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  • European Commission's Directorate- General for Environment

    Fiscal Measures to Reduce CO2 Emissions from New Passenger Cars

    Main Report Final Report

    A study contract undertaken by COWI A/S

    January 2002

  • European Commission's Directorate-General for Environment

    Fiscal Measures to Reduce CO2 Emissions from New Passenger Cars

    Main report Final Report

    A study contract undertaken by COWI A/S

    January 2002

    Report no. 4

    Issue no. 3

    Date of issue 25 January 2002

    Prepared JJD, AO, MSJ, NKR (COWI), MF (IEEP)

    Checked MSJ

    Approved MSJ

  • Fiscal Measures to Reduce CO2 Emissions from New Passenger Cars

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    i

    A Austria ACEA Association de Constructeurs Européens d'Automobiles ATS Austria Schillings AVG Average B Belgium BEF Belgium Francs CO2 Carbon Dioxide CRTS Community Reference Tax System CT Circulation Tax D Germany DEM Germany Deutsche Marks DG-ENV Directorate-General for Environment DG-TAXUD Directorate-General for Taxation and the Customs Union DK Denmark DKK Denmark Kroner E Spain ECE Standard for measurement of fuel consumption (litre/100 km) EEV Enhanced Environmentally friendly Vehicles ESP Spain Pesetas EU European Union EUR Euro F France FIFRAM Fiscal Framework Measures FIM Finnish Mark FRF France Francs GBP United Kingdom Pounds GRD Greece Drachmae GVW Gross Vehicle Weight HE Greece I Italy IEP Ireland Punt IRL Ireland ITL Italy Lira JAMA Japan Automobile Manufacturers Association, Inc. KAMA Korea Automobile Manufacturers Association L Luxembourg LUF Luxembourg Francs MPV Multi Purpose Vehicles NL Netherlands NLG Netherlands Guilder P Portugal PTE Portugal Escudos RON Research Octane Number S Sweden SEK Sweden Kronor SF Finland ToR Terms of Reference (the Technical Annex) VAT Value Added Tax UK United Kingdom

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    Table of Contents

    1 Executive Summary 1 1.1 Conclusions 1 1.2 Background and purpose 2 1.3 Study contents 4 1.4 Taxes and tax systems 13 1.5 Results from model calculation 14

    2 Introduction 23 2.1 Background and purpose of the study 23 2.2 Approach and methodology 26 2.3 Structure of this report 27

    3 The passenger car model 29 3.1 Model scope and approach 29 3.2 Model framework 30 3.3 Database 33 3.4 The logit model 34 1.1 Model validation 35

    2 Data on taxes and tax systems 41 2.1 Passenger cars in general 41 2.2 Taxes on acquisitions 41 3.5 Company cars 47

    3 Vehicle data 57 3.1 Vehicle basic data 58 3.2 Technological progress 61 3.3 CO2 emissions in 2008 65

    4 Socio-economic data 69 3.6 Definitions and the Danish database 69 3.7 The contents of the socio-economic data database 72

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    3.8 Sources and corrections 76

    4 Scenarios for the CO 2 effectiveness of national fiscal policies 81

    4.1 Scenario assumptions 82 4.2 The boundary conditions and sensitivity analyses 83 4.3 Functional approaches to defining tax scenarios 86 4.4 Coverage of the analyses 89

    5 Results and conclusions from model calculations 91

    5.1 Coverage of calcuations 91 5.2 Methodology and preparatory calculations 93 5.3 CO2 efficiency of existing taxation systems 96 5.4 Adding CO2 differentiation to existing systems 99 5.5 Purely CO2 differentiated taxes 101 5.6 CO2 tax differentiation levels 104 5.7 Implications of increased proportion of diesel cars 108 5.8 Alternative formulations of the budget constraint 110 5.9 Implications of increased fuel taxes 112 5.10 Interpretation of results 114

    Table of Appendices

    Technical Annexes A. The passenger car model B. Sub-Group Members and other national contacts C. Model validation D. The boundary conditions E. Model Results F. Sensitivity analyses - results G. Consulted literature H. Vocabulary

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    1 Executive Summary

    1.1 Conclusions Model based calculations constitute the core output of this study. The calcula- tions assess the extent to which vehicle related taxes (mainly acquisition taxes and ownership taxes) can be effective means to reduce CO2 emissions from new cars. More specifically, the model calculations have assessed the ability of vehicle taxes to support the target to reduce average CO2 emissions from new cars down to a level of 120 g/km. This is the agreed target of the Community Strategy to reduce CO2 emissions from passenger cars. The calculations point to the following conclusions:

    • It is essential to apply a tax scheme, which is directly or indirectly CO2 related in order to provide for significant reductions in the average CO2 emissions from new cars.

    • It is essential to differentiate the taxes in such a way that taxes for very en- ergy effective cars are significantly lower than taxes for cars with poor en- ergy efficiency.

    • Replacing the existing taxes with purely and directly CO2 related taxes that are sufficiently differentiated provide the largest reductions.

    • Adding a differentiated CO2 element to existing taxes provides smaller, but still quite large, CO2 reductions. If allowance were made for a subsidy to the most energy efficient vehicles, this would however increase the rate of progression and thus lead to even more CO2 reduction.

    • Merely enhancing the differentiation of existing taxes also provides sig- nificant CO2 reductions, although the reductions are smaller than in the above two cases.

    • The level of the potential CO2 reductions does not depend on the type of taxes, e.g. registration or circulation tax, but more on the CO2 specificality and the level of the tax differentiation.

    • Simple increases of the tax that do not involve changes to neither the tax base, i.e. the parameter(s), which determine the tax, nor the differentiation schemes provide only very small CO2 reductions.

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    • It is essential to modify national taxes that are of a significant size and where there is scope for improving the CO2 relation of that tax in order to harvest the full potentials of CO2 reductions within the boundary condi- tions.

    • Fuel tax increases provide only very small reductions of the average CO2 emissions of new cars compared to vehicle taxes. Fuel taxes may however still be a very effective means of controlling the total CO2 emissions that are attributable to passenger car transport.

    The model calculations have been subject to three important boundary condi- tions. All model-based assessments are thus done under the condition that there should be no downsizing of the vehicle sales. Furthermore, there should be no change to the overall revenue from vehicle related taxes from new cars (i.e. the total of registration taxes, circulation taxes and fuel taxes). Lastly, the propor- tion of diesel vehicles should remain constant at today's level. Respecting these conditions, the calculations show that:

    • While it is possible to reduce the average emissions of new passenger cars in EU by about 5% on average, it is not possible to achieve the target of 120 g/km on average and avoid an increase of the proportion of diesel cars and/or downsizing of vehicle sales. The accomplishment of the target would require an additional 5.5%. The picture would look different, if in- creases of the proportion of diesel vehicles and/or downsizing were ac- cepted. Moreover, it might be possible to achieve additional reductions if the fiscal measures are closely linked to the labelling scheme established under Directive 1999/24/EC. Increasing the proportion of diesel vehicles brings the estimated CO2 emissions closer to the target. Nevertheless, it needs to be combined with downsizing if the model calculations are to re- sult in a reduction down to 120 g/km.

    • On the other hand though, the calculations show that budget neutrality is not the binding constraint in most cases. Thus, the requirement about un- changed revenue can be fulfilled without major implications for the achieved reductions in most cases.

    • The achieved reductions depend on the particular conditions that apply in the individual Member State and are affected by for example the existing tax systems and the existing composition of vehicle sales.

    This executive summary first summarises the background and purpose of the study, followed by an outline of the study contents. Lastly, it contains a sum- mary of the results of the study.

    1.2 Background and purpose The study has been prepared by COWI A/S in accordance with the contractual arrangements governing the "Study of the potential effects of fiscal framework measures to reduce CO2 emissions of new passenger cars". The European

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    Commission’s Directorate-General for Environment (DG-ENV) in co-operation with the Directorate-General for Taxation and Customs Union (DG-TAXUD) launched the study in the summer of the year 2000. COWI A/S was awarded the contract later that year. The study commenced in late 2000, and wa