Juggling government priorities to meet low carbon objectives

Promoting low carbon technologies often lead to less revenue for governments. This is most recently explained by Andy Sharman in the Financial Times, as he shows how the sales of low carbon cars in the UK is affecting government budget planning.

 

Two thirds of new UK cars pay no tax in first year

Two-thirds of new cars sold in the UK now have such low carbon emission ratings that they pay no tax for the first year, putting pressure on revenues raised by the Treasury.

UK motorists buy more plug-in cars — hybrid vehicles with rechargeable batteries or fully electric models — than any other European country, though the number is a small fraction of annual sales, at almost 15,000 in 2014 against overall UK car sales of 2.5m.

But the popularity of models such as the Mitsubishi Outlander PHEV and increasingly fuel efficient petrol and diesel engines means that more than two-thirds of new cars are exempt from vehicle excise duty in the first year of ownership, according to figures released on Tuesday by the Society of Motor Manufacturers and Traders.

Meanwhile, petrol sales fell to an 25-year low in March, despite a litre of unleaded fuel being on average 18p cheaper than March 2014, according to data from HMRC.

The RAC motoring organisation said the fall to 1.3bn litres reflected the switch away from petrol to diesel — which itself tends to achieve better fuel economy — and a newer and more efficient fleet of cars in the UK, and meant fuel duty collected by the government was £172m lower than in February.

The news puts the government in a squeeze as it seeks to bring down the budget deficit while meeting ambitious environmental targets, such as halving carbon emissions from 1990 levels by the middle of the next decade.

“Striking the delicate balance between influencing buying behaviour, encouraging investment and maintaining critical tax income will be a big challenge,” said Mike Hawes, chief executive of the SMMT.

Manufacturers are also under pressure to meet strict emissions targets from Brussels that call for average emissions of 95 grammes of carbon dioxide per kilometre by 2020.

Vehicle excise duty (VED) and fuel duty, the UK’s two main motoring taxes, raised a combined £33bn in the 2013-14 tax year. The vast majority of this — about £27bn — came from fuel duty.

The Treasury takes almost 70 per cent of the pump price in fuel duty and VAT, partly to fund road maintenance, and unleaded petrol is levied at the highest rate in Europe.

But despite more than a million cars being added to the UK fleet since 2010, the overall amount collected through fuel duty has remained static.

This, the RAC said, was down to a combination of motorists reducing their annual mileage, buying more fuel-efficient vehicles and driving in a more eco-friendly way

“This clearly supports the need for the government to find better ways of securing funding to ensure the longer-term development and maintenance of the road network,” said the RAC.

Meanwhile, VED has, since the Labour government Budget of 2000, been calculated according to the carbon emission rating of each car sold to encourage sales of fuel-efficient models. The 2008 Budget went further, initiating a “showroom tax” that would charge a lower rate in the first year of ownership for cleaner vehicles, and a higher rate for the most polluting.

But the SMMT said that 69 per cent of vehicles sold in 2014 met or fell under the showroom tax threshold, versus less than a quarter of vehicles in 2007.

In a report commissioned by the trade body and published by the Centre for Economic and Business Research on Tuesday, the think-tank warned that revenues from VED would fall from about £5.7bn in 2013 to about £4.4bn in 2025 if the regime were not changed.

But the CEBR said that the government had the “toolbox” to make up any shortfalls, including ultra-low emission zones — such as the one planned for central London in 2020.

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