Tuesday, September 28, 2010

Enter DNA Economics - Vehicle Emission Tax Debate goes on

You may be familiar with the Business Day vehicle emission tax debate as I posted here and here. The latest defender of the tax is no other than Mr. Brent Cloete whose article appeared yesterday on Business Day. He argues that the tax is a good start even though we do not have cleaner fuels in South Africa. You can read his articles below or here. What I also learned is that double cabs are not yet being charged this tax but will be charged next year in March.

Carbon tax on cars is a good start

The tax applies to domestic sales of new passenger cars and is levied at R75 (before VAT) for every gram of CO² emitted per kilometre driven above a threshold of 120g/km.

SA’s new carbon dioxide (CO² ) emissions tax aims to encourage the purchase of fuel-efficient vehicles. The tax applies to domestic sales of new passenger cars and is levied at R75 (before VAT) for every gram of CO² emitted per kilometre driven above a threshold of 120g/km. The tax will be extended to double-cabs in March (at R100 for every gram per kilogram above 175g/km) and other light commercial vehicles will follow. Minibus taxis may be included in future.

The Treasury is also considering the use of annual vehicle licence fees, differentiated by emissions levels, and higher fuel levies to give people an incentive to switch to more fuel- efficient cars.

It has been argued this tax is unfair. It requires consumers to pay indirectly for transport carbon emission without extensive public transport alternatives. There are also few truly fuel- efficient vehicles available locally (only two models fall below the threshold) since sufficient quality fuel to use the latest technologies is not available in SA, and is unlikely to be for years .

Further , the tax threshold is lower than in the UK (165g/km) and France (155g/km), where modern fuel alternatives are available. It has also been argued that the tax may be ineffectual. An average price increase of 2%-4% is unlikely to have a significant effect on purchasing decisions in the long term, and is much smaller than the 27% import tariff on motor vehicles that consumers already bear.

The tax also doesn’t give people an incentive to drive less or in a more fuel- efficient way, whereas an increased fuel tax would. Consequently, many commentators view the tax as a revenue-generating instrument masquerading as an environmental tax.

These criticisms are overstated. While it would have been much better to co-ordinate tax changes with improvements in fuel technology and public transport, it is hardly within the Treasury’s ambit to enact fuel quality standards and drive buses.

The government has chosen an ambitious emissions trajectory, pursuing targets in the Copenhagen Accord. To remain on this trajectory climate policies must be adopted early and include carbon taxes. Waiting for fuel and public transport improvements would have put SA behind the climate change policy curve.

The Treasury should be applauded for taking a leading role in fighting climate change. Although the tax isn’t large enough to change consumer behaviour directly, it will make consumers aware of the climate change implications of vehicle purchases — and the possibility that decisions now could have repercussions if an additional fuel levy or differentiated annual licence fee is introduced.

It may, however, have been wise to start with a higher threshold that moved down over time as more fuel- efficient cars became available locally. This would have given consumers more opportunity to avoid the tax, thereby allaying fairness concerns and reducing the impression that the tax is mainly aimed at raising revenue.

Finally, it is important to note that this new tax simply aims to reduce vehicle emissions. The Treasury is considering a broad-based carbon tax that will increase the price of products that are carbon-intensive to produce, like cars. If implemented as a tax on coal, which seems likely, it may also increase the cost of fuel (23% of local fuel is produced from coal-to-liquid technology). The emissions tax is thus just one component in a suite of policy instruments that will be required to reduce SA’s greenhouse gas emissions.

For the government’s efforts on climate change to work, it is critical South Africans respond appropriately. It is therefore disappointing that the Treasury’s discussion document on the use of carbon taxes, and the green paper on climate change by the Department of Environmental Affairs, were not finalised before the vehicle emissions tax was implemented. A clear indication of future policy will enable consumers and producers to adjust their behaviour pre-emptively, making current policies more effective. It would also help to allay feelings of being “caught out” by changes such as the “surprise” introduction of the CO² vehicle emissions tax.

- Cloete is an economist at DNA Economics, an economics consulting firm, and leads the company’s climate change practice

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