Comparisons of CO₂-related tax rate differentiation in motor vehicle taxes

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.

This page presents information regarding 28 such taxes in 20 OECD member countries, plus South Africa. 18 of these taxes are levied one-off, at the time of the purchase or first registration of the vehicle, while the 10 others are recurrent taxes that the owners of the vehicles have to pay each year in order to be allowed to use their vehicles on public roads. There is also CO₂-related differentiation of the tax rates in several recurrent taxes on motor vehicle use applied by cantons in Switzerland, but it has not been possible to incorporate this in the present analysis.

There is no one-off tax on vehicle purchases as such in the United Kingdom. However, in the recurrent tax on motor vehicles, the tax rates applied in the first year of a vehicle's 'life' differs from the rates applied in later years. The difference compared to the normal rates is here treated as if it represented a one-off tax.

Israel is a special case in the illustrations presented. They apply an ad valorem tax rate of 83% on all the vehicles of the types compared here. However, they make a deduction in the tax rate depending on the 'Green grade' of the vehicle, where emissions of in gram per km of CO, HC, NO_x, PM₁₀ and CO₂ are given weights of 500, 900, 10000, 20000 and 30 respectively. The total is devided by 30, to obtain the relevant Green grade. Purely for illustration purposes, it is here assumed that each vehicle emit 0.75 gram CO, 0.05 gram HC and 0.03 gram NO_x per km driven – and cause no PM₁₀ emissions. With this stricktly technical assumption, the graphs illustrate which tax reductions would be accorded to different vehicles, depending on the amount of CO₂ they emit per km.

In order to compare the energy efficiency-based taxes in some countries to CO₂-based taxes in other countries, it has been assumed that the combustion of one litre petrol leads to emissions of 2.3434 kg CO₂, while the corresponding figure for a litre of diesel is 2.682 kg CO₂ emitted.

Differentiation in one-off taxes on motor vehicle purchases -- Tax rates per vehicle

Figure 1 below compares the tax rates (or bonuses) per vehicle applied in the countries covered, depending on the number of gram CO₂ the vehicle (on average) emits per km it is driven. As quite a few countries apply different tax rates for petrol- and for diesel-driven cars, and in order to simplify the presentation, tax rates for petrol-driven vehicles are shown in the upper panel, and tax rates for diesel-driven vehicles in the lower panel. In several countries, the tax per vehicle also depends on the price of the vehicle. For illustration purposes, Figure 1 shows tax rates for vehicles with net-of-tax prices of either 10,000€ or 25,000€.

As e.g. can be seen in the cases of the Netherlands and Portugal, where there are differences in tax rates depending on the fuels used, tax-rates for diesel-driven vehicles are higher than the tax rates applicable for petrol-driven vehicles.

In order to highlight the differences between (most) countries, Figure 2 zooms in on taxes and bonuses in the range -5,000 to 20,000€, for the case of petrol-driven vehicles. One can see that a number of countries give bonuses for the purchase of vehicles with relatively modest CO₂ emissions per km driven. In Denmark and Israel, the bonuses are given as tax reductions in generally quite high purchase taxes on motor vehicles. In France, the bonuses gradually decrease, and increasing taxes are levied for vehicles with emissions larger than 140 gram CO₂ per km. In the Norwegian case, rapidly increasing taxes apply for vehicles with CO₂ emissions per km exceeding 110 gram per km.

While no or limited bonuses apply for low-emission vehicles, rapidly increasing taxes also apply to vehicles with emissions higher than 110 gram per km in the Netherlands and 95 gram per km in Portugal. In Ireland, relatively significant taxes are levied also on the vehicles with the lowest CO₂ emissions, with increasing tax rates applying in the range 120 to 225 gram CO₂ emitted per km driven. In the US, ther are no taxes or bonuses for vehicles with emissions below (approximately) 250 gram CO₂ per km driven, but increasing "gas guzzler taxes" on vehicles with even lower fuel economy. In Finland, the tax rates increase monotonically almost from zero CO₂ emissions per km, with tax rates for expensive vehicles being higher than the tax rates for cheaper vehicles. The tax rates increase with vehicle prices also in Austria, Belgium, Ireland Slovenia and Spain – but at lower levels than in Finland.

Differentiation in one-off taxes on motor vehicle purchases -- Tax rates per tonne CO₂ emitted over a vehicles lifetime

By making assumptions regarding how far a vehicle is driven over its lifetime, one can also calculate tax rates expressed per tonne CO₂ each vehicle will emit over its lifetime. This is done in Figure 3, for petrol- and diesel-driven vehicles respectively – assuming for simplicity that all vehicles are driven 200,000 km over their lifetime.

Figure 3. One-off taxes motor vehicle - Tax per tonne CO₂ emitted over a vehicle's lifetime
Petrol- and diesel-driven vehicles, tax rates as of 01.01.2012

One can notice that while the tax per tonne of lifetime CO₂ emissions is relatively similar for vehicles that emit up to 170 gram CO₂ per km they are driven, vehicles that have higher emissions per km are strongly “penalised” in Norway, the Netherlands and Portugal (especially as regards diesel-driven vehicles). This is noteworthy, because each tonne of lifetime CO₂ emissions causes the same environmental damage – and thus ought to be taxed equally – regardless of how much the vehicle emits per km. However, to the extent that vehicles with large emissions per km are driven more over their lifetime than vehicles with lower emissions per km (thus invalidating the assumption used here that all vehicles are driven 200,000 km), some “penalisation” of vehicles with large emissions per km could be called for.

One can also notice that the tax per tonne of lifetime CO₂ emissions in (especially) Portugal is significantly higher for diesel-driven vehicles than for petrol-driven vehicles.

Figure 4 zooms in on bonuses and tax rates per lifetime CO₂ emissions in the range -200€ to 400€, in order to better show differences between (most) countries – in this case, for diesel-driven vehicles. One can distinguish between three groups of countries. Norway, the Netherlands and Portugal have very high tax rates per tonne lifetime CO₂ emissions for vehicles with high CO₂ emissions per km driven. In Finland and Ireland, the tax rates for diesel-driven vehicles with net-of-tax prices like 25,000€ (about 100-150 € per tonne CO₂) are clearly exceeding the tax rates found in the remaining cases (where the rates in most cases vary between 20€ and 80€ for high-emission vehicles).

Figure 4. One-off taxes motor vehicle - Tax per tonne CO₂ emitted over a vehicle's lifetime
Diesel-driven vehicles, tax rates as of 01.01.2012

Differentiation in recurrent taxes on motor vehicle use -- Tax rates per year

Differentiation of recurrent (annual) taxes on motor vehicle use in relation to the CO₂ emissions of the vehicles will also provide (potential) car owners with an incentive to choose a vehicle causing lower emissions than otherwise – but somewhat less directly so at the time of vehicle purchase than differentiated one-off purchase taxes. On the other hand, a recurrent tax also give owners of used cars an incentive to switch to vehicles with lower emissions, while this is not the case with one-off taxes.

Figure 5 illustrates the use of CO₂-related tax rate differentiation in recurrent motor vehicle taxes in the 9 OECD countries that apply such differentiation. One can see that these taxes are generally very modest for vehicles with CO₂ emissions below 100 (diesel) to 120 (petrol) gram per km driven. Beyond these emission levels, the taxes due per year increase significantly – and more so for diesel-driven than for petrol-driven vehicles in Luxembourg and Sweden. In France, the tax rates differ between company-owned vehicles and other vehicles, and while the tax rates for the latter category are quite modest, the tax rates applied to company-owned vehicles increase rapidly and reach very high levels for high-emission vehicles.

Figure 5. Recurrent taxes motor vehicle - Tax per year
Petrol- and diesel-driven vehicles, tax rates as of 01.01.2012

Differentiation in recurrent taxes on motor vehicle use -- Tax rates per tonne CO₂ emitted over a vehicles lifetime

By assuming that each vehicle is driven 200,000 km over its lifespan, and by also assuming that the lifespan of each vehicle is 15 years, one can calculate tax rates per tonne CO₂ emitted by the vehicle over its lifetime. Figure 6 provides an illustration, with separate panels for petrol-and diesel-driven vehicles.

Figure 6. Recurrent motor vehicle taxes - Tax rates per tonne CO₂ emitted over a vehicles lifetime
Petrol- and diesel-driven vehicles, tax rates as of 01.01.2012

One can observe that a flat tax rate per year for vehicles with CO₂ emissions over a certain limit, as applied in Ireland, UK and Portugal, (obviously) translates into a tax rate per tonne lifetime CO₂ emissions that decreases with increasing CO₂ emissions per km driven. Hence, in all three countries, the tax rates per tonne CO₂ emitted over the lifetime of a vehicle emitting 300 gram CO₂ per km is lower than the rate for a vehicle emitting 220 gram per km.

While the environmental harm caused by a vehicle hardly vary much, depending on whether the vehicles is privately or company owned, there is a large difference in the taxation of these two categories of vehicle in France, with the tax rates per tonne CO₂ applied for company-owned reaching very high levels.

Discounting of recurrent taxes

No discounting of future tax payments was made in Figure 6. In Figure 7, the impacts on the present value of the tax payments over 15 years of applying four different discount rates are illustrated, for the case of petrol-driven vehicles.

Figure 7. Recurrent motor vehicle taxes - Tax rates per tonne CO₂ emitted over a vehicles lifetime - Discounting
Petrol-driven vehicles, 0%, 4%, 7% and 15% discounting

Clearly, applying a positive discount rate reduces the present value of recurrent motor vehicle tax payments. And while a 15% (real) discount rate would be considered very high in terms of e.g. a social cost-benefit analysis, it is not unconceivable that households actually apply such a high rate of discounting when considering choices between different motor vehicle models. If that is the case, the differences between the bulk of the one-off lifetime CO₂ tax rates of Figure 3 and the recurrent lifetime CO₂ tax rates of Figure 7 are relatively small.

Total taxes

To facilitate comparisons, Figure 8 illustrates tax rates per tonne CO₂ emitted over a vehicles’ lifetime in one-off and recurrent motor vehicle taxes at selected CO₂ emission levels, for both petrol- and diesel-driven vehicles. No discounting is used here regarding the recurrent taxes. Where tax rates in one-off taxes vary with vehicle price, a net-of-tax price of 10,000€ has been used in this comparison.

Figure 8. Recurrent and one-off motor vehicle taxes - Tax rates per tonne CO₂ emitted over a vehicles lifetime
Petrol-and diesel-driven vehicles, selected emission levels