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Greenhouse emissions

Tackling greenhouse emissions from private cars: are we going the right way?  By John Swanson

Taxing carbon from cars

Present Government policy is rooted in the belief that there is strong potential to transform our cars, lorries and buses away from relying on fossil fuels. A range of technological approaches are advocated utilising biofuels (sugar beet and corn or wood and waste) or hybrid and fully electric vehicles, and lighter, and hence more fuel-efficient cars .

The EU has mooted a legislative framework to replace existing voluntary agreements with car manufacturers that will focus on achieving a new mandatory car average target of 130g CO2/km by 2012 and a further 10g CO2/km reduction from other technological improvements and increased use of biofuels.

To make the most of these technological changes, our tax system also is intended to:

• encourage people to drive less;
• use other modes of transport and drive in a more environmentally friendly way (both through fuel duty); and
• to purchase more environmentally friendly cars (through differentials in Vehicle Excise Duty, the Company Car Tax regime and through fuel duty).
   

The Chancellor’s most recent budget announced an increase in fuel duty rates of 2p per litre, and further increases in the next two years, altering VED rates for the most polluting cars to £400 and rates for clean cars to £35, and the 20p per litre biofuels duty differential to run to 2009-10.

At a local level, other taxes are also used to encourage ‘green’ travel. Exemptions are given from the London Congestion Charge, for example, to cars that meet the Band 4 criteria on the TransportEnergy PowerShift Register (i.e. have hydrocarbon emissions at least 40% cleaner than the Euro IV standard).

Scenarios tested

Steer Davies Gleave examined a number of test scenarios as follows:

• Base Case: with only standard vehicles available, no changes, giving steady state baseline.
• Incentives for ‘green’ cars: ‘green’ cars available 10% cheaper to buy, more fuel efficient and with a discount on fuel price.
• Disincentives for standard cars: Keeping incentives for ‘green cars’, but adding £500 p.a. to the cost of running a standard car.
• Further tax increases: Additional taxes added to the price of standard cars and standard fuel.
   

In addition, each of these was considered further with a 1% p.a. rise in real incomes. Each scenario was simulated over a ten year period.

Making ‘green cars’ cheaper: just encouraging more travel?

The model indicated that both introducing incentives for ‘green’ cars and moderate disincentives for standard cars would result in about 29% of the vehicle fleet being comprised of ‘green’ cars after 10 years.

However, it also showed that this would lead overall to greater car ownership and more travel. This is essentially because the cost of owning and running a car is reduced overall. However this could be done with slightly lower total fuel consumption.

We also found that the disincentive on a standard car at £500 p.a. had little effect, and the proportion of ‘green’ cars in the fleet, the amount of travel and fuel consumption stayed almost the same in both of these scenarios.

Once rising incomes were taken into account the picture changed sharply. The effect of modest changes in the price of owning and operating cars were all wiped out by income leading to more cars, more kilometres driven and more fuel consumed. In fact one policy, which focussed on reducing the costs of new, fuel efficient technology, produced some of the biggest increases in the fleet size, kilometres driven and total fuel consumption.

The most effective test was to couple quite sharp increases in the cost of the older technology with similarly significant increases in the fuel efficiency of new vehicles, without reducing their purchase cost or their unit fuel costs. This can hold the total fleet size steady, even with rising incomes, and cut fuel consumption. However it still leads to more kilometres driven because the new vehicles are so much more efficient. The outcome seems to be, paradoxically, more congestion but less fuel consumed and therefore lower emissions.

The way forward?

Steer Davies Gleave believes that this research indicates some possible new directions in applying taxation to achieve the goals of the Government’s climate change strategy. The outcomes of the work that has been undertaken suggests that:

• Encouraging the purchase and use of ‘green’ cars through lower purchase and operating costs could produce unintended effects. Our research suggests this could increase car ownership, the amount of travel by car and fuel consumption. All of this would be contrary to the Government’s intentions in introducing such policies.
• As income increases over time in real terms, this effect becomes even more pronounced and even greater increases in car ownership, travel and fuel consumption could result.
• Even levying moderate extra taxes on the purchase cost of standard cars is unlikely to offset these effects.
• The most effective way of capping or reducing fuel consumption would appear to be to increase the cost of buying and running standard cars, while not reducing the costs for ‘green’ cars. Our research indicates that this policy could lead to reductions in fuel consumption overall while maintaining car ownership at current levels. Even so, it can lead, paradoxically, to more kilometres being driven because of the greater fuel efficiency, resulting in more congestion but fewer emissions.
   

Overall, the context of the Government’s present policies are perhaps more complex than first appears. The way that consumers respond to price signals is complex and sometimes undoes the best of intentions.
Measures to reduce carbon impacts also in general reduce fuel costs, which in turn can lead to increases in car use, congestion and carbon emissions. This is not a particularly original perspective, and others have postulated this idea . However, in examining this further, we have developed a mathematical representation of the key causal links that enables policy-makers to explore the consequences of their actions.

This shows that by providing subsidies for travel, no matter whether ‘green’ or not, the outcome may just be more of it, leading to ever-greater use of resources and failure to halt irreversible and unsustainable changes in climate. In particular, rising real incomes is an absolutely critical factor which is one reason why the type of dynamic model we have used is essential. Well-intentioned regulation and/or price signals may have unintended consequences, and these need to be examined in more detail using dynamic policy simulation tools. Steer Davies Gleave has made a start on this, but there is still much to do before the most effective direction for policy can be identified.

This article was produced as Steer Davies Gleave Occasional Paper no.1, and hard copies are available on request. Our Occasional Papers are funded through our research and development programme.  

For more information contact

Chris Ferrary
t +44 (0) 20 7910 5000
e chris.ferrary@sdgworld.net

John Swanson
t +44 (0) 20 7910 5000
e john.swanson@sdgworld.net

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