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Topic: Tax design to reduce passenger vehicle CO2 emissions

Abstract: literature on tax designs to reduce CO2 emissions, and compared the design of current
taxes on passenger vehicles in South Africa to the tax design n evaluate the effectiveness of the
current South African design for this purpose.
Findings: the current tax mix, taxes on passenger vehicles may not be the most effective way of
reducing emissions. The investigation of a “feebate” policy as an alternative initiative to address
increased passenger vehicle CO2 emissions is recommended.
The National Treasury (South Africa) (2006) has identified three possible options for reforming
the existing environment-related taxes in the transport sector in an attemptbto address the impact
of vehicle emissions. These options are, first, increasing the general fuel levy, second, increasing
vehicle customs and excise duties (an ad valorem tax) and, third, increasing the vehicle licensing
fees on fuel-inefficient vehicles (National Treasury (South Africa), 2006).
Purpose implementation
The objective of the vehicle emissions tax is to attempt to change consumer purchasing decisions
by discouraging the acquisition of vehicles that emit higher CO2 levels. Although this tax is
currently only levied on passenger vehicles, the vehicle emissions tax regime will be expanded in
future to include light commercial vehicles (SARS, 2009).
 met with a mixture of outrage and relief by consumers and the South African automotive
industry. Some consumers do recognise the need for change, whilst others perceive this
tax only as yet another income-generating exercise by government.
 concerns about the possible negative implications of the tax for employment in the
vehicle retail, manufacturing and component industries.
 According to Nel and Nienaber (2011), the likelihood that the new South African vehicle
emissions tax will achieve its objective of reducing CO2 emissions in South Africa may
be affected by the design of the taxes, which refers to the stage at which taxes are levied
(whether they are purchase, ownership or usage taxes
 In addition, consumers may not always fully appreciate the impact of their actions on the
environment (Kunert and Hartmut, 2007); therefore, the tax design should also ensure
that it is not only consumers who are targeted in an attempt to address environmental
to determine the tax design(s) that may be most effective in reducing the CO2 emissions of
passenger vehicles.

because levying taxes at the different stages can have a different impact on the reduction of CO2 emissions (Hayashi et al. Example: include sales taxes (or VAT) levied on the selling price of vehicles. Kunert and Hartmut.. they note that an annual circulation tax linked to CO2 emissions (ownership taxes) has been more influential in encouraging fuel efficiency and hence a reduction in the CO2 emissions of vehicles. Ownership taxes are normally recurrent in nature.. 2001. 2007). unless the ownership tax rate is set in proportion to actual fuel efficiency or CO2 emissions. as they are levied on the ownership or tenure of vehicles (Kunert and Hartmut. (2001) increases in ownership taxes produce a minimal effect on the reduction of CO2 emissions.Tax system explanation: In considering the effect of vehicle taxes in reducing CO2 emissions. Ryan et al. ownership and usage taxes (Hayashi et al. annual vehicle circulation taxes (similar to vehicle licensing fees) and other annual taxes on vehicle ownership. 2001. Arguments:  Hayashi et al. 2009). 2010). prior researchers have categorised taxes into three different stages. Instead. This approach could therefore be effective in reducing CO2 emissions if the ownership taxes on fuelefficient vehicles (or lower CO2-emitting vehicles) are reduced to encourage the acquisition of such vehicles.. (2009): registration tax also does not appear to have an important impact on the CO2 intensity of new passenger vehicles in Europe over the ten-year period considered in their study. Santos et al. but are not directly linked to vehicle usage. possible effect in reducing CO2 emissions and to formulate the design of taxes in order to reduce the CO2 emissions of passenger vehicles Purchase taxes Definition: levied upon the initial acquisition of a vehicle and are normally non-recurrent in nature (Kunert and Hartmut. 2007. We also apply this categorisation here. namely the levying of purchase. Furthermore. Example: annual license fees. but also egistration taxes and registration fees. (2001): purchase taxes are not particularly effective in reducing CO2 emissions by influencing either consumers’ decisions on purchasing vehicles or their driving patterns  Ryan et al. Support: . Argument:  Hayashi et al. increasing ownership taxes for specific classes of vehicles can also result in a shift to another class of vehicle. 2007). Ownership taxes Definition: levied over the period during which a vehicle is owned..

(2009). Therefore. even if it is not negligible. It seems that the main effect of such a policy in Italy is to push car users toward more fuel-efficient vehicles (Gallo. 2011). Thesefindings suggest that ownership taxesmay bemore effective in affecting consumers’ purchasing decisions than purchase taxes would be. while environmentally damaging products should be taxed at higher rates (Albrecht. 2006). because of the minute difference between the emissions of the vehicles people have driven previously and those of the new vehicles they are switching to. ownership and usage) and should therefore be considered separately as a fiscal reform instrument. consumers inEurope appear to bemoreaware of annual circulation taxes levied over the lifetime of the vehicle in their purchasing decisions than of other taxes levied once off on the initial purchase of the vehicle. Support: According to Hayashi et al. since vehicle owners can. avoid them (Kunert and Hartmut. the development of low-consumption vehicles and of clean fuels combined with fuel price policies based on minimising total green house gas emissions is still considered to be a better way to reduce global warming (Gallo. the overall reduction in emissions may be limited. Value added tax VAT can be levied across all three stages (purchase. Fuel taxes are the best known usage taxes introduced thus far. even if car users do switch to more fuel-efficient vehicles. 2007). fuel taxes (usage taxes) are the most effective fiscal instrument that can be used to help reduce CO2 emissions.   The empirical evidence presented by Beck et al. However. (2011) suggests that annual and variable emissions charges are drivers promoting individuals’ willingness to adopt hybrid technology According toRyan et al. Argument: Gallo (2011) proposes a car pricing policy based on fuel surcharges (usage taxes) as a substitute for car ownership taxes in reducing greenhouse gas emissions by vehicles in Italy. to a large extent. Avoidable use-dependent fees (such as tolls fees and parking costs) are excluded here. 2011). Purchase Once-off purchase on initial Not particularly effective in reducing CO2 emissions by influencing consumer decisions Ownership Recurrent over period Minimal effect set in proportion to fuel . Usage taxes Usage taxes depend on vehicle usage. Compared to the existing uniform consumption tax or standard VAT. green products should be promoted by imposing a lower consumption tax on them. (2001).

namely a tax based on the CO2 emissions of passenger vehicles. introduced with effect of 1 September 2010.. Most of the reduction as a result of a decrease in driving distance Other alternatives: In a mixed “stick and carrot” approach. 2009). as is the case with ownership taxes and usage taxes 4. is levied at USD 9. in initiatives to address environmental concerns. CO2 emissions can be accurately measured. The vehicle emissions tax is also classified as a purchase tax. In all the provinces. In addition. 2009). 2011. in combination with taxes which are levied. namely to change consumer purchasing decisions. The design of current taxes on passenger vehicles in South Africa: 4. Ad valorem excise duties currently levied in South Africa are based solely on price and do not incorporate any environmental criteria (SARS. Vehicle emissions tax. and the actual tax. 2010b). 2005). The registration fee levied in Gauteng is the highest in all nine South African provinces. Fullerton and West (2010) present empirical evidence on a fuel tax.1 Registration fees. a subsidy based on vehicle size and a new-car subsidy as alternatives to a Pigovian tax (levied on the basis of emissions).1 Purchase taxes Purchase taxes in South Africa include once-off registration fees and ad valorem excise duties. Greene et al. environment-related taxes can also take the form of incentives (“carrots”) for acting in an environmentally friendly manner (Gaffney. 4. combination of a fuel tax (usage tax) and a new-car subsidy (incentive) welfare benefits highlight the role of incentives. Furthermore. as it is a tax incurred on the initial acquisition of vehicles and is not recurrent or linked to usage.29[1] per gram per kilometre (g/km) of CO2 emissions which exceeds 120 g/km on all passenger vehicles (SARS. without taking into account any environmental considerations such as CO2 emissions. such incentives may encourage the development of low-consumption vehicles and cleaner fuels which other researchers highlight as important in addressing environmental concerns (Gallo.1.2 Ad valorem customs and excise duties.87[1] (Foresight Publications. apart from purchase. 4. Once-off registration fees are levied in all nine South African provinces (Nel. 2008). the current registration and licensing fees are levied according to the tare weight of a vehicle (which represents the unloaded weight of the vehicle). There is a clear link between the objective of the tax. 2011).1. ownership and usage taxes (or “sticks”). Technology aimed at reducing CO2 emissions is important Highest possible reduction in CO2 emissions. amounting to USD 14. and therefore the tax .3 Vehicle emissions tax.1.usage owned (not directly linked to usage) Recurrent and directly linked to usage efficiency/CO2 emissions.

However. 2010). However. 2005). 2010. 2001). 2011). petrol and diesel. the RMI and NAAMSA question whether the vehicle emissions tax will succeed in reducing CO2 emissions (ABR. but are not levied in proportion to usage. 4. the highest annual licensing fees of USD 57. Annual licence fees are assessed on a vehicle’s tare (the unloaded weight of the vehicle) with separate scales for vehicle types. The National Treasury (South Africa) (2006) has considered an increase in vehicle ownership costs in an attempt to suppress vehicle demand as an option for reforming existing environment-related taxes in the transport sector. The National Budget Speech for 2010 indicates that traffic congestion charges are to be investigated further in future (SARS. NAAMSA (2010) has indicated that if government is really serious about penalising emissions (a proxy for fuel consumption). 2011).. Both are aimed at increasing the cost of vehicles with high fuel consumption (or high CO2 emissions). Each province determines its own registration and licence fees.251 and 1. However. the vehicle emissions tax in South Africa is similar to the gas-guzzler taxes in the USA. with a tare weight between 1. which may result in an expansion of ownership taxes on passenger vehicles in future. For a standard-sized passenger vehicle.500 kg. the prospects of success may also be negatively affected by the focus on consumers. These fees are increased by proclamation in the respective provincial gazettes fromtime to time. 4. These taxes are recurrent. 2011).Astudy by Greene et al. annual licensing fees are levied in all nine provinces. Transport levies represent one of the usage taxes levied in South Africa and consist of different components as indicated in Table II. In SouthAfrica. The National . who may not always take into account environmental concerns in their purchase decision-making (Nel.can be seen as technically viable and it thus fulfils another criterion for effectiveness(van Aarle et al. (2005) shows that theUS gas-guzzler taxes are effective in increasing more efficient fuel consumption. Furthermore. In principle. the fact that the environmental incentive is likely to be small is a shortcoming of this option. The fact that similar taxes have been implemented in the US mitigates risks associated with unilateral implementation (Ashiabor. thereby lowering CO2 emissions.NAAMSA. whereas the customs and excise levy is a duty collected in terms of the Customs Union agreement (SASOL. A transaction fee of USD 4.2 Ownership taxes Ownership taxes in South Africa include annual licensing fees. which suggests that a vehicle emissions tax may achieve the objective of reducing CO2 in South Africa too. none of the components of transport fuel levies are levied directly based on CO2 emissions.3 Usage taxes Usage taxes are directly linked to the use of a vehicle and may affect the day-to-day decisions of consumers with regard to the use of their vehicles (Hayashi et al. 2010a). 2009). to date.46[1] is also added to the licence fee in every province.99[1] are payable in Kwazulu-Natal (Foresight Publications.. with a view to curbing the demand for such vehicles. the authorities should introduce an environmental levy on all fuels. The general fuel levy is levied by the national government and is adjusted annually by the Minister of Finance.

Furthermore.. an analysis of data by Mabugu et al.3) may answer this question. 4. In every debate over increasing the fuel taxes. Furthermore. 2009). although further increases in fuel duty rates in South Africa will generate higher tax revenues for government. Therefore.Treasury (South Africa) (2006) has considered increasing the general fuel levy as an option for reforming existing environment-related taxes in the transport sector. In fact. 89 of 1991). although they may be linked directly to usage. however. (2008) argue that. but it still needs to be considered whether further increases will result in actual reductions of the CO2 emissions in South Africa. merely increasing transport fuel levies in an attempt to reduce CO2 emissions should not be considered the first or best option. the increases will have an almost negligible effect on fuel consumption and the resulting reduction of CO2 emissions from fuel combustion. Akinboade et al. public acceptance should also be carefully considered.5 Conclusion on current taxes on passenger vehicles in South Africa . VAT is levied in all nine provinces on registration fees (purchase tax) and on annual licensing fees (ownership tax). The supply of petrol and diesel (usagetaxes) are. 4. (2009) suggests that the proportion of expenditure on fuel for transport purposes only represents a small percentage of total expenditure for households and most of the industries in South Africa. This raises the question of why VAT is not levied on petrol and diesel in an attempt to reduce CO2 emissions. Currently. In addition. The existing VAT system in South Africa presents an opportunity to expand the VAT system as an alternative instrument to serve as vehicle green taxes. numerous arguments are presented about the detrimental impact of such increases on the poor and the fact that such an increase could be regressive (Walls and Hanson. The fact that further increases in the price of petrol and diesel (usage taxes) will not necessarily result in reduced fuel consumption and CO2 emissions (Section 4. 2009). zero-rated supplies for VAT purposes (Section 11(1)(h) of the Value-Added Tax Act No. VAT is an indirect tax which is currently levied at 14 per cent on the value of taxable supplies. However. the potential negative effect on economic activity induced by the fuel levy increase may be addressed if the respective government spheres make tax room elsewhere to accommodate this intervention (Mabugu et al.4 Value added tax In South Africa. apart from anecdotal evidence. it might not be regressive. 1999). the fact that this option may be potentially regressive has been identified as a shortcoming. 2011). as there may already be further increases on the horizon if the decision is taken to finance the freeways refurbished under the Gauteng Freeway Improvement Project by means of a ring-fenced infrastructure fuel levy (Venter. there is also empirical evidence which suggests that South Africa is a country in which motor fuel is already overtaxed (Ley and Boccardo. Thus.

but should be considered carefully because they could be regressive. . the highest rate of registration fee of USD 14. the recently introduced vehicle emissions tax is the only tax in South Africa which takes into account CO2 emissions in the assessment base. new and old. it is clear that current taxes on passenger vehicles in South Africa consist pre-dominantly of purchase taxes (levied on the acquisition of a vehicle). however. Therefore. based on the considerations above. The investigation of current taxes on passenger vehicles in South Africa suggests that the composition of such taxes consists pre-dominantly of purchase taxes (levied on the acquisition of vehicle). in monetary terms. Unavoidable ownership taxes are based only on the weight of the vehicle. 2001).99[1] per vehicle may not be significant in influencing the purchasing decisions of consumers. the current taxes on passenger vehicles in South Africa may not represent the ideal “mix” of the different taxes considered necessary to obtain the maximum possible reduction in CO2 emissions (Hayashi et al. The assessment bases of other taxes include vehicle selling price and tare weight. ownership and usage). which are not considered to be most effective in reducing CO2 emissions. 5. and should therefore have a clear environmental objective (National Treasury (South Africa). by reviewing the vehicle license fees implemented by provinces. Furthermore.87[1] and the highest licensing fee of USD 57. as they may affect the day-to-day decision-making of consumers. the current taxes on passenger vehicles in South Africa may not represent an ideal mix of the different taxes considered necessary to obtain the maximum possible reduction in CO2 emissions (Hayashi et al. based on CO2 emissions. In addition.. From Table III. Conclusion The National Treasury (South Africa) (2010) recognises that one instrument alone is not sufficient to achieve the country’s environmental goals. Therefore. which are not considered to be most effective way of reducing CO2 emissions. but further fiscal reform in the form of initiatives in terms of other taxes/levies should also be considered in order to achieve the highest possible reduction in the CO2 emissions by passenger vehicles.In South Africa. the recently introduced vehicle emissions tax is currently the only tax levied directly on the basis of CO2 emissions. the design of taxes to reduce the CO2 emissions of passenger vehicles should consist of a mix of taxes (purchase. taxes aimed at reducing CO2 emissions should be levied directly. Complementary measures under consideration include the implementation of a CO2 vehicle emissions tax on all cars. 2006). In principle. without incorporating any component based on CO2 emissions. Usage taxes are also currently levied in all nine provinces. 2001). Based on the literature considered.. further increases are not likely to result in a further reduction of CO2 emissions in South Africa (Section 4. but no direct component linked directly to CO2 emissions.3). The introduction of the vehicle emissions tax is no doubt a step in the right direction. The literature suggests that usage taxes might be the most effective option in reducing CO2 emissions.

. who may not always take into account environmental concerns in their purchase decision-making (Nel. The incentives (provided to vehicle manufacturers and funded by the vehicles emissions tax) could encourage investment in technology to develop vehicles with lower fuel consumption and CO2 emissions. we recommend that the implementation of a “feebate” policy in South Africa be investigated in an attempt to achieve the highest possible reduction in CO2 in the automotive industry. 2008).Fiscal reform initiatives relating to purchase and ownership taxes should be considered carefully. Implementing a “feebate” policy is a possible alternative which may facilitate shifting the focus away from consumers to provide incentives for vehicle manufacturers in the automotive industry to invest in fuel economy technology (Peters et al.3). fiscal reform initiatives to reduce CO2 emissions should also include incentives (“carrots”) to encourage investments in fuel economy technology and improved CO2 emissions (Fullerton and West. Therefore. it is suggested that the focus should rather be shifted from targeting consumers to providing incentives for vehicle manufacturers in the automotive industry to invest in fuel economy technology (fuel standards that would result in the best possible fuel consumption and the lowest possible CO2 emissions). because these taxes place the onus on consumers. As consumers may not always value the impact of their actions on the environment. Gallo. . 2011). The additional taxes (levied on consumers by means of the vehicle emissions tax) will discourage higher fuel consumption or CO2 emissions. A “feebate” policy would involve both additional taxes and incentives. 2010. These incentives can be provided directly to consumers or to manufacturers. increases in transport fuel levies (usage taxes) will also not necessarily result in reduced CO2 emissions in South Africa (Section 4. Furthermore. 2009). Aside from taxes and levies (“sticks”).