THE price of cars with ‘average’ or ‘above average’ emissions will have to increase so people will buy ‘greener’ vehicles, a government think-tank report warns.
t does so in proposals for a radical shakeup of car taxation in the Budget.
In what is a mix of carrot-and-stick approach, the proposed overhaul is geared so that the ‘polluter’ pays.
And while ‘average’ and ‘above average’ emitting cars would rise, those owning gas guzzlers will be hit more severely, adding potentially thousands to the price of their vehicles.
The plan proposes an increase in VRT bands from 11 to 20.
Those with electric cars and low-output plug-in hybrids (PHEVs) will benefit most from an ‘ultra-green’ band of 7pc.
In addition, if implemented, road tax would be reduced on EVs to €100 from €120. Significantly, the new plan would leave an estimated 88pc of car owners untouched by the new road-tax regime but vehicles with higher emissions would suffer most.
It seems to favour three motor tax charging routes:
1. The pre-July 2008 based on engine size.
2. Cars registered up to 31/12/2020 (mostly old-emissions test NEDC).
3. Cars registered from 1/1/2021 (new WLTP test system).
It proposes that motor tax for zero-emission cars is reduced from €120 to €100. Meanwhile the rates for high emission cars would be increased thus: 141-155 +€10; 156-170 +€30; 171-190 +€40; 191-225 +€50; 226 or higher +€50.
It claims there would be no extra cost for 88pc of cars while 7pc would increase by €10 a year. The 4pc highest polluters would be hit by €30 to €50 a year.
There is a renewed suggestion that excise on diesel – currently 11.6 cent/litre less than that on petrol – needs to be phased out. Increasing diesel excise by 2.32 cent/litre a year over five years remains a ‘viable option’ but the plan also suggests that bridging the gap over a longer period, for example 1.16 cent/litre a year over 10 years is worth considering.
Despite hopes to the contrary, the plan effectively rules out the prospect of a Scrappage Scheme to get rid of old, high-emission cars.
The report was compiled by the Tax Strategy Group (TSG). It is chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of civil service departments and offices. Papers on various options for tax policy changes are prepared, annually by Department of Finance officials.
Central to the report is the Government’s handling of how cars are treated for VRT and road tax under the new, more realistic WLTP system of measuring emissions that must fully apply from January 1 next.
The old NEDC regime was widely criticised for being well off the mark. The new system has been shown to reveal 21pc higher emissions on average. That has huge implications for many cars in terms of what VRT band they fall into if nothing was done.
The Plan cites the International Council on Clean Transportation (ICCT) estimation that between 2010 and 2017 the real-world CO2 performance of newly registered Irish cars completely stagnated, even though the official NEDC data showed a large improvement during the same period.
The authors say: “Essentially there is an argument that VRT charges were far too low during the last decade as the rates applied were based on vastly underestimated CO2 values.”
The Climate Action Plan (CAP) 2019 planned for transportation sector emissions to decrease by 45pc-50pc.
Central to that are CAP targets that we will have 550,000 EVs and 290,000 PHEVs on the road by 2030. It is clear that the strategy in the report is aimed at getting more people to switch to such vehicles (all new fossil-fuelled cars are to be banned for sale from 2030).
Against that backdrop the TSG authors say: “Vehicle taxation of average and above average emission cars will need to increase so that the cost gap between ultra-low emission vehicles and the rest provides strong enough incentives to motorists in the market for a new car to make ‘greener choices’.”
If no adjustments are made to the VRT regime the TSG paper says used imports would gain an unfair competitive advantage over new cars (as a result of lower VRT rate) because they were subjected to a less stringent testing regime.
The main issue is that the large volume of used, mostly diesel, cars from the UK have CO2 emissions well above the Irish average.
“The policy objective is therefore to both maintain a level playing field for new and used cars, while delivering on the government’s climate action goals to the greatest extent possible.”
As part of its approach to the new regime it says the simplest transition to WLTP would involve making no adjustment to rates or CO2 bands to take account of the new test.
For example, a NEDC tested petrol car with 115 gCO2/km would be re-valued at 140 gCO2/km, meaning a rate increase from 17pc to 19pc.
But it notes that it would mostly have the effect of raising rates – and prices - across the board.
The second option suggests a single VRT charging table for all cars, regardless of which test they were subject to.
It would create the ultra-low emission vehicle band – with emissions lower than 50 g/km.
That would mean that EVs and some PHEVs would have their VRT reduced by half (14pc to 7pc).
By the same token the gap between the highest and lowest rate would be much greater than under the current regime (32pc v 22pc).
Increasing the number of bands from 11 to 20, and creating 5-gramme bands would better apply the ‘polluter pays’ approach.
The rate gap between the lowest band and that applied to cars with average emission levels (currently 107 NEDC or 131-135 WLTP) amounts to an overall increase to 10.25pc. Hence the TSG summation: “This is a significant widening of this rate gap.”
It notes that the impact on used cars of the proposed VRT regime would be greater as they have significantly higher CO2 emissions.
But it does caution that the government may think the reform is too much too soon considering the challenges facing the motor sector.
“If it’s considered to be the case one option is to decrease rates in certain bands, either marginally or by a significant amount.”
It also says that where much lower rates are being proposed for low emission vehicles consideration should be given to ensuring the €5,000 battery electric vehicle (BEV) relief delivers better value for money for the taxpayer, considering the very high value of some BEVs.
It found that the introduction of a NOx surcharge from last January reduced the volume of the worst polluting used diesel cars coming into the Irish market. The average NOx charge for a new vehicle has been €149 and €395 for used.
It says consideration could be given to an adjustment of the current bands in the surcharge structure. One option would be lower the ceiling of the first band to 40mg/km.
On the likelihood of a Scrappage Scheme, which the motor industry has called for, it says: “It is unlikely that there is much crossover between the population of motorists with old low value cars and the population of motorists who might be in the market for a new, expensive, electric car.”
“Our view is that such a car scrappage scheme is not likely to work well.”
VRT reform in 2021 may require changes to taxation on company vehicles such as capital allowances. Other options include extending the zero BIK rate for electric vehicles beyond 31/12/2022 out to 31/12/2023 or beyond, potentially reducing the €50,000 OMV threshold to €40,000.
The paper highlights how significant annual Exchequer revenues are at risk with the scale of the proposed ‘electrification’ of the national vehicle fleet.
“The State relies on the purchase/acquisition and fuel usage of fossil-fuel-vehicles to raise significant revenues each year. It is estimated that if the Climate Action Plan 2030 EV target is achieved, the Exchequer will lose approximately €1.5bn worth of revenue annually from motor tax, VAT, fuel excise.”
One road-user charging option it holds up would be systematic recording of odometer readings on vehicles and applying a charge based on the kilometres driven.