Policy: United Kingdom

Policy Objectives

The UK Vehicle Excise Duty (VED) was reformed so that from March 2001 it became graduated by CO₂ emissions. This comprised one element of a strategy to reduce the levels of CO₂ emissions from the private car fleet as part of the Government’s commitments to the Kyoto agreement. More specifically, the linkage between a graduated VED and carbon abatement seeks to raise awareness among consumers of how vehicle purchase choice can impact climate change thereby encouraging a shift towards lower CO₂ emitting vehicles (DfT, 2003; Defra, 2007; AEA, 2007).

Policy Structure

Charges are levied based on CO₂ emissions performance differentiated by bands (A-G). A indicates emissions performance of 100 gCO₂/km or less, while G indicates 226 gCO₂/km and above. In Budget 2006, further reforms were introduced with band A vehicles charged (£0) while petrol and diesel band G vehicles were subject to a £300 annual charge rising to £400 in 2008 with band B vehicles reduced to £35 per year. For vehicles registered before 2001, a two tier system remains in place distinguishing small cars with an engine size less than 1100cc from larger vehicles (AEA, 2007; Anable and Bristow, 2007; Defra, 2007 ).

Implementation & Operation

Detailed costs for the implementation and operation of the graduated VED have not been found. Estimates using proxy cost indicators based on enforcement of VED between 2006 – 2007 include £2.3 million on court cases and £900,000 on debt collection. Advertising costs of £5.4 million in 2006 - 2007 and £4.1 million in 2005 - 2006 were expended to reduce evasion (Bourn, 2007). Moreover, Wordsworth and Grubb (2002) estimate that the foregone revenue associated with reduced tax rates of VED and company car taxation for lower carbon emission vehicles is approximately £100 million per year.

Major Impacts

VED reforms have been criticized for not increasing differentials sufficiently to induce a change in consumer purchasing behaviour (Anable and Bristow, 2007; EST, 2007a). The Energy Savings Trust (2007) suggest that an indication of the low impact the VED to date is that since 2003/04 the average CO₂ emissions of cars sold to private consumers has been higher than vehicles sold to companies (Figure 3-1, Table 3-2). This suggests that although VED reforms in 2006 were welcome there is further need to increase differentials between bands (EST, 2007).

Figure 3-1. Car sales and sales-weighted average CO₂ by sales type

Source: Energy Savings Trust, 2007

Table 3-2. Statistics on new car sales 1997-2005

Source: Energy Savings Trust, 2007

The ineffectiveness of the 2006 VED reforms led to further changes introduced in Budget 2007 where rates for 2007 - 2009 increased for the most polluting vehicles (band G) to £300 from 2007 - 2008 and £400 in 2008 - 2009 while reducing the rate for low carbon band B cars to £35 in 2007 - 2008 carrying forward until 2010. Band A continued to pay no VED. Rates for the graduated bands C-E, vehicles registered before 2001 and all light goods vehicles (LGV) increased by £5 in each of the following three years. Moreover, VED rates for petrol and diesel cars were aligned.

 Source: Windsor Vehicle Leasing, 2008