Many OECD member countries are now applying some form of CO2-related tax rate differentiation in their taxes on either the PURCHASE or the USE of motor vehicles.
There is also a number of countries where the tax rates in motor vehicle taxes depend on the fuel efficiency of the vehicles in question – which is closely linked to the CO2 emissions caused.
The report “The scope for CO2-based differentiation in Motor Vehicle Taxes” discusses the theory behind the use of such differentiation in vehicle taxes, both in general and in the context of an economic crisis. When the economy is in equilibrium, theoretical principles suggest a limited role for such differentiation. However, if it is considered necessary to provide some form of support to the motor vehicle sector, the use of policy measures that also reflects environmental considerations is advisable.
The report “Incentives for CO2 Emission Reductions in Current Motor Vehicle Taxes” describes the use of CO2-related tax rate differentiation of vehicle taxes as of 1st January 2009. A finding of the analysis is that in a number of cases, the incentives given to limit CO2 emissions from motor vehicles are very high compared to the abatement incentives provided to other sectors of the economy. Calculated per tonne of CO2 emitted over the lifetime of the vehicle concerned, the taxes for high-emission vehicles can reach several hundreds of Euro.
It should here be remembered that each tonne of CO2 causes the same environmental harm, regardless of how much the vehicle emits per km driven. It should also be kept in mind that these abatement incentives come on top of the similar incentives provided by the taxes on the fuels that the vehicles use.
A possible danger with a vehicle taxation system that places too much attention to CO2 emissions is that it can contribute to a further shift in the vehicle fleet, from petrol-driven to diesel-driven vehicles. Given that the environmental harm caused by vehicles with diesel engines (via emissions of NOx and fine particulates) is much larger than the harm caused by petrol-driven vehicles, such a shift in the fleet composition ought to be discouraged.
The vehicle fleet composition is also strongly affected by the taxes applied to different vehicle fuels. In a large majority of OECD countries, tax rates on diesel are lower that the tax rates on petrol.
Source: Organisation for Economic Co-operation and Development