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).
Bantahan:
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.
Sokongan:
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
concerns.
Purpose:
to determine the tax design(s) that may be most effective in reducing the CO2 emissions of
passenger vehicles.

Tax system explanation:

In considering the effect of vehicle taxes in reducing CO2 emissions, prior researchers have
categorised taxes into three different stages, namely the levying of purchase, ownership and
usage taxes (Hayashi et al., 2001; Kunert and Hartmut, 2007; Santos et al., 2010).
We also apply this categorisation here, because levying taxes at the different stages can have a
different impact on the reduction of CO2 emissions (Hayashi et al., 2001; Ryan et al., 2009).
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).
Example: include sales taxes (or VAT) levied on the selling price of vehicles, but also egistration
taxes and registration fees.
Argument:
Hayashi et al. (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. (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. Instead, 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
Definition: levied over the period during which a vehicle is owned, but are not directly linked to
vehicle usage. Ownership taxes are normally recurrent in nature, as they are levied on the
ownership or tenure of vehicles (Kunert and Hartmut, 2007).
Example: annual license fees, annual vehicle circulation taxes (similar to vehicle licensing fees)
and other annual taxes on vehicle ownership.
Arguments:
Hayashi et al. (2001) increases in ownership taxes produce a minimal effect on the
reduction of CO2 emissions, unless the ownership tax rate is set in proportion to actual
fuel efficiency or CO2 emissions. Furthermore, increasing ownership taxes for specific
classes of vehicles can also result in a shift to another class of vehicle. 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.
Support:

The empirical evidence presented by Beck et al. (2011) suggests that annual and variable
emissions charges are drivers promoting individuals willingness to adopt hybrid
technology
According toRyan
et al. (2009), 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.
Thesefindings suggest that ownership taxesmay bemore effective in affecting consumers
purchasing decisions than purchase taxes would be.

Usage taxes
Usage taxes depend on vehicle usage. Fuel taxes are the best known usage taxes introduced thus
far. Avoidable use-dependent fees (such as tolls fees and parking costs) are excluded here, since
vehicle owners can, to a large extent, avoid them (Kunert and Hartmut, 2007).
Support:
According to Hayashi et al. (2001), fuel taxes (usage taxes) are the most effective fiscal
instrument that can be used to help reduce CO2 emissions.
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. It seems that
the main effect of such a policy in Italy is to push car users toward more fuel-efficient vehicles
(Gallo, 2011). However, even if car users do switch to more fuel-efficient vehicles, the overall
reduction in emissions may be limited, even if it is not negligible, 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. Therefore, 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, 2011).
Value added tax
VAT can be levied across all three stages (purchase, ownership and usage) and should therefore
be considered separately as a fiscal reform instrument.
Compared to the existing uniform consumption tax or standard VAT, green products should be
promoted by imposing a lower consumption tax on them, while environmentally damaging
products should be taxed at higher rates (Albrecht, 2006).
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

owned (not directly

linked to usage)
Recurrent and directly
linked to usage

efficiency/CO2 emissions. Technology aimed

at reducing CO2 emissions is important
Highest possible reduction in CO2 emissions.
Most of the reduction as a result of a
decrease in driving distance

Other alternatives:
In a mixed stick and carrot approach, apart from purchase, ownership and usage taxes (or
sticks), environment-related taxes can also take the form of incentives (carrots) for acting in
an environmentally friendly manner (Gaffney, 2008). Fullerton and West (2010) present
empirical evidence on a fuel tax, a subsidy based on vehicle size and a new-car subsidy as
alternatives to a Pigovian tax (levied on the basis of emissions).
combination of a fuel tax (usage tax) and a new-car subsidy (incentive) welfare benefits
highlight the role of incentives, in combination with taxes which are levied, in initiatives to
address environmental concerns. Furthermore, such incentives may encourage the development
of low-consumption vehicles and cleaner fuels which other researchers highlight as important in
addressing environmental concerns (Gallo, 2011; Greene et al., 2005).
The design of current taxes on passenger vehicles in South Africa:
4.1 Purchase taxes
Purchase taxes in South Africa include once-off registration fees and ad valorem excise duties.
The vehicle emissions tax is also classified as a purchase tax, as it is a tax incurred on the initial
acquisition of vehicles and is not recurrent or linked to usage, as is the case with ownership taxes
and usage taxes
4.1.1 Registration fees.
Once-off registration fees are levied in all nine South African provinces (Nel, 2009). In all the
provinces, the current registration and licensing fees are levied according to the tare weight of a
vehicle (which represents the unloaded weight of the vehicle), without taking into account any
environmental considerations such as CO2 emissions. The registration fee levied in Gauteng is
the highest in all nine South African provinces, amounting to USD 14.87[1] (Foresight
Publications, 2011).
4.1.2 Ad valorem customs and excise duties.
Ad valorem excise duties currently levied in South Africa are based solely on price and do not
incorporate any environmental criteria (SARS, 2009).
4.1.3 Vehicle emissions tax.
Vehicle emissions tax, introduced with effect of 1 September 2010, is levied at USD 9.29[1] per
gram per kilometre (g/km) of CO2 emissions which exceeds 120 g/km on all passenger vehicles
(SARS, 2010b). There is a clear link between the objective of the tax, namely to change
consumer purchasing decisions, and the actual tax, namely a tax based on the CO2 emissions of
passenger vehicles. In addition, CO2 emissions can be accurately measured, and therefore the tax

can be seen as technically viable and it thus fulfils another criterion for effectiveness(van Aarle et
al., 2011). In principle, the vehicle emissions tax in South Africa is similar to the gas-guzzler
taxes in the USA. Both are aimed at increasing the cost of vehicles with high fuel consumption
(or high CO2 emissions), with a view to curbing the demand for such vehicles.Astudy by Greene
et al. (2005) shows that theUS gas-guzzler taxes are effective in increasing more efficient fuel
consumption, thereby lowering CO2 emissions, which suggests that a vehicle emissions tax may
achieve the objective of reducing CO2 in South Africa too. The fact that similar taxes have been
implemented in the US mitigates risks associated with unilateral implementation (Ashiabor,
2005). However, the RMI and NAAMSA question whether the vehicle emissions tax will
succeed in reducing CO2 emissions (ABR, 2010;NAAMSA, 2010). Furthermore, the prospects
of success may also be negatively affected by the focus on consumers, who may not always take
into account environmental concerns in their purchase decision-making (Nel, 2009).
4.2 Ownership taxes
Ownership taxes in South Africa include annual licensing fees. These taxes are recurrent, but are
not levied in proportion to usage. In SouthAfrica, annual licensing fees are levied in all nine
provinces. Each province determines its own registration and licence fees. These fees are
increased by proclamation in the respective provincial gazettes fromtime to time. Annual licence
fees are assessed on a vehicles tare (the unloaded weight of the vehicle) with separate scales for
vehicle types. A transaction fee of USD 4.46[1] is also added to the licence fee in every
province. For a standard-sized passenger vehicle, with a tare weight between 1,251 and 1,500 kg,
the highest annual licensing fees of USD 57.99[1] are payable in Kwazulu-Natal (Foresight
Publications, 2011). 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. However, the fact that the
environmental incentive is likely to be small is a shortcoming of this option. The National
Budget Speech for 2010 indicates that traffic congestion charges are to be investigated further in
future (SARS, 2010a), which may result in an expansion of ownership taxes on passenger
vehicles in future.
4.3 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., 2001). Transport levies
represent one of the usage taxes levied in South Africa and consist of different components as
indicated in Table II.
The general fuel levy is levied by the national government and is adjusted annually by the
Minister of Finance, whereas the customs and excise levy is a duty collected in terms of the
Customs Union agreement (SASOL, 2011). NAAMSA (2010) has indicated that if government is
really serious about penalising emissions (a proxy for fuel consumption), the authorities should
introduce an environmental levy on all fuels, petrol and diesel. However, to date, none of the
components of transport fuel levies are levied directly based on CO2 emissions. The National

Treasury (South Africa) (2006) has considered increasing the general fuel levy as an option for
reforming existing environment-related taxes in the transport sector. However, the fact that this
option may be potentially regressive has been identified as a shortcoming. In every debate over
increasing the fuel 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,
1999). In fact, an analysis of data by Mabugu et al. (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. Furthermore, 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.,
2009). Thus, it might not be regressive, but it still needs to be considered whether further
increases will result in actual reductions of the CO2 emissions in South Africa. Akinboade et al.
(2008) argue that, although further increases in fuel duty rates in South Africa will generate
higher tax revenues for government, the increases will have an almost negligible effect on fuel
consumption and the resulting reduction of CO2 emissions from fuel combustion. Furthermore,
public acceptance should also be carefully considered, 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, 2011).
In addition, apart from anecdotal evidence, there is also empirical evidence which suggests that
South Africa is a country in which motor fuel is already overtaxed (Ley and Boccardo, 2009).
Therefore, although they may be linked directly to usage, merely increasing transport fuel levies
in an attempt to reduce CO2 emissions should not be considered the first or best option.
4.4 Value added tax
In South Africa, VAT is an indirect tax which is currently levied at 14 per cent on the value of
taxable supplies. 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. Currently, 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, however, zero-rated supplies for VAT
purposes (Section 11(1)(h) of the Value-Added Tax Act No. 89 of 1991). This raises the question
of why VAT is not levied on petrol and diesel in an attempt to reduce CO2 emissions. 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 4.3) may answer this question.

4.5 Conclusion on current taxes on passenger vehicles in South Africa

In South Africa, the recently introduced vehicle emissions tax is currently the only tax levied
directly on the basis of CO2 emissions. The assessment bases of other taxes include vehicle
selling price and tare weight, but no direct component linked directly to CO2 emissions.
From Table III, 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), which
are not considered to be most effective way of reducing CO2 emissions. Unavoidable
ownership taxes are based only on the weight of the vehicle, without incorporating any
component based on CO2 emissions. Furthermore, in monetary terms, the highest rate
of registration fee of USD 14.87[1] and the highest licensing fee of USD 57.99[1]
per vehicle may not be significant in influencing the purchasing decisions of
consumers. Usage taxes are also currently levied in all nine provinces; however, further
increases are not likely to result in a further reduction of CO2 emissions in South Africa
(Section 4.3). Therefore, based on the considerations above, 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., 2001).
5. Conclusion
The National Treasury (South Africa) (2010) recognises that one instrument alone is not
sufficient to achieve the countrys environmental goals. Complementary measures under
consideration include the implementation of a CO2 vehicle emissions tax on all cars, new and
old, by reviewing the vehicle license fees implemented by provinces. Based on the literature
considered, the design of taxes to reduce the CO2 emissions of passenger vehicles should consist
of a mix of taxes (purchase, ownership and usage). In principle, taxes aimed at reducing CO2
emissions should be levied directly, based on CO2 emissions, and should therefore have a clear
environmental objective (National Treasury (South Africa), 2006). The literature suggests that
usage taxes might be the most effective option in reducing CO2 emissions, as they may affect the
day-to-day decision-making of consumers, but should be considered carefully because they could
be regressive. 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), which are not considered to be most effective in reducing CO2 emissions.
In addition, the recently introduced vehicle emissions tax is the only tax in South Africa which
takes into account CO2 emissions in the assessment base. Therefore, 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., 2001). The introduction of the vehicle emissions tax is no doubt a step in the right direction,
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.

Fiscal reform initiatives relating to purchase and ownership taxes should be considered
carefully, because these taxes place the onus on consumers, who may not always take into
account environmental concerns in their purchase decision-making (Nel, 2009). Furthermore,
increases in transport fuel levies (usage taxes) will also not necessarily result in reduced CO2
emissions in South Africa (Section 4.3). Aside from taxes and levies (sticks), 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,
2010; Gallo, 2011). These incentives can be provided directly to consumers or to manufacturers.
As consumers may not always value the impact of their actions on the environment, 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). 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., 2008). A feebate
policy would involve both additional taxes and incentives. The additional taxes (levied on
consumers by means of the vehicle emissions tax) will discourage higher fuel consumption or
CO2 emissions. 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. Therefore, 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.