Encouraging fuel-efficient cars via Vehicle Purchase Tax

At the request of the Netherlands’ Environment Ministry the environmental effectiveness of eight alternative Vehicle Purchase Tax (VPT) schemes was investigated. There were essentially three variants:

1. A basic VPT indexed to net catalogue value.
2. Schemes whereby the basic VPT is combined with discounts and forfeits, calculated on the basis of the vehicle’s energy label, its relative CO₂ emission (compared with the vehicle-class average) or its absolute CO₂ emission.
3. BPM schemes indexed to absolute vehicle CO₂ emission. In this case there can be either a flat rate or a progressive tariff per gram CO₂/km. In addition, two progressive schemes were examined in which there is also a discount for vehicles with an ‘efficient’ (A, B or C) label.

These alternative schemes were compared on two counts: the (financial) incentive to consumers to buy a more efficient vehicle, and the estimated CO₂ emission cuts to which they might lead. In both contexts allowance was made for the scheduled phase-out of VPT in the Netherlands prior to introduction of road pricing.

The study indicates that the progressive VPT schemes indexed to CO₂ emissions create the greatest incentive to buy a more efficient vehicle. With these schemes the estimated CO₂ reduction in 2020 relative to today is an additional 0.3 to 0.5 Mt, assuming 100% phase-out of the current VPT. With 25% phase-out of VPT, the CO₂ reduction is 0.9 to 1.2 Mt. The progressive VPT schemes owe their effectiveness to the fact that they provide a strong incentive for buying a smaller vehicle as well as for buying a more efficient vehicle in the same size bracket. In addition, these schemes create an incentive to purchase a vehicle fitted out with fuel-saving technologies at additional cost. This contrasts with a VPT indexed to net catalogue value, which in this context creates precisely the wrong kind of incentive.