routes to clean air 2016 - paul drummond, ucl

Tackling NOx Emissions from Diesel Cars Through Tax: Options for the UK

Paul Drummond

Research Associate

UCL Institute for Sustainable Resources

[email protected]

Routes to Clean Air – Air Quality Conference

The Grand Hotel, Bristol

12th October 2016

Green Budget Europegrow · engage · shape

• Founded 2008

• Brussels-based EU wide experts platform

• Promoting Market-Based Instruments

GBE vision:An ecological and social market economy, in which:

“prices tell not only the economic, but also the ecological truth"

(Ernst Ulrich von Weizsäcker)

Key focus: Ending diesel subsidies in Europe7 Target Countries: UK, Germany, France, Spain, Ireland,

Luxembourg, Hungary

http://green-budget.eu/

Air Pollution - A ‘Public Health Emergency’

- 40-52,500 annual premature deaths from outdoor air pollution in the UK, producing annual cost to society of £15-30 billion (NOx = ~50%).

- House of Commons Environment, Food and Rural Affairs Committee (EFRAC) recognises this as a ‘Public Health Emergency’

- Air Quality Directive – 38/43 areas in breach of limits for NO2.- Two-thirds of NOx emissions in these areas are sourced from road transport, with diesel cars in turn

responsible for a third of this.

- ‘Euro’ Standards define air pollutant limits for new passenger cars (including NOx), currently set at 60 mgNOx/km for petrol cars, and 80 mgNOx/km for diesel cars (Euro 6)

- Unsuitable testing mechanism means ‘real world’ emissions for diesel cars exceed reported values up to 12 times for some vehicles (15 times?), and 5-6 times on average. Petrol cars (largely) compliant.

- For new cars sold between September 2014 and April 2016, estimated additional NOx-related cost to UK society of £3.6 billion over their lifetimes (£4.1 billion if compared to petrol cars).

Tackling NOx emissions from Diesel Cars Through Tax: Options for the UK

Paul Drummond

Plans to Tackle NOx Emissions from Diesel Cars

- Current testing methodology to be replaced by ‘Real Driving Emissions (RDE)’ testing, beginning in September 2017. However, ‘conformity factors’ are applied…

- Diesel cars sold between September 2014 and December 2021, estimated additional NOx-related cost to society in the UK of £10.3 billion over their lifetimes (£12.2 billion compared to petrol)

- UK-specific Instruments:- ‘Clean Air Zones’ to be introduced in five cities around England to tackle NOx emissions,

although passenger cars not in scope (other specifics TBD). ‘Ultra Low Emission Zone’ (ULEZ) to be introduced in 2019 in London includes passenger cars, but excludes Euro 6.

- 37 of 38 zones to remain non-compliant until at least 2020 (London – 2025)


Paul Drummond

Further Action is Justified (and Required)


Paul Drummond

-

- 5 tax options to tackle NOx emissions from diesel cars are explored

- Taxation approaches may hold a range of benefits that complement the existing landscape

(a) While Euro Standards seek to drive changes on the supplier side, taxation instruments may induce changes on the consumer side

(b) Often more flexible than regulation, and easier to adjust over time(c) Generate a revenue stream, which may be used for different purposes(d) In the UK, it aligns with existing approaches and plans to tackle NOx (and other)

emissions through tax/charging (inc. Clean Air Zones and ULEZ), and plans to invest in low-emission transport options

Supplementary NOx Tax on Diesel Fuel- Unlike CO2, cannot directly price the externality

- NOx emissions from diesel vary by by engine, external conditions, tailpipe technologies, etc.- Marginal damage costs from NOx also vary in time and space

- Average Euro 6 diesel car produces average marginal damage cost of £0.19/l fuel, compared to a petrol equivalent


Paul Drummond

60

70

80

90

100

110

120

130

140

150

160

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

PenceperLitre(Currentprices)

Petrol Diesel

£0.50/l

- Provides differential with petrol, however retains lower per-mile cost, and evidence suggests fuel price changes only considered ~3 years into the future

- Politically difficult – represents 33%increase in Fuel Duty (frozen since 2011)

- May be regressive among car-owning households (particularly rural), and heavily impact commercial transport operations (without compensation)

Supplementary NOx Registration Tax- Evidence suggests registration taxes are effective in influencing new vehicle purchase decisions (commonly

applied with regard to CO2 emissions)- However, such an instrument cannot influence emissions from existing vehicles, or address spatio-temporal characteristics

- Optimal rate to levy – NPV of marginal NOx damage costs over the lifetime of the vehicle, against a comparator


Paul Drummond

*(see paper for detailed assumptions)

~10%

~30%

~15%

~45%

- Data availability/reliability is a key issue if introduced pre-September 2019. Two broad options:- Use EQUA data obtained through ‘real-world’ testing (nearly, but not quite comprehensive)- Use default Grade to encourage submission of vehicle models for ‘real-world’ testing

- Grade H provides largest incentive, but Grade E perhaps more feasible

Jan 2021

September 2019

Supplementary NOx Circulation Tax- Optimal rate to levy – NPV of average marginal NOx damage costs in a single year, against a comparator


Paul Drummond

*(see paper for detailed assumptions)

~10%

~30%

~15%

~45%

Jan 2021

September 2019

- Data availability/reliability remains a key issue, although same potential solutions as a NOx Registration Tax. May also only apply to new vehicles (for administrative, technical and political feasibility)

- As with NOx Fuel Tax and Registration Tax, cannot influence emissions from existing vehicles, or address spatio-temporal characteristics

- In addition, evidence suggests circulation taxes are generally ineffective in influencing new vehicle purchase decisions, largely due to discounting of future costs and benefits

NOx-Based Road Pricing- Different potential designs, but generally more able to influence spatio-temporal characteristics

than other instrument options- London Congestion Charge – successful in reducing congestion and encouraging a switch from private to

public transport in Central London, and driving NOx emissions to move ‘weakly downwards’

- Ultra-Low Emission Zone (ULEZ) to be introduced in 2019 – will charge pre-Euro 6 diesel (Pre-Euro 4 petrol) cars £12.50/day (common 80 mgNOx/km standard). Euro 6 diesel cars exempt.


Paul Drummond

- RDE testing results to assign Euro 6 diesel cars to 3 categories

- Mechanism required to include pre-2019 Euro 6 diesel cars

- May require entry into force after initial establishment (but clear signalling ASAP)

Approach may apply to other ‘Clean Air Zone’ cities, which currently plan to exempt all passenger cars

Diesel Company Car Taxation


Paul Drummond

- ~50% of new vehicles purchased in the UK are for company car use – high proportion of large diesels- ‘Benefit in Kind’ (BIK) = (list price of car + VAT & delivery charges) * (CO2 intensity ‘appropriate rate’)

- Excludes other taxes (First Year VED & Registration Tax)

- Currently 30 CO2 intensity bands, from zero emissions (7% BIK) to >220 gCO2/km (37% BIK)- Diesel cars experience an additional 3% surcharge in most bands (extended to 2021). However, this

rate is not encouraging a shift from diesel at any significant rate.

- Two Options:

1. Increase the existing 3% surcharge. However, this does not differentiate between diesel cars with different NOx intensities

2. Differentiate diesel surcharge based on real-world NOx emissions. Provides appropriate incentive, but requires data. May be implemented alongside instruments discussed above (and may only be applicable to new diesel cars).

Revenue Generation- ‘Back of an envelope’ estimates for additional revenue raised in first year of operation:

- Supplementary NOx Tax on Diesel Fuel: £4.5 billion- Supplementary Registration Tax: £650 million- Supplementary Circulation Tax: £90 million- NOx-Based Road Pricing (London ULEZ): £20-25 million- Diesel Company Car Surcharge Reform: £200 million

Two key rules:

(1) Any instrument should be revenue neutral- Using funds for a specified objective, alongside advancing public welfare (if used

appropriately), increases public acceptability of the revenue-generating instrument

(2) However allocated, the use of revenue should not work against other environmental or public health objectives, and should ideally encourage their achievement


Paul Drummond

Options for the Use of Revenue(1) Reduce Taxation on Labour

- Only (initial) revenue on a tax on diesel fuel is of any significance (~2.5% Income Tax), although other compensatory measures would likely require funding. May remain regressive, and produce income deficit over time.

(2) Diesel Car Scrappage Scheme- Called for by a range of policy-making bodies in the UK (including HoC EFRAC & EAC, London

Assembly and successive Mayors of London), but rejected by Government as an option in April 2016

- Evidence suggests they are ineffective in reducing emissions for 3 reasons:- (a) increased fuel efficiency mean new vehicles tend to be driven more than older vehicles- (b) may simply advance vehicle replacements that would have occurred soon anyway, without

additional financial incentive- (c) lifecycle emissions (of all kinds) of the new cars purchased may erode (or overcome) remaining

benefits of a less emission intensive vehicle (in the ‘use’ phase)


Paul Drummond

Options for the Use of Revenue(3) Capital Grants for Low-Emission Cars

- Supplement or extend grants under the ‘Plug-in Car’ grant scheme, for low or zero-emission cars (currently up to £4,500, until March 2018)

- Similar issues to a scrappage scheme, but in addition may increase overall size of the fleet

(4) Investment in Enabling Infrastructure for Low-Emission Cars- Supplement or extend existing initiatives (e.g. ‘Electric Vehicle Homecharge Scheme’, ‘Plugged in Places’,

‘Go Ultra Low City Scheme’) to extend electric vehicle charging and/or hydrogen refuelling stations

(5) Investment in Low-Emission ‘Car Clubs’- Holds particular potential in cities - thus far led to the removal of 25,000 private cars in London. Revenue

could be used to support their expansion in cities around the country (London has a target of 1 million car club members by 2025 – currently ~200k).

(6) Investment in Public and Active Transport- Supplement or extend existing initiatives (e.g. Low Emission bus Scheme, Clean Bus Technology Fund,

Government’s Walking and Cycling Investment Strategy, Mayor of London’s Transport Strategy)- Modal-switch reduces emissions (of all kinds), and may also relieve congestion. In the case of active

transport, may also tackle other environmental and public health objectives (e.g. noise pollution, obesity), producing additional benefit.


Paul Drummond

Conclusions & Recommendations

- Primary Instrument = Supplementary NOx Registration Tax for Diesel Cars- May be introduced alongside CO2-based ‘Vehicle Excise Duty’ (VED) ‘First Year Rate’ (£0 –

2,000) & flat-rate annual circulation tax (£140)- Incentivises purchase of low-CO2, low NOx vehicles, but doesn’t influence emissions from

existing diesel cars, or spatio-temporal characteristics

- Secondary Instruments = Revised Company Car Rules & City-level Road Pricing- Company car BIK would not include a NOx Registration Tax – parallel incentive required- City level road pricing effective in influencing vehicle use and mode choice, and spatio-

temporal characteristics of emissions

Such a combination discourages the purchase of new NOx-intensive diesel cars, and discourages NOx

emissions from all diesel cars in areas where marginal damage costs are greatest. Potentially regressive taxation is avoided (e.g. of owners of existing diesel vehicles driven in rural areas). Revenue generated should ideally be used to invest in low-emission public and active transport infrastructure)

to maximise environmental and public health social and economic benefit


Paul Drummond

Thank you!

[email protected]