Reforming Vehicle Taxes on New Car Purchases Can Reduce Road Transport Emissions -- Ex Post Evidence.

Abstract

Australia is falling behind the international trend towards low carbon transport to reduce greenhouse gas (GHG) emissions. For instance, in 2012 the Australian Government forecasts that road transport emissions will continue to increase to 2020 and then slow to 2030 because of higher oil prices and the introduction of mandatory CO2 emissions standards. The forecast assumes vehicle efficiencies of petrol and diesel engines will improve, and there will be a gradual shift to alternative technologies. However, in 2007 the European Union found that while advances in vehicle technology had delivered most of the carbon reductions, these advances were offset by new cars that had become significantly more powerful, larger, and heavier. This is the case in Australia. The paper shows how Australia can accelerate the uptake of low carbon technology through reforming existing vehicle taxes into an environmental related tax. The reform will require basing the tax on CO2 emissions from previously being based on the vehicles technical characteristics such as cylinder capacity, engine size and fuel type. The literature supports the reform of vehicle taxes into an environmental tax, which was found to be a powerful instrument in influencing the purchase decisions of consumers. Specifically, the paper examines the literature and reviews the ex post evidence on the successful reform of vehicles taxes. In the case study of Ireland, it was found that the reformed vehicle taxes based on CO2 emissions provided a strong price signal, and consumer response was greater than anticipated. As a result, Irelands ambitious targets in reducing its GHG emissions were met. The paper provides evidence to Australia’s policy makers, consultants and car manufacturers that reforming existing vehicle taxes into an environmental related tax is an effective measure in transitioning Australia into a low carbon transport and reducing road transport emissions.