Vehicle purchase and ownership taxes
Taxes on vehicle purchase and ownership can take the form of taxes on vehicle acquisition (value-added tax, sales tax, registration tax), on vehicle ownership (annual circulation tax, road tax) and on motoring (fuel tax – which is covered specifically under Carbon Tax separately on TCAD). Virtually any such tax is likely to have some influence on CO2 emissions through, for example, decreasing demand for private cars. The existing studies usually focus on collecting and analysing the evidence on those circulation taxes that specifically aim to reduce CO2 emissions per kilometre (km) by linking the level of taxes directly or indirectly to this metric. Indirect links include fuel efficiency, engine size, and power-to-weight ratio.
Ex post evaluation studies of relevant taxes mostly show a positive effect of the vehicle purchase and car ownership tax on CO2 reduction. For example, a study for France, Germany and Sweden shows that such taxes have reduced the average emissions rate by 7.95 grammes (g) of CO2 per km in France, 1.56 g CO2/km in Germany and 0.57 g CO2/km in Sweden in the studied time frame.
A study for Norway showed that a tax increase of NOK 1 000 (kroner) (about USD 120 [US dollars]) is associated with a reduction of 1.13-1.58% in vehicle registrations, and the responsiveness in car choice to fuel costs is of the same magnitude. The estimated effect of the tax explains the majority (79%) of the reduction in average CO2 intensity in the new car fleet. A point estimate of the elasticity of the CO2 intensity with respect to the CO2 price is minus 0.06, whereas the elasticity with respect to (resulting) car prices is about minus 0.5.
While introducing taxes mostly causes some administrative costs, studies showed that the overall tax revenue can decrease with time as a result of the vehicle purchase and ownership taxes. For example, a study for Ireland showed the cost to the exchequer per tonne (t) of CO2 avoided. In 2011, it varied between EUR 3 800/t CO2 without the carbon tax and the rebound effect of lowering driving costs, and EUR 17 000/t CO2 with rebound and carbon tax. Another study for Ireland showed that the introduction of carbon-based taxes would result in a reduction in annual tax revenue of EUR 191 million. Tax rates should be periodically and frequently adjusted to account for increasingly clean vehicles that emit fewer emissions, to induce further vehicle efficiency increases and avoid a dwindling of tax revenue income over time.
It is important to note that vehicle ownership/purchase taxes can account only for the average pollution profile of a vehicle, but not the external costs related to driving.
Authorities need to assess the tax revenue impacts of potentially significant shifts to zero- or low-emission vehicles in the future, whether in relation to vehicle (purchase or ownership) taxes or fuel taxes. Strategies to avoid a dwindling of tax revenues due to the uptake of environmentally friendly vehicles need to be put in place.
Vehicle taxes can result in reduced car ownership and cause related benefits (such as shifts to more sustainable modes of transport and reductions in externalities other than CO2).
Vehicle taxes can have negative impacts on equity, in particular in that they may impact negatively on poorer, larger households in locations with few alternatives to the car.
Taxes may shift purchases from the target sector to another. For example, the company car tax in the United Kingdom led to a reduction in company car sales while sales of privately owned cars increased.
As diesel engines are more fuel-efficient than petrol engines, taxes may lead to “dieselification” rather than to using alternative fuels-based cars. Also, due to dieselification, and therefore, reduced cost of travel, people might start travelling more. Dieselification also leads to higher level of pollution by other particles such as nitrogen oxides.
If such taxes are set too high, they can delay fleet replacement with less-polluting vehicles.
OECD/ITF (2019), Tax Revenue Implications of Decarbonising Road Transport: Scenarios for Slovenia, OECD Publishing, Paris, https://doi.org/10.1787/87b39a2f-en
Dineen, D., Ryan, L. and Ó Gallachóir, B. (2018) Greening the Vehicle Fleet: Evidence from Norway's CO2 Differentiated Registration Tax. Climate policy, Volume: 18 issue: 4, page(s): 396-412 https://doi.org/10.1080/14693062.2017.1294044 (Accessed: October 2019)
Giblin, S. and McNabola, A. (2009) Modelling the impacts of a carbon emission-differentiated vehicle tax system on CO2 emissions intensity from new vehicle purchases in Ireland. Energy Policy, Volume: 37 issue 4, page(s): 1404-1411 https://doi.org/10.1016/j.enpol.2008.11.047 (Accessed: October 2019)
Hennessy, H. and Tol, R.S.J. (2011) The impact of tax reform on new car purchases in Ireland. Energy Policy, Volume: 39 issue: 11, page(s): 7059-7067 https://doi.org/10.1016/j.enpol.2011.08.011 (Accessed: October 2019)
Klier, T. and Linn, J. (2015) Using Taxes to Reduce Carbon Dioxide Emissions Rates of New Passenger Vehicles: Evidence from France, Germany, and Sweden. American Economic Journal: Economic Policy, Volume: 7 issue: 1, page(s): 212-242 https://doi.org/10.1257/pol.20120256 (Accessed: October 2019)
Kok, R. (2015) Six years of CO2-based tax incentives for new passenger cars in The Netherlands: Impacts on purchasing behavior trends and CO2 effectiveness. Transportation Research Part A: Policy and Practice, Volume: 77, page(s): 137-153 https://doi.org/10.1016/j.tra.2015.04.009 (Accessed: October 2019)
Leinert, S., Daly, H., Hyde, B. and Gallachóir, B.Ó. (2013) Co-benefits? Not always: Quantifying the negative effect of a CO2-reducing car taxation policy on NOx emissions. Energy Policy, Volume: 63, page(s): 1151-1159. https://doi.org/10.1016/j.enpol.2013.09.063 (Accessed: October 2019)
Yan, S. and Eskeland, G.S. (2016) Greening the Vehicle Fleet: Evidence from Norway's CO2 Differentiated Registration Tax. NHH Dept. of Business and Management Science Discussion Paper, (2016/14) http://dx.doi.org/10.2139/ssrn.2834804 (Accessed: October 2019)
Zimmermannova, J. (2012) Ex-post analysis of impacts of the car registration fee in the Czech Republic. Transportation Research Part A: Policy and Practice, Volume: 46 issue: 9, page(s): 1458-1464 https://doi.org/10.1016/j.tra.2012.07.001 (Accessed: October 2019)
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