Use fiscal policies to drive away from diesel and clean up air pollution
In this blog, Richard Howard, Policy Exchange’s Head of Environment and Energy, sets out the case for using fiscal policies to shift motorists away from diesels and clean up air pollution in our cities.
There is an air pollution crisis taking place in London and many of the UK’s other major cities. Our recent report Up in the Air documents the fact that 12.5% of London’s total area exceeded legal and healthy limits for nitrogen dioxide (NO2) in 2010. This area contains a workplace population of 3.8 million people, as well as 979 schools attended by a quarter of London’s school population. Exposure to NO2 can cause lung irritation and increases the chances of respiratory infections, particularly amongst those with a pre-existing condition such as asthma. It is estimated that if air pollution stayed at current levels it would reduce the average life expectancy across all Londoners born in 2010 by up to 2 years (9 months for Particulate Matter and up to 15 months for NO2).
Air pollution is overwhelmingly a diesel problem. Road transport is the primary source of emissions of Nitrogen Oxides (NOx) and Particulate Matter (PM) in London, and within this diesel cars and vans are the main culprits. Diesel has been promoted by successive governments since the 1990s on the grounds that diesel vehicles have lower CO2 emissions than equivalent petrol vehicles. However, recent evidence shows that the CO2 advantage of diesels has now been eliminated: data from the Society of Motor Manufacturers and Traders shows that in 2013, for the first time, CO2 emissions from new petrol cars were lower than emissions from diesel cars (on a sales-weighted basis).
The problem with diesels, as exemplified by the Volkswagen “dieselgate” scandal, is that they perform very badly in terms of local air pollution. Emissions standards have systematically failed to control NOx emissions from diesel cars and vans. Recent evidence from on-road testing of vehicles in London shows that Euro 5 diesel cars sold as recently as 2014 perform no better in terms of NOx emissions than Euro 1 diesels sold in the 1990s. Whilst the latest Euro 6 diesel cars show some improvement over Euro 5, on average they still emit 4 times as much NOx on the road the Euro 6 standard, and 6 times more NOx than the latest petrol vehicles.
Despite this, Government policies continue to promote diesel vehicles ahead of alternatives. For the last 15 years, motorists have been encouraged to purchase diesel vehicles, with road tax (Vehicle Excise Duty), Company Car Tax, and Capital Allowances are all geared towards lower CO2 vehicles. Consequently, diesel cars have increased from 14% of the car fleet in Great Britain in 2001, to 36% of the car fleet today. However these fiscal incentives fail to recognise the greater damage done by diesels in terms of air pollution.
If we are to clean up air pollution in London and the rest of the UK, then Government needs to recognise that diesel is the primary cause of the problem, and to promote a shift away from diesel to alternatives. As part of our ongoing work on air pollution, with King’s College London, we have identified a package of measures to clean up London’s air. The analysis clearly suggests that the trend towards diesel needs to be reversed in order to bring air pollution in line with legal and healthy limits. At the same time, this needs to be done in a way which does not unduly penalise existing diesel drivers, who bought their vehicles in good faith, and gives motorists sufficient time to respond. Older diesels should be removed from the fleet through appropriate incentives, not by retrospectively increasing taxes on diesel fuel or banning them from city centres.
Our forthcoming report, which will be published in full shortly, proposes a number of changes to fiscal policies which would reverse the trend towards diesel in favour of alternatives, whilst avoiding penalising existing diesel drivers, as follows:
•Vehicle Excise Duty: We propose that HM Treasury should increase the first year VED rate for new diesels by up to £800 to reflect the greater damage done by diesels in terms of local air pollution. The £800 figure reflects the additional air pollution damage caused by a Euro 6 diesel car compared to a Euro 6 petrol car (using Defra valuation methods). This increase in VED would discourage motorists from purchasing a new diesel and encourage them to consider lower emission alternatives such as petrol, hybrid, LPG or electric vehicles. Similar changes should be made to the Company Car Tax and Capital Allowance regimes to remove and reverse the tax advantages available when purchasing a diesel. These changes would apply to new diesel cars only and would not affect existing diesel drivers.
•Diesel scrappage scheme: the additional revenues generated by the above policies could be used to fund a new diesel scrappage scheme, providing grants to motorists who scrap an old diesel car or van and purchase a new lower emission vehicle. Government previously ran a scrappage scheme in 2010 which provided grants of £1,000 per vehicle scrapped, with manufacturers matching the £1,000 to provide a full £2,000 of the list price of a new vehicle. Given that car manufacturers are at fault for creating polluting diesels in the first place, it is only right that they should contribute to their replacement. HM Treasury should recreate the scrappage scheme model, but this time grants should be targeted more specifically towards improving air quality.
•Liquid Petroleum Gas (LPG) Vehicles: Our analysis suggests that a switch towards LPG vehicles could also play a role in reducing air pollution. LPG vehicles emit far less pollution than diesel or petrol cars, and are cheaper to run. However, despite the apparent advantages, uptake of LPG cars is very low, making up just 0.1% of the car fleet in the UK (compared to 4% in Europe). One of the barriers to uptake of LPG is uncertainty around fuel duty: LPG fuel duty has risen much faster than duty on petrol or diesel, which may put off motorists from converting their vehicle. Another issue is the fact that there are currently no LPG production cars available to the UK market, despite these vehicles being widely available in Europe. The Treasury could overcome this catch-22 situation by signalling in the forthcoming budget that LPG fuel duty will remain frozen for a period of time, in order to provide clarity for motorists to switch to LPG, and to manufacturers to bring LPG vehicles to the UK market.
The proposed increase in VED would raise around £500 million per year in additional taxes (this is after accounting for an assumed 50% reduction in diesel car sales). This is roughly equivalent in revenue terms to increasing fuel duty by 1 pence per litre. However, our proposed increase in VED is a far better way to target air quality improvements, and would avoid penalising existing motorists. We propose that any additional revenue generated by the proposed fiscal changes should be used to fund a diesel scrappage scheme as outlined above.