UK Vehicle Excise Duty

An illustration of the way differential tax rates can be used by governments to promote 'greener' products can be found in the UK car market. Here, car owners pay an annual charge for the use of their vehicle, known as Vehicle Excise Duty. In 2001, VED was for the first time related to the carbon dioxide (CO2) emissions of an individual vehicle.

Environmental groups in the UK had been pressing for a reform of the VED regime for years. Until the late 1990s, car owners in the UK had been required to pay a flat-rate charge for using their vehicle, unrelated to the type of car they chose to purchase and use.

Vehicles registered on or after 1 March 2001 are categorised into one of four VED bands, according to their emissions. In general, the larger the car, the more fuel it consumes and the more CO2 it produces, so the more tax has to be paid by its owner.

The Driver and Vehicle Licensing Agency, which administers the scheme on behalf of the UK government, explains: 'The new system of VED based on CO2 sends a clear signal to vehicle manufacturers and purchasers about the environmental impact of the cars they make and use, and encourages the use of more fuel-efficient cars.'

The categories and tax rates for petrol-engined cars are summarised below.

A similar schedule applies to diesel-engined cars, except that all of the tax rates are slightly higher. Conversely, slightly lower rates of tax are payable on cars fuelled by 'clean' fuels such as natural gas and LPG.

For cars registered before 1 March 2001, a cruder banding structure applies. Those with an engine capacity of less than 1.6 litres pay £105 per year, while those of 1.6 litres or more pay £160. This simpler regime reflects the difficulty involved in retrospectively calculating CO2 emissions of car models that may no longer be in production.

In terms of whole-life environmental costs, the choice of model made by a car buyer at the time of purchase is highly significant. Over its lifetime, a car whose gasoline consumption averages 8 litres per 100km will consume around two tonnes more fuel than a car that uses 7l/100km, and release around seven tonnes more CO2  into the atmosphere.

The importance of fuel economy from a whole-life perspective is highlighted by Dr Stephen Potter of the Open University in the UK, who says carmakers have traditionally focused their environmental efforts on the relatively uncontroversial areas of manufacturing, waste and recycling, while playing down the importance of fuel economy. 'Yet these stages in a car's life account for only 12% of key environmental impacts,' says Potter. 'The fuel consumed by a car [during its lifetime] accounts for 70% of total greenhouse emissions.'

It is too early to say what effect the new UK vehicle excise regime will have on car purchasing behaviour. A spokesman for Vauxhall, the UK arm of General Motors, said the introduction of the variable-rate tax structure had yet to be noticed by most car owners, since few of them had yet had to renew their VED licence under the new regime.

Furthermore, few motorists are likely to rush to buy a new car simply because of the new tax schedule. Any shift in buying habits will become apparent over time, as part of the turnover of the UK car stock.

'What we're finding is that buying patterns are not changing at all,' said the Vauxhall spokesman. 'But you have to expect that they will change in the next three years. People will suddenly realise what's going on, and take the next opportunity to change [their choice of car].'

Another effect, Vauxhall believes, will be an increase in the proportion of diesel-engined cars sold, since diesel has a significant advantage over gasoline in terms of CO2 emissions.

The new VED regime represents a clear financial incentive for motorists to drive smaller, less polluting cars. It has been presented to the public as part of an environmental education campaign called 'Are you doing your bit?', and the publicity material explaining the new regime is headed 'The less it pollutes, the less you pay'.

In his annual Budget speech of 7 March 2001, the UK Chancellor of the Exchequer, Gordon Brown, summarised the new tax regime thus: 'For all newly purchased cars, a new four-band vehicle excise duty rewards the most environmentally friendly vehicles.' To drive home the point that the scheme was designed to reward economical motorists rather than penalise gas-guzzlers, he added: 'Seventy per cent of all new cars will now enjoy a reduced licence fee.'

Click here for further details of the scheme.