Taxes on petrol can be the equivalent of nearly $500/tonne. The UK’s annual tax on cars can bring the total up to over $700/tonne with typical mileage. This is around two orders of magnitude greater than the carbon price that other sectors face at the moment under the EUETS, and one indicator of the challenges involved in decarbonising road transport.
With the UK budget due next week there is, as usual, debate about whether planned increases in petrol taxes should be abandoned. Although emissions from cars are not subject to a carbon price under the EUETS at the moment, existing taxes put an effective price on emissions – the more petrol a car burns the greater the emissions and the greater the tax paid. There is a price signal to reduce fuel burnt, and hence CO2 emissions (although fuel duty is not labelled a carbon tax, and may, of course, also price other externalities associated with burning petrol or diesel). Looking at this price signal gives important insights into how the transport sector would be likely to react to an explicit carbon price, and says much about whether proposed increases in fuel duty can be justified on the grounds of incentivising reductions in CO2 emissions.
Fuel duties are strikingly high compared with carbon prices prevailing under emissions trading schemes. The current excise duty on petrol in the UK is 61p/litre, with VAT of 20% also payable on the duty. A litre of petrol emits around 2.3 kg of CO2, so the duty plus VAT is equivalent to a tax of £318/tonne CO2 ($484/tonne CO2). Tax levels are roughly similar in Germany and several other European countries. Even in California, where fuel excise taxes are much lower, the equivalent carbon price is around $65/tonne, higher than under any emissions trading scheme or carbon tax at present. (The California emissions trading scheme is due to be extended to transport in 2015, which will add at least around an extra $12/tonne – the 2015 floor price for the scheme – to the price of gasoline, assuming no accompanying change in excise taxes.)
Excise taxes on petrol (Fuel Excise Duty) expressed as a tax per tonne of CO2 emitted are in the hundreds of dollars per tonne in some European countries …
VAT charged on the excise tax is included, but that on the petrol is not, as this is not a tax specific to petrol. Emissions factor assumed is 2.3 kgCO2e/litre. Federal and state taxes are included in California, no sales tax is included.
This calculation excludes the effect of UK Vehicle Excise Duty (VED), sometimes called road tax. This annual charge per vehicle depends on the vehicle’s emissions of CO2 per km. Although it does not vary with actual emissions, which depend on distance travelled and other factors such as traffic conditions, it nevertheless makes vehicles with higher carbon emissions more expensive to own on an annual basis.
Increasing vehicle emissions from just over 100g/km to just over 200g/km adds £250 p.a. of VED to the annual cost of a vehicle. Assuming the vehicle clocks up 16,000 km (around 10,000 miles) per year, and emissions per km are at the standardised level used to set VED, the additional emissions are 1.6 tonnes p.a., so the change in VED adds another £156/tonne ($238/tonne) to the effective carbon price, to give a total effective price of over $700/tonne (see chart). This figure is lower for those who travel more, higher for those who travel less than the 16,000km p.a. assumed, but it’s a large number for any typical car owner, and leads to a total effective carbon price about a 100 times greater than the current carbon price under the EUETS.
Taxes on emissions from cars in the UK including both fuel and vehicle taxes are over $700/tonne, assuming 10,000 miles per year …
There are additional policy measures to encourage lower emissions vehicles in place in the UK designed. Vehicles’ CO2 emissions are clearly labelled in advertisements for cars. EU regulation sets limits to average fleet emissions over time. Electric vehicles receive a subsidy to encourage their uptake, and there are efforts to create a grid of charging points.
Yet people still choose to drive conventional internal combustion engine cars. A carbon price of several hundred dollars per tonne is not enough to reduce emissions from cars to anywhere near zero with present technologies. People have a high willingness to pay for personal mobility and the alternatives to internal combustion engine cars are not available at the price and travelling range that would lead people to switch.
Furthermore, despite high oil prices as well as high taxes, many people continue to drive cars with much higher emissions than others on the market. People place a high value on many of the features that go with additional emissions, whether it’s better acceleration, increased size, or greater social prestige. Continuing innovation will be needed from the world’s car makers if the transport sector is to be decarbonised, even with an effective carbon price vastly greater than that currently found in emissions trading schemes.
And whatever justifications there may be for increases in petrol duty in the forthcoming budget, creating a carbon price signal comparable with that prevailing in other sectors is certainly not one of them.
Adam Whitmore 15th March 2013
References and data sources