U.K. Government Set to Double Tax on Heavily Polluting Vehicles

The U.K. government looks set to increase vehicle excise duty (VED) further and increase the amount charged for highly polluting vehicles. Chancellor Gordon Brown is expected to increase VED for the most-polluting band "G" (225g/km) to £400 (US$777) in an attempt to change consumer buying habits. In addition to the CO2-related VED increase, Brown will likely also introduce a new company car taxation scheme designed to close a loophole in the current regime that sees company car drivers opting for "employee car ownership schemes" run cars without being penalised on the CO2 output, as with the current tax regime on traditional company car drivers.

Some green campaigners say that this move is not enough, some arguing for an increase to £1,000 for the worst polluters. Friends of the Earth called for substantial measures to tackle climate change if Brown was to leave a "green legacy as chancellor" they told the BBC.

However, industry and the beleaguered U.K. motorists are saying enough is enough. VED is charged on top of VAT, the highest government-imposed fuel duty in Europe and congestion charging in some cities. According to the Freight Transport Association: "UK road transport is obliged to pay the highest rate of fuel duty in Europe at 47.1p per litre duty on diesel. This compares with an average for the rest of Europe of just 22p per litre." With diesel constituting about one-third of the running costs of a heavy goods vehicle, and with some high-mileage individual vehicles contributing road taxation of up to £30,000 per year, then these high prices are a very real problem which any increase in fuel duty could only worsen.

In addition to the increases in VED, the Chancellor is likely to close a loophole in the personal taxation laws that allow businesses to help employees buy and run their own cars. According to a Financial Times (FT) report, the government is concerned over the expansion of "employee car ownership schemes", or Ecos, because they allow businesses to circumvent tax rules that penalise high-emission company cars. The government's Treasury Department believes it is losing both revenue and its influence over the carbon emissions of Ecos cars. The use of Ecos has spread since the introduction of personal and company car taxation rules gauged by the vehicle's CO2 output and has now reached the point where they are offered by 9% of companies that have car policies, according to the report. Revenue & Customs discussed employee car schemes with industry in a series of meetings held in January and reported that some Ecos schemes "have been designed to provide an on-going benefit to employees that are currently not taxed or subject to NICs [national insurance contributions]; and that the carbon emissions of an average Ecos car are around 20g per kilometre higher than an average company car", according to the FT report.

Outlook and Implications

The Chancellor's move to nearly double VED on highly polluting vehicles will attempt to influence consumers to make greener choices, but reality is far more complex than that, and again places the burden of lowering emissions on the individual and avoids the much-needed root-and-branch overhaul of the U.K. transport taxation system and a cohesive energy strategy for the country as a whole.

The increase in VED will directly affect vehicle leasing rates to businesses and hit residual values of affected models, further increasing costs associated with leasing to businesses, although these increases are relatively small still and are only likely to influence individuals on the margins of affordability and increase diesel penetration in these segments. The rise of large sports-utility vehicles (SUVs), often used as an emblem for climate change, will not be stopped in its tracks by this action.

Band G, which largely consists of high-performance models and larger SUVs, are predominantly aspirational choices made by consumers who can absorb the few hundred pounds in difference the tax change accounts for. Therefore the increases will have little effect on these segments overall. Indeed, the high cost of fuel in the United Kingdom due to the high level of fuel duty paid to the government, has failed to stem the rise in high fuel consuming and therefore high CO2 emitting vehicles in the past and it appears from this evidence that the VED tax increase is not significant enough to reach a tipping point.

This argument in its simplest form appears to support increasing taxation further to reduce the numbers of these models on the roads, but the entire taxation system, and the CO2 banding system should be revisited (no current powertrain either gasoline (petrol), diesel or hybrid for sale in the United Kingdom meets band A, which is free from VED). If this taxation is an attempt to reduce emissions, and a potential blueprint for CO2-based taxation across Europe then it requires further investigation and research to affect personal consumer decisions. Redressing of the bands to favour the lower emitting vehicles and the use of the additional revenue in further advancing environmentally friendly personal transportation technologies, or other such measures should ensue.

Furthermore, it would seem logical to demand from government a cohesive, coherent energy usage policy, based on emissions for the whole country, addressing both individuals and businesses, something which still appears a long way off—while this all assumes that the entire "climate change" debate has not been hijacked by political groups, wrested from the arena of true scientific debate in order to expedite political will and control.