Voluntary Agreement package
41. The second of DfT's carbon reduction priorities
is "working closely with manufacturers to deliver cleaner
and greener cars", with the third being to help people make
more environmentally informed choices about their transport options,
including "what type of vehicles they choose to buy in the
future." These apply to the Department's single largest measure
in terms of carbon reductions, the "Voluntary Agreement (VA)
package". This in turn comprises four main elements:
- § Manufacturers'
Voluntary Agreements: Between 1998 and
1999 the European Commission concluded an agreement with major
car manufacturers, committing them to reduce the average carbon
emissions from new models sold within the EU by 25%, down to 140
grammes CO2 per kilometre (g/km) by 2008-09;
- § Company
Car Tax reforms: Since April 2002, Company
Car Tax (CCT) has been based on CO2 emissions: "Under the
new system, charges for petrol cars range from 15% to 35% of the
list price (diesel cars pay a 3% supplement to reflect local air
quality emissions), and increase by 1% for each 5g/km rise in
the CO2 emissions figure for the car between minimum and maximum
thresholds (set at 140g/km and 240g/km respectively for the 2006/07
tax year, reducing to 135g/km and 235g/km in 2008/09). […]
From 2008/09 there will be a new 10% band for company cars with
very low emissions of 120g/km or less. The Company Car Tax Fuel
Benefit Charge—paid by those who receive employer provided
fuel for unlimited personal use—was also reformed in 2003
to follow the company car tax carbon basis. The figure is set
at £14,400, and since 1997 the number of employees in receipt
of free fuel for unlimited private use has fallen by around 600,000,
partly as a result of the 2003 reforms."[47]
- § Vehicle
Excise Duty reforms: For new cars purchased
since 1 April 2001, Vehicle Excise Duty (VED) charges have been
grouped into bands, based on carbon emissions of each model. In
Budget 2006, duty on the lowest emitting band was reduced to zero
and, for cars purchased from 23 March 2006, a new upper band added,
creating a maximum differential of £210 (for petrol cars)
per year between the highest and lowest emitting models;
- § Car
efficiency labels: DfT has worked with
the Low Carbon Vehicle Partnership and the motor industry to introduce
colour coded efficiency labels for cars, similar to those for
electrical goods but based on the new VED bands. These are "currently
available in most UK showrooms [to] enable consumers to make informed
choices about fuel efficiency when buying a new car".[48]
42. In addition, and complementary to the VA package,
in 2002 the Government launched the Powering Future Vehicles (PFV)
Strategy, designed "to promote new vehicle technologies and
fuels, and ensure the involvement of the UK automotive industry
in the development of new technologies."[49]
This contained a main target that "By 2012, 10% of all new
car sales will be cars emitting 100g/km CO2 or less at the tailpipe".[50]
To help achieve this target, the Government established the Low
Carbon Vehicle Partnership (LowCVP), a coalition of public, industry,
and academic groups, to help to co-ordinate research and drive
on innovation; and implemented a package of measures, including
"TransportEnergy grants to encourage take-up of cleaner,
more efficient vehicle technologies; and support for industrial
and academic research, development and demonstration."[51]
The Government also counts the CCT and VED reforms detailed above
as counting towards the PFV Strategy. The Strategy is currently
being reviewed, with a report due this year.
Progress of
the VA package
43. CCP 2006 forecasts the Voluntary Agreement package
to deliver 2.3MtC savings in 2010, making it by far transport's
biggest contribution to the UK Climate Change Programme. However,
progress has faltered since its inception, and these savings are
smaller than the 4MtC originally projected. Indeed, Defra's Synthesis
of Climate Change Policy Evaluations, published in April this
year, reports: "Projected savings in 2010 from the transport
sector have been revised downwards, based on new estimates of
the GHG [greenhouse gas] emissions reductions achievable in the
voluntary agreement package."[52]
44. Average
emissions of new cars in the UK have certainly been declining
in recent years, reaching 169.4 grammes CO2 per kilometre in 2005,
a reduction of 20g/km, or 10.7%, since 1997.[53]
All the same, at this rate of progress, the average will only
be reduced to around 164g/km by 2008, meaning that the UK would
not achieve the EU target of 140g/km until around 2022.[54]
Indeed, while the European Commission envisaged progress accelerating
towards the end of the agreement, CCP 2006 reports that the rate
of progress has actually been slowing down in recent years.[55]
In addition, the UK
is lagging behind other European countries: for 2004, the UK ranked
ninth out of the 13 EU states for which data are currently available,
with new car emissions standing some 7g/km above, and the rate
of progress since 1998-9 behind, the EU average.[56]
The Department for Transport
should lead the Government in taking decisive action to improve
this record.
45. One of the main reasons given for this slow progress
is summarised in the DTI's Updated Emissions Projections:
"recent moves towards the purchase of larger and heavier
vehicles will have offset some of the technical advances that
improve efficiency."[57]
The Society of Motor Manufacturers and Traders (SMMT) described
to us how, although the industry has been making technological
advances, these were being to an extent counteracted by market
demand for safety and comfort features: these consume more fuel,
either directly by drawing on power (such as air conditioning)
or indirectly by adding weight (such as roll bars).[58]
The Energy Saving Trust (EST) told us, for example, that air conditioning
could increase fuel consumption by up to 25%.[59]
As for why the UK is doing worse than the EU average, we were
told that this stems from, first, a market preference for larger
and heavier cars in the UK compared to countries such as France
and Italy,[60] and second,
as the Secretary of State himself put it, "the level of dieselisation
in Britain [which] is significantly below, certainly, that of
France" among some other European countries.[61]
46. This latter point is important because diesel
engines give on average over 28% more miles per gallon than petrol,[62]
and hence emit less g/km. In fact, "dieselisation" appears
to be the single biggest factor in making progress towards the
Voluntary Agreement's targets. The SMMT baldly states, for instance:
"The improvements in average new car CO2 emissions stem from
increased dieselisation of the fleet."[63]
This was also the conclusion of the VIBAT authors: "The
main reason […] has been diesel penetration into the car
fleet".[64] At the
same time, the SMMT argued that this trend towards diesel will
not continue for very much longer in the UK under the present
fiscal regime, in which duty on diesel is slightly higher than
on petrol[65]—in
contrast to countries such as France and Germany, in which diesel
prices are "20 to 40 per cent lower than petrol prices."[66]
If this is true, it would beg the question why the Government
does not directly incentivise the use of diesel relative to petrol
- especially given the conspicuous success in using of duty differentials
in the past, notably to transform the market for unleaded petrol.
The LowCVP, however, described two potentially serious problems
with seeking to increase and rely on dieselisation in order to
meet the VA target. First, high and increasing demand in Europe
has the potential to drive up diesel prices relative to petrol,
thus dampening demand once more (perhaps especially in less mature
markets for diesel such as the UK); second, diesel vehicles are
worse for air quality. [67]
47. Given that
increasing the proportion of new cars that run on diesel is a
very major factor in the Voluntary Agreement package—transport's
biggest contribution to the UK Climate Change Programme—it
is surprising that the Government does not provide any direct
financial incentives for diesel over petrol. While there may be
concerns about the air quality implications of increased diesel
use, and about availability and price of diesel in the European
market, the Government should at least set out explicitly why
it is not providing such incentives, and what impact their absence
is having on the UK's progress towards the Voluntary Agreement
target for reducing the average carbon emissions of new cars.
48. Linked to the importance of diesel use, another
pronounced feature of the way in which the Voluntary Agreement
package is working in the UK is, as CCP 2006 puts it, the "increasing
split between the company car market, where average emissions
of new vehicles continue to fall, and that for private cars, where
progress has stagnated."[68]
In 2001, new company cars emitted over 2g/km more than new private
cars (179g/km compared to 176.5g/km); but by 2005, this had reversed,
with new company cars emitting some 5g/km less than private cars
(167g/km compared to 172g/km).[69]
Indeed, not only has progress of private car emissions been much
slower, in 2004 average emissions from new private cars actually
went up slightly. The SMMT firmly puts this difference
down to the greater penetration of diesel vehicles in the company
car market, something which has accelerated since the CCT reforms
of 2002.[70] According
to HM Revenue & Customs (HMRC), while there is a general market
trend towards diesel cars, CCT reforms alone are responsible for
a full third of the marked increase in new company cars that run
on diesel since 2002. In addition, HMRC finds that CCT reforms
have led to more people choosing smaller and lighter—hence
more fuel efficient—company
cars. Altogether, HMRC estimates that the net effects of CCT changes,
taken on their own, are to have reduced average company car emissions
by 15g/km from what they would otherwise have been, and to deliver
total net savings of 0.35-0.65MtC
by 2010.[71]
49. The picture is somewhat different, meanwhile,
if we turn to Vehicle Excise Duty. The Government does not publish
any disaggregated estimates of the carbon savings from the VA
package which result specifically from its VED reforms. However,
the fact that average emissions from company cars have reduced
more rapidly than the average from all cars strongly suggests
that VED reforms have been markedly less successful than CCT.
Indeed, HMRC estimates that, since the CCT reforms were announced,
some 400,000 company cars have been directly replaced by privately-bought
vehicles (for which employees are sometimes receiving a cash bonus
to assist with the purchase), and which on average emit 5g/km
more than new company cars.[72]
The implication is clearly that VED on its own does not
impose nearly as effective a financial incentive to opt for a
lower carbon vehicle. This was certainly the view of
the Low Carbon Vehicle Partnership: "The incentives in the
company car sector are significantly larger than those that bear
down on the private motorist and the outcomes are similarly more
obvious."[73] And
indeed this is strongly backed up by DfT's own research. A study
it commissioned in 2004 found that: "Key players in the industry,
as well as the car drivers themselves, feel that for these initiatives
to be taken up they need to 'hit people in the pocket'. The current
VED scheme does not."[74]
50. Since that DfT research was carried out, the
Government has made further reforms to VED. In Budget 2006 the
Chancellor raised VED for higher emitting cars and reduced it
for lower emitting cars. Notably, he introduced a new top band
(Band G) for cars emitting over 225g/km, and reduced VED to zero
for cars emitting under 100g/km (Band A). The Energy Saving Trust
told us this was "a very important initial step",[75]
which might help to shift the middle of the market towards Band
B (101-120g/km). However, EST thought it would be less likely
to have an effect at the higher carbon end, and LowCVP thought
that overall the differentials were still very small in comparison
to CCT, and commensurately less effective: "If you ask private
consumers they normally require about £1000 to £1700
incentive before they are willing to downsize their vehicle and
select a smaller vehicle. […] Vehicle Excise Duty gives you
a range of between nought and about £220".[76]
51. The Government
deserves praise for being the first in Europe to introduce vehicle
taxes specifically based on CO2 emissions. In particular, its
boldness in reforming Company Car Tax from 2002 has been rewarded
by the visible progress made in that market.
52. Reforms
to Vehicle Excise Duty, however, have been much less impressive,
even allowing for the changes announced in Budget 2006. Tax differentials
between higher and lower carbon cars must be made much wider if
they are to drive market transformation. We note that in its submission
to the Climate Change Programme Review, the Sustainable Development
Commission stated it had "modelled the carbon savings that
could be achieved through new VED rates. Our proposal is that
[…] that there is a £300 gap between each band. So the
top band of VED would rise dramatically to £1800/yr […]
and below this the bands would be at £1500, £1200, £900,
£600, £300, and £0".[77]
The Department should publish its calculations of resulting carbon
savings from adopting such £300 differentials between Bands.
53. In particular,
the new Band G is ineffective—given
that it is so wide and represents so little of the purchase price
of the vehicles it covers—and
needs to be substantially raised in cost. As things stand (see
Figure 6), the VED paid by
the highest emitting 4x4s and luxury saloons in Band G represents
a lower percentage of their sales price, and works out at half
the cost per gramme CO2 emitted, than lower emitting hatchbacks
in Band C. To take an extreme example,
the VED on a Bentley Arnage V8 (495 g/km) works out at 0.1% of
the sales price, and £0.42 per g/km, where for a Smart forfour
diesel (121 g/km) the figures are 0.9% and £0.89 respectively.
If VED were designed effectively to weight purchases towards lower
carbon cars, we might expect the charge per g/km to shift down
markedly as it moves through the bands. This is clearly not the
case - other than for the newly reformed Band B, which EST singled
out for praise. (While it is obviously even more the case for
the new Band A rates as well, sales within this band are currently
extremely limited.)
Figure 6 Highest carbon cars are taxed disproportionately
lightly
