Impacts of an emission based private car taxation policy – First year ex-post analysis

This paper assesses the impacts of a targeted policy designed to influence car purchasing trends towards lower CO2 emitting vehicles. Vehicle registration tax and annual motor tax rates in Ireland changed in July 2008 from being based on engine size to emissions performance of cars. This paper provides a one year ex-post analysis of the first year of the tax change, tracking the change in purchasing trends arising from the measure related to specific CO2 emissions, engine size and fuel, and the implications for car prices, CO2 emissions abatement, and revenue gathered. While engine efficiency improvements had been offset by purchasing trends towards larger and generally less efficient cars in the past, with the average MJ/km remaining constant from 2000 to 2007, this analysis shows that in the first year of the new taxation system the average specific emissions of new cars fell by 13% to 145 g/km. This was brought about, not by a reduction in engine size, but rather through a significant shift to diesel cars. Despite an unexpected reduction in car sales due to a recession in 2008, the policy measure has had a larger than anticipated impact on CO2 emissions, calculated to be 5.9 ktCO2 in the first year of the measure. The strong price signal did however result in a 33% reduction in tax revenue from VRT, in financial terms amounting to a drop of €166 million compared to a baseline situation.

► Car tax rates in Ireland changed in July 2008 from being based on engine size to emissions performance.
► We provide an ex-post analysis of the first year of the tax change.
► The average specific emissions of new cars fell by 13% to 145 g/km.
► The policy measure resulted in a 5.9 ktCO2 reduction in CO2 emissions.
► The strong price signal did however result in a 33% reduction in tax revenue.