Policy: Objectives & Rationale

As a type of vehicle tax VED can theoretically be used to influence vehicle ownership and the size and composition of the vehicle fleet. Their design through differentiation (or graduation) and selection of tax base can influence purchase choice and possibly stimulate the development of new technology (Harmsen et al., 2002). For instance, VED can be graduated according to the emission limits vehicle engines are designed to meet. The objective of introducing a graduated VED in the UK among other EU countries is to reduce levels of CO₂ emissions from the vehicle fleet as part of the Kyoto agreement. A graduated VED sends a price signal where new vehicles with CO₂ emissions below pre-defined levels benefit from a reduced VED tariff. This price signal aims to raise awareness among consumers of how vehicle choice can impact upon climate change thereby encouraging a shift to lower CO₂ emitting vehicles (Newberry, 1995; DfT, 2003; AEA, 2007). Vehicle Excise Duty can arguably be viewed as an effective use of price signals rather than standards, which may encourage the retention of old polluting vehicles longer than otherwise warranted (Newberry, 1995). The central debate over the effectiveness of VED is the level of charge necessary to influence consumer behaviour (DfT, 2003; EST, 2004, 2007).

The rationale behind introducing a graduated VED is that the demand for larger, more comfortable and higher CO₂ emitting vehicles has increased due to rising disposable incomes across Europe and the parallel improvements in fuel efficiency of all classes of car leading to a ‘rebound’ or ‘take back’ effects (DfT, 2003; EST, 2004; Anable and Bristow, 2007). The use of taxes to reduce emissions is based on the argument that emissions are an externality created by private consumption of transportation. The increase of Greenhouse Gas (GHG) emissions and the potential costs of climate change are absorbed by the public and therefore privately negotiated solutions are not feasible. Thus, government intervention is necessary (Myles and Uyduranoglu, 2002; Hicks, 2006).