.39
It is not straightforward to measure the effects of these taxes.
Individual countries have different cultural preferences for cars and different “home” manufacturers, fuel prices vary and affect new car purchases, and so on. Nevertheless, academics have done good work in this area, and the results are clear: up front charges are much more effective than annual charges in incentivising consumers to choose lower carbon cars. For example, Klier and Linn find that the adoption of an upfront CO2 related charge in France cut emissions by 8g compared with what would otherwise have happened. In contrast the adoption of annual CO2 related charges in Germany and Sweden reduced emissions by only 1.7 and 0.6g respectively.
38 www2.oecd.org/ecoinst/queries/MotorVehicleCO2.htm, figure 2, based on petrol cars emitting 200g of CO2.
39 www2.oecd.org/ecoinst/queries/MotorVehicleCO2.htm, figure 3, defining low emission as 91g.
: 6 – How to reform VED
This report proposes the abolition of annual VED for all cars purchased in future, with no change to the current regime for existing cars except simple indexation. Annual VED would be replaced by a first registration charge, equivalent to the anticipated annual lifetime VED that would otherwise have been paid. Since the two are fiscally equivalent, neither government nor motorist are better or worse off, taken as a whole. As we have seen already, levying an upfront CO2 charge is common practice, and has been found to be more effective by academic researchers. We shall set out below the exact ways in which the system would be advantageous, and attempt to quantify the extent to which this change would reduce CO2 emissions from cars in the UK.
The charge would be levied at first registration, which means sale in most cases, but would also mean the point of importation for cars bought abroad and shipped here permanently. In that case a lower charge would apply if the car is not new, to take account of its reduced life expectancy.
The current bands are, as we have seen, incoherent. The proposed system would not use bands, but would instead be based on the assessed CO2 emissions, measured in grams.
The system would work as follows. At the end of December, the government would note the distribution of cars sold in the previous 12 months. They would then set a “CO2 pivot point”, equal to the level of the most efficient 1% of cars sold in that 12 month period.40 They would then set a green purchase tax per gram of CO2 above this level, with the tax calibrated to ensure that revenues remain constant. This would apply to cars sold the following year. Cars with higher CO2 emissions than that of the best 1% will be liable for a higher first registration charge, and the charge will be directly
40 Cars must be conventionally fuelled, and have four seats, and meet the definition of being a car, as opposed to a quadricycle, or other specialist class of vehicle.
related to emissions above that level. Furthermore, and as an added incentive, cars with CO2 emissions below the pivot point would receive a subsidy set at the same rate per gram of CO2. As a result, every manufacturer of every car has an incentive to reduce carbon emissions, so long as the cost of doing so is lower than the tax levied.
This scheme would lead carbon emissions from cars to fall at a faster rate than would otherwise be the case. Individuals would have an incentive to buy lower carbon cars, and manufacturers would have an incentive to produce lower carbon cars. Together, the combined effect is powerful.
To demonstrate the effectiveness of this proposal, we first calibrate the scheme, by calculating the amount of “free” CO2 that manufacturers would be allowed, and by calculating the charge per gram above that level.
In order to do this, we use the SMMT dataset for all new cars sold in 2011. Under the proposal, this is the dataset that the government would use to set the 2012 first registration emissions charge.
In 2011, 1.94 million cars were sold. Taking into account their VED bands they will collectively and cumulatively raise £3.27bn in VED over their assumed 15 year lives at an average of £1687 per car. In order to ensure that the scheme is revenue neutral, we therefore need to calibrate the first registration charge so that we raise
£3.27bn.41
The lowest conventionally powered CO2 car available in 2011 was the Kia Rio 1.1 CRD 1 ecodynamics, which emitted a remarkably low 85 grams of CO2 per km. At the opposite extreme, the Aston Martin one-77, a £1.2m supercar, emitted 555 grams of CO2 per km. The average overall was 138 grams, while the 1% level was 94 grams, that is, 1% of cars sold in 2011 had CO2 levels of 94 grams or lower.
Adding the emissions over the pivot point (that is, a 100 g/CO2 car counts as 6 g, a 120g car as 26g etc) and subtracting the emissions of cars below the pivot point, tells us that a charge of £38.17 yields the same revenue for the government as the current system.
This figure would be correct were we to assume no further improvements in emissions. In fact we know that emissions are on a downward trend, and argue that the proposal in this report would
41 Clearly the tax will be paid up front, so the government will get the interest. Against that, VED currently rises each year, so the government loses the increment. We treat these two offsetting amounts as being equal – whether they are in reality depends on the interest rate and the rate at which VED increases over time. The assumption is plausible and will be approximately right.
increase the speed at which emissions decline. So while £38.17 above 94g would have yielded the same revenue in 2011 as the 2011 VED system raised, if no-one changed their behaviour, it will not ensure that the UK government is able to stabilise the returns from VED in the medium term.
We can take this into account by repeating the exercise with 2010 data, setting the tax rate that is apparently revenue neutral, and then measuring the shortfall given actual 2011 car purchases. This shows that the nominally revenue-neutral figure needs to be increased by 14% to be revenue neutral in practice. Normal technological change implies a figure of £43.63 for 2012, based on the 2011 data and our understanding of dynamic change in the industry.
Furthermore, since we believe that this proposal will incentivise lower CO2 cars, we assume a further 5g/CO2 reduction in the typical car sold. This is a 3% improvement, and well within the bounds of plausibility. Arithmetically, this implies that the revenue neutral charge for 2012 would be £49.83 above 94g, which we call £50 for convenience.42 Cars with CO2 emissions above 94g per km would therefore pay a first registration charge of £50 per gram above 94g, and cars with CO2 emissions lower than 94g would therefore receive a subsidy of £50 per gram below that level.43
It is important that we use the £50 figure rather than the £38 or
£43 estimates, because otherwise the proposal is unlikely to prove to be revenue neutral for the government. Indeed, when France implemented a supposedly revenue neutral measure along these lines they ended up with a first year deficit of 225 million euros, because consumers reacted more strongly than expected to the new charge.44 The Netherlands had the same issue when they introduced a CO2 related first registration charge in 2002.45 This proposal is for a first registration charge that is recalibrated each year, which means that any revenue shortfall or surplus can be eliminated after one year, as appropriate.
42 We note that assuming a 10% cut in emissions as a result of the scheme (that is, a 13.8g cut) implies a charge of £66.45 above 94g. It is obviously impossible to know the extent to which individuals and manufacturers will respond to this incentive, but if the government finds that behavioural responses are stronger or weaker than expected, it can take them into account in the following year when setting the rate per gram.
43 Note that VAT would not be levied on this charge.
44 X D’Haultfoeuille, I Durrmeyerz and P Févrierx: “What did you expect? Lessons from the French bonus/malus”, www.crest.fr/ckfinder/userfiles/files/Pageperso/idurrmeyer/papier_durrmeyer.
45 A Adamouy, S Cleridesz and T Zachariadis: “Environmental and Economic Effects of CO2-based Automobile Taxes in Germany” www.webmeets.com/files/papers/earie/2011/326/
AdamouCleridesZachariadis2011.pdf
We can set out a few examples of the effect of this proposal. The average car sold in 2011 emitted 138 grams of CO2, 6g lower than the average in the previous year. We therefore hypothesise that 2012 CO2 emissions would be 132 grams without this proposal being implemented, and 127 grams with this proposal. A 132 gram car would be in band E, and would pay £1800 in VED over a 15 year lifetime.46 under this proposal a 127 gram car would pay £1650 in first registration charge. The cost of motoring is therefore broadly unaffected. A first registration charge of this magnitude is smaller than that levied in Finland, Ireland, Netherlands, Norway and approximately the same as in Austria and Spain.47 It is therefore well within the range of plausible policy decisions.
Under this proposal, the cost of the greenest cars will fall. Toyota has just announced a new hybrid Yaris, which emits just 79g of CO2 per km. Under the current system it pays nothing in either immediate or annual VED, but under this proposal it would receive an immediate subsidy of £750, and attract no further taxes in future.
In contrast the costs of cars with the highest level of emissions will rise. The purchasers of the 555g CO2/km Aston Martin one-77 will pay £23,050 in first registration tax, although they will recoup about 20% of that by not having to pay annual VED thereafter. Unless manufacturers improve CO2 emissions, 152 models with total sales of 5400 units would face a first registration fee of £10,000 or more.
Although some are supercars for which a first registration fee of
£10,000 would make little difference, others are particularly high emission versions of regular cars, with prices in the £30,000s and
£40,000s. Since some rival cars will have a first registration fee of around a tenth of that amount, a £10,000 charge on such cars is likely to lead manufacturers to sort out their emissions – or face plunging sales. We shall now look in detail at exactly what we would expect to happen.
46 Note that this excludes any rises in VED over the 15 years.
47 www2.oecd.org/ecoinst/queries/MotorVehicleCO2.htm, figure 3.
: 7 – Consumer responses
If this proposal were introduced overnight, manufacturers would continue to offer exactly the same cars, but the prices of those cars would change. The cost of the lowest emission cars would fall, and the cost of the highest emission cars would rise. This in turn will lead people to buy different cars. The claim is not, of course, that the would-be Aston Martin one-77 driver will suddenly buy a Kia Rio, but rather that the would-be driver of a fairly regular car will have an incentive to drive a lower emission version of the same car, or a lower emission car that is otherwise fairly similar to the one that they would have bought. The effect of consumers picking a lower emission version of any given model can be large, and accounts, for example, for nearly two thirds of the difference in emission rates between France and Germany in 2005, or around 13g of CO2. In contrast the greater preponderance of larger cars on German roads accounted for just 7g of extra emissions. King (2007) estimates that emissions would fall by 25% were consumers to pick lower emission cars within any given size class.
We can see this effect by looking at Britain’s best-selling car, the Ford Fiesta. Excluding engines used only in niche sporting variants, the Fiesta is available with a choice of five engines, three petrol and two diesel. Table 2 (overleaf) sets out the size of the engine, the engine’s power, the level of CO2 emissions, and the current price.48 It is immediately apparent that the greenest car is the 1.6 diesel, which emits less than two-thirds as much CO2 per km driven as the equivalent powered petrol engine. But going green is expensive – the diesel is £1850 more expensive than the similar powered petrol version. The same is true for the lower powered diesel – which is over £1400 dearer than the two petrol engines with higher levels of power. No wonder that petrol engined Fiestas account for over 70%
48 Rather than using the official list prices, which no-one pays, we use online discounted prices given by Broadspeed.com. In this case, all Fiestas listed here were available with a discount of 17.5% +/- 0.1%.
of total sales in 2011.49 The higher emission 1.4 diesel Fiesta is also cheaper than the cleaner, greener 1.6 – and, perhaps inevitably – it is the 1.4 that is the bigger seller.
Now let us assume that exactly the same cars are available, but that the proposal put forward in this report has been implemented, namely a charge of £50 for every gram of CO2 over 94g, with a subsidy of the same amount for every gram below that level.
This leads to first registration charges of £1650-£1950 on the three petrol engines. The 1.4 diesel attracts a charge of £650, while the 1.6 diesel receives a subsidy of £350. We can now restate Table 2 with an additional column, giving the new cost, including the proposed first registration charge.
Rather than having to pay a premium of £1,850 for the far greener 1.6 diesel over the similarly powered but much less green 1.4 petrol, as at present, this proposal makes the 1.6 diesel £450 cheaper than its petrol engined rival. In this scenario the diesel has a lower purchase price and lower running costs, thanks to much lower fuel bills. In addition, it also offers faster in gear acceleration, and a higher top speed. In all probability, every customer who would currently pick the 1.4 petrol would now choose the 1.6 diesel. Why would anyone want to pay an extra £450 for a worse car that costs more to run?
Unless Ford reduces the emissions of the 1.4 petrol, we can be confident that consumers will not buy it.
The same is likely to be true for the 1.25 (82hp) petrol and 1.4 diesel
49 This figure excludes niche sporting models that are even more disproportionately more likely to be petrol engined
Table 2: Ford Fiesta engine options
Size Fuel Power Emissions (g CO2/km) Current price
1.25 petrol 60hp 127 £9,084
1.25 petrol 82hp 129 £9,586
1.4 petrol 96hp 133 £9,992
1.4 diesel 70hp 107 £10,757
1.6 diesel 95hp 87 £11,845
Note: The prices are for mid-range “Edge” specification. We exclude automatics for simplicity.
