2010

Joint Transport Research Centre
ROUND TABLE
18-19 February 2010, ParisDISCUSSION PAPERS

8

THE IMPACT OF ECONOMIC
INSTRUMENTS ON THE AUTO
INDUSTRY AND THE CONSEQUENCES
oF FRAGMENTING MARKETSLuc BASTARD, Renault, Environment and Taxation, CFFA, FranceJOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2010-8

Prepared for the Round Table of 18-19 February 2010 on
Stimulating Low-Carbon Vehicle Technologies

THE IMPACT OF ECONOMIC INSTRUMENTS ON THE AUTO INDUSTRY AND THE
CONSEQUENCES OF FRAGMENTING MARKETS – FOCUS ON THE EU CASE

Luc BASTARD
Renault
Public Affairs, Environment and Taxation
CFFA, Vice-President
FRANCE

February 2010

The views expressed in this paper are those of the authors and do not necessarily
represent positions of Renault, the CFFA,
the OECD or the International Transport Forum.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

1

TABLE OF CONTENTS

1.

RÉSUMÉ.......................................................................................................................................... 52.

OVERVIEW OF FISCAL MEASURES IN THE EUROPEAN UNION FOR REDUCING
CO2 EMISSIONS FROM CONVENTIONAL CARS ..................................................................... 6
2.1. Some elements of context ......................................................................................................... 6
2.2. Diversity of economic instruments addressing car CO2 emissions......................................... 11
2.3. Visibility or not? ..................................................................................................................... 172.4. Why this diversity? ................................................................................................................. 18
2.5. Specific and new domains of taxation on vehicles ................................................................. 19
2.6. Some elements of their effects and some concrete examples ................................................. 222.7. Conclusions............................................................................................................................. 31

3.

HOW OEM CAN MANAGE THE TAXATION? ........................................................................ 32
3.1. Diverse customers with very diverse behaviours in relation to CO2 incentives ..................... 32
3.2. How to adapt in the short term................................................................................................ 33
3.3. How to deal with economic instruments in the future? .......................................................... 34

4.

ECONOMIC INCENTIVES FOR FUTURE EV AND VERY LOW CO2 VEHICLES? ............. 36
4.1. Policies regarding very low CO2 vehicles .............................................................................. 36
4.2. How incentives will impact the EV and low CO2 car market ................................................. 37
4.3. How States should evaluate policy value of these vehicles .................................................... 39
4.4. Which public policies to support the deployment of very low CO2 vehicles and EV ............ 39

5.

CONCLUSIONS ............................................................................................................................ 40
Paris, February 2010

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 20103

1. RÉSUMÉ

For several years now, numerous States and Regions have developed policies to reduce CO2
emissions from the transport sector. More precisely, CO2 emission reductions from cars were in mostcases the first target of these policies. Over the last two years, policy makers have tightened the rules
currently in force and developed new regulations, in line with public concern about Climate Change
and the growing importance of energy policies.
Policy makers can use a variety of instruments in implementing policies. We can identify inparticular: regulations, taxation and incentive schemes, consumer information, or a combination ofthem.
This paper will focus on taxation issues addressing CO2 emissions in the European Union. Whenobserving the different systems in place, a very broad diversity appears even with a cursory firstglance. Actually, the diversity of taxation schemes among the Member States is such that it
jeopardizes the concept of a Single Market in the European Union. Furthermore, this tax environment
is not predictable. Even if the question of the efficiency of using such taxes to reduce CO2 emissions is
put to one side, cost-effectiveness is an important issue, including in terms of the consequences forvehicle and component manufacturers.
This paper is divided into 3 sections. First, the diversity of the schemes will be analysed in termsof intensity and predictability, in order to identify the key consequences for manufacturers. This will
be illustrated with different examples. The second section comprises a short description of how theOEM can deal with the diversity and unpredictability of taxation. In the third section a specificanalysis of policies addressing “electric vehicles (EVs) and very low CO2 emitting vehicles” will bepresented.
This paper is developed from a manufacturer’s perspective, not from a policy maker perspective.
It intends to give a practical understanding of the diversity of economic instruments from amanufacturer’s point of view and examine how an OEM (original equipment manufacturer) can try to
manage this diversity. The paper does not attempt a complete political and economic evaluation of thevarious policy options, which would be a very complex exercise considering the different andcumulative instruments applied simultaneously on car markets and the dynamics of the wider
economic environment including the impact of both the current economic crisis and the evolution ofoil prices.
For manufacturers, the key issues regarding taxation are twofold:Mid- & long term, when defining the product plan and designing new vehicles and new
powertrains: how to anticipate the fiscal environment of the vehicles in a time frame up to
10 years, as CO2 taxation will impact the competitiveness of the product, and even possibly

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 20105

accelerate its obsolescence. How fiscal measures and regulations will interact together. And
how to arbitrate between costs and CO2 performances of a car, in a highly competitivemarket.
Short term: how to prepare or adapt the marketing of vehicles in each country to CO2
taxation which weighs on the market and competition more than ever, with effects that differ
with customers.
Key conclusions are:
The current economic instruments applied in the EU do produce a strong environmental
incentive, driving a decrease of the CO2 emissions of the new car fleet.
The current fragmentation of regulations and taxes seriously complicates manufacturing
decisions and represents a significant cost.
Incentives should be designed to correlate as closely as possible to CO2 and other aspects ofthe environmental performances of vehicles.
In this very mature industry new, innovative technologies will require extensive support
from national Governments, with legitimate potential benefits for climate change policies.

2. OVERVIEW OF FISCAL MEASURES IN THE EUROPEAN UNION FOR REDUCING
CO2 EMISSIONS FROM CONVENTIONAL CARS

2.1. Some elements of context
As of the beginning of 2010, 16 EU Member States have put in place one or several economic
measures intended to reduce CO2 emissions from cars. Most of them were introduced in the last
3 years.

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Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

EUROPEAN FISCAL CONTEXT ON CO2
Beginning 2010

E85

E85
E85

CO2 rules
16 countries

E85

Alternative fuel incentive

LPG
E85
LPG
E85/LPG(LPG/CNG/E85 …)
9 countries

LPG< 120gA large number of these policy developments were simultaneous with, or close to the period
where the EU regulation on car CO2 emission reductions was discussed and adopted, and close to theend of the Voluntary Commitments made by three car manufacturer associations in 1998/99. The
Voluntary Commitments set a target of 140 g/km for the average CO2 emissions of the new car fleet,by 2008 for ACEA, 2009 for JAMA and 2009 for KAMA. After agreeing industry’s Commitments,
the Commission suggested in its recommendations that the Member States establish taxation schemes
based on CO2 emissions to provide a demand side incentive for meeting the target; this was noteffective at the beginning of the period of the Commitments as governments were slow to differentiate
existing taxes according to CO2 emissions or introduce fee-bates. Only very late on did momentum
build for tax differentiation, by which time it already appeared that a regulatory EU standard for CO2
emissions was inevitable, in response to a period of slower than hoped for progress in reducing
average CO2 emissions from the new car fleet.
It is also important to note that the Commission adopted in 2005 (Community reference:COM(2005)0261Final of 5 July 2005) a draft for a Directive on car taxation addressing CO2
emissions, but this draft was finally never adopted by the European Council. Vis-à-vis CO2, the draftcontained two main elements: all or a major part of the taxation of cars should be based on the CO 2
emissions of the vehicle, and the taxes on vehicles should be based on ownership and annual taxes,
rather than on purchase.
When analysing taxation and its effects, one should admit that 2008 and 2009 were not “normal
years” with respect to the car market. The setting and the impacts of tax differentiation schemes
cannot be analysed independently of two key elements with deep impacts on the economy as a whole,on purchasing power, on key patterns of consumption, on mobility and on the car industry itself:
1. The evolution of the oil price, with its impacts on fuel costs in 2008.
This element itself impacted purchasing patterns of both private and professional buyers, as it
made clear that the part of fuel cost in mobility was highly variable and likely to increase. Thiscertainly induced changes in the market, as consumers now bear in mind that the fuel price is anuncertain and major part of their transport costs (Transport costs represent on average 12% to
15% of household consumption in the EU).
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 20107

2. The crisis in 2008–2009, with its direct impact on markets, distribution networks, industry
and the economy as a whole, on purchasing power and on consumer confidence.
The crisis deeply affected the market and the automotive industry as a whole (see table). Due tothe importance of this sector for the economy, it forced Governments to adopt specific measures
to support distribution networks and the automotive industry – manufacturers and suppliers – innumerous countries in the EU. Mid-2009, 17 EU countries, representing more than 85% of the
new car market, had specific schemes in place, some of them having decided and others still
considering extension of their measures in 2010. Many of these schemes took the form of
incentives for purchasing a car and scrapping an old one; others took the form of loans for car
purchase. They presented a large diversity in monetary value, criteria and duration.

Production of cars wordwide
Comparison 3 quarters 2008/2009
Source OICACARS only

2008 Q 1+2+3

2009 Q 1+2+3

VARIATION 09/08

PdM 2009

EUROPEFRANCEGERMANY(1)ITALY
ROMANIA
TURKEYAMERICA- NAFTAUSA
SOUTH AMERICA
ARGENTINA
BRAZIL
ASIA-OCEANIA
CHINA
INDIA
JAPAN
SOUTH KOREA
AFRICA
SOUTH AFRICA

14 853 930
1 773 633
4 350 927
556 660
185 027524 329
7 224 017
4 789 546
2 956 456
2 434 471
315 445
2 096 618
18 083 252
5 187 998
1 451 391
7 699 319
2 566 899
266 131
243 462

10 970 307
1 288 878
3 610 993
498 603
201 545374 927
4 901 673
2 730 427
1 520 946
2 171 246
257 276
1 898 486
16 525 265
7 155 866
1 565 985
4 709 218
2 195 137
157 667
155 402-26,1%-27,3%-17,0%-10,4%+8,9%-28,5%-32,1%-43,0%-48,6%-10,8%-18,4%-9,5%-8,6%+37,9%+7,9%-38,8%-14,5%-40,8%-36,2%

33,7%
4,0%
11,1%
1,5%
0,6%
1,2%
15,1%
8,4%
4,7%
6,7%
0,8%
5,8%
50,8%
22,0%
4,8%
14,5%
6,7%
0,5%
0,5%

Change PdM
09 / 08
-3,0%
-0,4%
+0,3%
+0,2%
+0,2%
-0,1%
-2,8%
-3,5%
-2,6%
+0,6%
+0,0%
+0,6%
+6,0%
+9,1%
+1,2%
-4,6%
+0,4%
-0,2%
-0,1%

TOTAL

40 427 330

32 554 912-19,5%

100,0%+0,0%

Scrappage schemes in EU, Dec 09
Source Renault

8

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

In summary, average CO2 emissions of the new car fleet in the EU decreased in 2009 by 7 g/km,
following a decrease of 5 g/km in 2008 compared to 2007 (source: AAA, preliminary data for 2009that might be refined in the coming months). Compared to the trend over recent years, this represents a
rapid acceleration. All the elements above – taxation, scrappage schemes, oil prices – have influenced
this significant decrease in new car emissions.
When considering the different EU countries, we can observe in the 2006 – 2009 period very
different evolutions in the emissions of new cars: from -24 to -7 g in absolute values, from 15% to 4 %relative to 2006. And we can still observe a very large range of CO2 fleet average values, from 165 to
134 g/km in 2009 (this range narrowed from 45 g to 30 g in recent years). The ranking below is basedon the percentage decrease in emissions between 2006 and 2009.
EU 15 - Average fleet CO2 value 2006 - 2009 and evolution (absolute and %)Country

A 06

A 07

A 08

A 09

GRECE
BELGIQUEITALIEPORTUGALLUXEMBOURG
AUTRICHE
ESPAGNE
Europe 15
ALLEMAGNEROYAUME-UNIPAYS BASFRANCESUEDE
FINLANDEIRLANDEDANEMARK

169
153
149
144
165
162
156
161
172
167
165
150
188
179
166
163

167
153
147
143
164
162
157
159
170
164
164
149
182
178
165
157

163
149
146
138
160
159
152
154
165
159
157
140
175
162
159
146

162
145
141
136
155
151
145
147
154
150
148
134
165
157
145
139

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Decrease 2009
- 2006
7
8
8
8
10
11
11
14
18
17
17
16
23
22
21
24

Decrease %
09/06
4,3%
5,1%
5,3%
5,4%
6,1%
6,9%
7,2%
8,7%
10,4%
10,4%
10,5%
10,5%
12,5%
12,5%
12,5%
14,9%

9

New car fleet, CO2 average, 2006 – 2009; EU 15 average, main countries and extreme
countries

New car fleet, CO2 per class of CO2, 2005 – 2009; 5 main EU countries, average

10

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

2.2. Diversity of economic instruments addressing car CO2 emissions
2.2.1.

Overall development in the last years

Car taxation in the EU is very diverse and complex. As an illustration of this point, the tablebelow indicates for EU countries some of the criteria used in determining taxation in 2007 already;this has since become even more complex.

Incentives based on technology-specific criteria

Date/age

Price

EmissionsPower (kW, hp)

WeightCO2 / fuel cons

Cyl. Capacity

Vehicle characteristics

Country

RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT

CyprusCzech Republic
Germany
Denmark
Estonia
Spain
FinlandFranceGreeceHungary
Ireland
Italy
Lithuania
Luxembourg
LatviaMalta
The Netherlands
PolandPortugal
SwedenSlovenia
Slovakia
United Kingdom
Bulgaria
Romania

NorwaySwitzerland

Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car
Private vehicle
Fleet / company car

' 08

Taxis

' 08

' 08

RT: Registration Tax
AT: Annual Circulation Tax

Austria
Belgium

Safety
CO2
EV
HEV
LPG
CNG
E85
B30
DPF
features
RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT RT ACT

'08

'08

Private vehicle
Fleet / company car
Private vehicle
Fleet / company car

The taxation specifically related to CO2 emissions is in itself very complex. It associates
numerous parameters that are managed independently by the EU Member States that will be described
below. It is also very unpredictable: Member States may change these parameters on a time-frame thatis very short in comparison to product planning and industrial planning cycles for the car industry, oreven compared to yearly sales and marketing planning.
This diversity, along with this high level of unpredictability, creates a real difficulty for
manufacturers. 16 EU Member States have currently put in place one or several fiscal dispositions
intending to reduce the CO2 emissions of the car fleet. These elements were mainly adopted in the last
3 years. Their setting was quite simultaneous with, or close to, the period where the EU Regulation on
car CO2 emission reductions was negotiated and adopted. When it agreed to the industry CO2
Commitments, the European Commission suggested that the Member States develop taxation schemes
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201011

based on CO2 emissions. Further to that, the Commission adopted in 2005 a draft for a Directive
relative to car taxation, addressing their CO2 emissions, but no text was finally adopted by the Council
due to objections from some of the States. Vis-à-vis CO2, the draft contained two main elements: all ora major part of the taxation of cars should be based on the CO2 emissions of the vehicle, and the taxes
on vehicles should be based on ownership and annual taxes, rather than purchase.
Comparing when EU Member States introduced their economic instruments addressing CO2
emissions, some of them acted rather early (Portugal, France, UK, The Netherlands), others have only
just adopted or started implementing new schemes (D, Slovenia,…), and some are still only at thestage of contemplating or studying introduction. Those with a scheme in place implemented them
progressively.
2.2.2.

Criteria for CO2 taxes and incentives

Independently of measures adopted to address the crisis, the diversity of forms of CO2-basedtaxes and incentives is obvious. The criteria on which incentives are based can be categorised asfollows:-

Form of taxes on conventional cars: on new cars at purchasing (Registration tax, RT), on the
fleet (Annual Circulation Taxes, ACT) or on usage (Fuel taxes, Carbon Tax, in the future“pay as you drive”, or even possibly “congestion charges”). (We do not deal with taxes
related to registration of the Second Hand cars here, with specific issues for imported
vehicles).
o The move from RT to ACT, that was a target of the draft directive of the Commission
related to car taxation, is not generally seen as a result of the changes in taxation.
o Instead, countries tend to retain their existing systems of taxation and replace parameterslike engine capacity or price with taxes based on CO2, totally or partially (Portugal, NL,
Germany for instance).

-

Who bears the cost of the tax? The owner in most cases, the user in some cases (i.e.UK
Company car tax). But note that different types of customers for the same segment or productcan bear a very different level of tax, in case of company cars.

-

What is the basis for establishing the monetary level of the tax paid? The criteria for CO2 isquite systematically the CO2 certification value corresponding to the NEDC (New European
Driving Cycle) used for type approval of new vehicles; the value itself can depend only on
the CO2, or on a calculation that can include the price, or the engine capacity in some cases,
even if this criteria is becoming less frequent:o The value of the tax/incentive is directly related to tested CO2 emissions rating in France,
UK, Portugal (Progressive implementation, initially a tax based on engine capacity only).
o The tax is a percentage of the price depending determined by CO2 emissions rating inSpain, NL (Progressive implementation), and Belgium.
o The rate of tax is determined by a mix of criteria such as CO2 and engine capacity, forexample the new taxation scheme in Germany.

12

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

-The system can be “fuel neutral”, or otherwise:o The system can be based specifically on the CO2 certification value, which is neutral
vis-à-vis fuels, or differentiated among fuels. This adds a lot of complexity for
manufacturers: very different fuel mixes exist among EU Member States, and even atsegment level, independently of differences in fuel prices.
o This policy choice, fuel neutral taxation or not, is often driven by consideration of nonCO2 emissions. We can anticipate that the difference in non-CO2 emissions between
gasoline and diesel ought to narrow in the future with Euro 5 and Euro 6 standards.

In terms of format, these systems are not linear and rarely continuous. Most of them include
thresholds, with some times highly discriminating gaps when passing from one band to the next
(i.e. on registration taxes: up to 1 000 € for instance in France, up to 1 500 € in Spain for a
30 000 € car passing a threshold adding 5% to the tax rate). These thresholds are not coordinatedamong Member States at all. They create strong discrimination between products and versions ofvehicles. They are the source of an extreme diversity in EU markets. They are one of the mostcomplex issues for manufacturers because of the following factors:
o Optimization in the different countries is quite impossible, as it requires specificadaptations of the vehicles.
o No or limited visibility exists on these thresholds, except for some countries. Therefore,
product planning cannot be established on the basis of a robust scenario related totaxation and incentives, including for relatively low volume products like LPG or CNG
requiring specific investments. Current example: discussions in Italy on thresholds for
CNG and LPG, and for a scrappage scheme.
o Such thresholds can have a very strong effect on consumers, who either want to reducethe cost of vehicle ownership and usage, or in some cases place a specific importance in
avoiding paying a tax, in particular if the threshold acts as a “lower trigger” for the tax;
you pay nothing if you are below, you pay the full tax if you are above the threshold.
This is the case in the Netherlands and Germany, and to a lesser extent in France andSpain.
o The way they impact the market is very uneven between the different car segments of agiven market, and also on a given segment between the different markets.
 In the case a significant threshold cuts a product segment in two parts it can fullyorient demand to the lower CO2 vehicles.
 When thresholds are established or changed, they can cause versions or even themodel line to become instantaneously unmarketable; such policy instruments may
accelerate the obsolescence of products, and manufacturing capacities for vehicles orengines.
o Some examples of thresholds:
 Spain: Registration Tax rate of 0%, 5%, 10%, 15% of the price of the car dependingon the CO2 value: lower than 120g, between 121 and 159, or 160 and 199 g, or
higher than 199 g.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201013

 France: the different fiscal instruments on cars – TVTS (ACT for company cars),
Bonus/Malus, Technology incentive for HEV/LPG/CNG among others – havethresholds. (Note: the thresholds of the Bonus/Malus, the TVTS and for CO2
labelling are not the same, and they do not evolve consistently; this makes
communication towards customer on CO2 complicated).
 Germany: continuous ACT, but a low trigger, that significantly influencescompetition in the lower (A/B/C) classes.
-

A number of specific cases for Passenger Cars (M1 vehicles) among EU countries:o Technology incentives for Hybrid or Alternative energies (CNG, LPG in particular) thatare sometimes very high and directed to specific products, with or without CO2 criteria.
o Specific incentives on cars compatible with certain biofuels or on Environmentally
Friendly Vehicles.
o Exemption of taxes or fees related to the usage of the vehicles; i.e. exemption for “clean
vehicles” from the congestion charge in London or from the public parking fee andcongestion charge in Stockholm.

-

2.2.3.

Additionally, Light Commercial Vehicles (LCV/N1 vehicles) are so far rarely subject to CO2
taxation in the EU. The importance for the professional users of the cost of usage, whatever
way they assess it, and the share of fuel cost in the global cost ownership create a strong
incentive for fuel economy for LCVs. Therefore CO2 taxation of the LCV/N1 segment would
not have as big an effect in stimulating fuel efficiency as for private cars. In the EU, somesmall LCV vehicles and the powertrains of most of the LCV are derivates of M1
vehicles/powertrains, and benefit from their improvements directly.
Great diversity in the intensity of tax incentives

From a manufacturer perspective, two key parameters emerge from a taxation scheme: the overalllevel of the taxation and the intensity of the CO2 differentiation. The rhythm of evolution varies also
along Member States. The net effect on markets and customers results from the sum of these
intensities combined with fuel prices, which also depend on taxes and varies quite widely between
countries and between fuels.
2.2.3.1. Overall level of taxation
Depending on the country, the level of average tax per vehicle can vary considerably, as well as
the level of CO2 tax. Examples:

14-

Some countries have particularly high Registration Taxes that are not CO2- related: Denmark,Greece for example.

-

In The Netherlands, the average level of RT is high; it combines a high percentage (27.4%
in 2010) of the retail price, elements related to energy and emissions, and a share based on
CO2 that will progressively increase. This is also the case of the RT in Portugal that isindexed on CO2 mainly.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

-On the contrary, in France, the only heavy economic instrument that applies to cars owned byprivate customers is a registration fee/rebate. The “Bonus/Malus” system eventually lead in2009 to a public expense of more than € 500 M, equivalent to 0.5 % of the total turn-over ofthe new car market.

CO2-related or not, the large differences in levels of taxes affect the manufacturers in terms of
product development and marketing, as they modify the retail price of the same vehicle from one
country to another, and therefore the mix of products and fuels demanded, as well as the rhythm ofrenewal of the fleet. To illustrate and quantify this effect, in the Renault case, two examples based on
the above mentioned countries follow:-

The taxes on a Twingo (Gasoline Version /1.2 l/120 g/km) range in 2010 from a bonus of
700 € (France) to a cost of 1 800€ (NL) including a CO2 part of 340 €. The total difference of
2 500 € for a car of around 10 000 €, that is 25% of the basic retail price, makes themarketing of this simple vehicle very different in the two countries.

-

The same year, the taxes on a Scenic (Diesel Version /1.4 l/135 g/km) are in a range of 0 €(France) or 120 € (UK) to 7 500 € (NL), 30% of the basic retail price of the car.

2.2.3.2. Intensity of CO2 differentiation
This parameter is of utmost importance, as it drives the choice at the point of purchase, and caneven drive the decision to purchase a new car to replace an existing high emission vehicle: whether thedifferentiation is strong or not, it impacts the choice of new cars, with various ways of evaluation bycustomers.
Comparison of incentives can not be direct because of the wide differences between national
systems. But starting from estimations of the slope in €/g of CO2 at certification, one way to compare
incentives consists in defining the equivalence of a taxation in € per ton of CO2 saved on the basis ofsome simplifying assumptions: taking a range of CO2 values covering most of the market i.e. 100 to
200 g/km, for cars driven mileages of 200 000 km over the average vehicle life-time and
15 000 km/year. This does not take into account effects of thresholds on specific segments or products,
but allows a first simple comparison among countries and between measures.
Measures exist already that are very intense and highly discriminating in the market. In somecases, they correspond to a value of the ton of CO2 much higher than in current trading systems, andup to € 1 000. In summary:-

Spain, Portugal and The Netherland apply, on average, high registration taxes, withsignificant intensity amplified by thresholds making their effect stronger and uneven among
segments.

-

France and UK apply high Company car taxes, that are in a range of 1000 €/ton. While theintensity in France is quite even among segments, this may not be the case in the UK, with ahigh intensity on upper segments resulting from the application through personal income
taxes.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201015

Some examples:-

In France, the purchase Bonus/Malus is a registration tax equivalent to 150 €/ton, and the
TVTS tax on company cars (paid by the companies) reaches € 3 400/year for vehicles
emitting 200 g/km, and even € 2 400/year for those emitting 160 g/km. It is equivalent to€ 1 000/ton of CO2.

-

In The Netherlands, a complex registration tax scheme is being introduced progressively,
with a CO2 share that is today equivalent to 200 €/ton, but that will become three times
higher by 2013. For a gasoline car, this CO2 part is today € 0 for CO2 if CO2 ≤ 110g, € 2 400
if CO2 = 180 g, ~ € 7 000 if CO2 ~ 220g. And in 2013, € 7 000 if CO2 ~ 180 g.

-

In Portugal, where the registration tax based now on CO2 and engine capacity reaches€ 10 000 for a diesel car emitting 200 g/km, the intensity of the RT is estimated as high as~ 500 €/t on diesel and ~ 300 €/t on gasoline.

This level of differentiation (1) may change in the time – this was the case in Portugal, with aprogressive shift from a tax based on engine capacity and energy to a CO2-based one – and (2) has tobe appreciated in connection with other taxes/incentives applying in the country, as some of them havesettled a package of measures, including different tax policies on fuels.
2.2.4.

Technology incentives

Depending on national policies, we can identify technology incentives in particular for hybrid
vehicles. As a matter of principle, technology incentives are not generally supported by manufacturers,
because they discriminate among technologies without considering their actual efficiency, and because
they may impede the development of other, possibly more promising, technologies in competition
with those benefiting of the incentives. (Issues related to very low CO2 and electric vehicles aredeveloped in Chapter 3).
In some cases, evaluating the value of the CO2 attached to these incentives reveals very highlevels (France: 2 000 € for a hybrid car correspond to more than 600 €/ton of CO2 compared to CO2
efficient comparable vehicles, when comparing CO2 emission on life-time usage).
A large diversity of such incentives exists in the EU, with a wide range of values. This diversity
does not help the development of these cars. Market penetration is low and product offer has beenslow to develop despite high levels of incentive: these policies are not very effective.
Furthermore, the potential of technology incentives for CO2 improvement remains questionable
in the EU where a majority of the market is for small and medium sized cars, with already a high CO2
efficiency and rather low prices. In such conditions, massive CO2 reductions rely basically on
improving CO2 efficiency of conventional vehicles with technologies that are affordable, in a very
competitive market where prices are the first criterion for most customers and fuel efficiency thesecond most important criteria.

16

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

2.3. Visibility or not?
2.3.1.

Why visibility is crucial for manufacturers?

For manufacturers, taxation becomes a major driver regarding product planning, marketing,manufacturing investment and production:-

Mid- & long term, when defining the product plan and designing new vehicles and new
powertrains: how to anticipate the fiscal environment of the vehicles in a time frame up to
10 years is crucial, as CO2 taxation will impact the competitiveness of the product or possibly
render some products unsellable. How fiscal measures and regulations will interact together
is also key.

-

Short term, when preparing the marketing of the vehicles in each country, as CO 2 taxation
now weighs on the market and competition more than ever, and in different ways depending
on customers.

2.3.2.

Unpredictable procedures

Depending on the countries and the kind of measures, the legal form of schemes can be very
different. This form can be either a law or another form of Government decisions such as a decree. As
an example, in France, the “Bonus/Malus” system requires two different texts: a law, adopted in theannual fiscal law, for the “malus” that is a tax, and a decree for the “bonus”, that is not a tax but an
incentive, and does not need a law to be set up.
Lack of visibility is a direct consequence of this diversity in the nature of texts and procedures:
car taxation, as with other laws related to taxation, is often established or revised in the annual fiscal
budget under the full control of the Parliament. This procedure makes the information for
manufacturers certain only very late, and stays open for late changes in some cases after adoption of
the budget in principal. Other Government initiatives can make the preparation of the measures moretransparent.
In some cases, due to the nature of the measure, the Government publishes its intentions only
very late; this can even happen in agreement with the manufacturers and distributors if the measure is
supposed to have a strong and negative impact on the market. In Spain, a new format for theregistration tax, to be applied as from beginning of 2009, was announced in September 2008, themanufacturers were forced to offer to new car buyers compensation for a future bonus for lower CO2
emitters until the end of 2008.
2.3.3.

Improvements to visibility: dates and thresholds

From a manufacturer’s perspective, visibility is a necessity. Manufacturers note morepredictability in a strong policy setting. The countries below have announced plans for their schemesin advance:-

Germany: up to 2014.
The Netherlands: elements announced up to 2013.
France: from 2008 to 2012.
UK: up to 2011.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201017

In these cases for example, the key thresholds structuring the schemes have been defined forseveral years (Graph below). But note that, for instance, France has recently modified elements(values and, more important for manufacturers, thresholds) that were fixed end of 2007 for applicationin 2012, in order to limit the cost of the “bonus/malus” system to the State. In the end there is no suchthing as full regulatory certainty for these schemes.

2008 european labelling

It is also worth mentioning that some convergence is apparent on lower thresholds, which might
have been influenced by the 2020 target value adopted in the EU regulation on car CO2 emission
reduction – a target of 95g/km, subject to review before it becomes binding. Several countries use
95 g/km as a criterion in their taxation, in the same way as some countries earlier used 120 g/km, as apoint of reference. The graph below indicates how the thresholds in some key EU countries will move,
between 2008 and 2014, in so far as they are defined today.

Thresholds sliding in France, UK, Germany, Netherlands(announced or voted)
95
70

80 90

A

100

110

120

160

130
140

9

B

C

150

D

170

180

E

2014

2013

2012

2011

2010

2009

60

2.4. Why this diversity?
Without contesting the total sovereignty of European Member States for fiscal and taxation
policy, this diversity merits question. To date the bodies and institutions with legal rights in regard totaxation have worked without considering that their individual policies would totally fragment themarket, with a risk on the possible efficiency and effectiveness of their CO2 policies, or at least of highcosts for the industry.
2.4.1.

European level

With the exception of the 2005 draft directive, the European Commission has not appeared toconsider convergence among Member States important. The draft directive contained three items:
18

Move taxation of vehicles from current criteria to CO2 emissions, with reference to the typeapproval test certification value.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

-Use annual taxes on vehicles rather than purchase taxes; this is considered by many
politicians to be more effective towards CO2 emission reductions, and more consistent with
the Single market.

-

Install a system of compensation payments when people move from one to another EU
Member State, in order not to impair the free mobility of goods in the Union.

This third, very specific item relative to the Single Market probably made the proposal of theCommission unnecessarily complex, and did not help during the later discussions.
While manufacturers systematically requested reducing the diversity of taxation schemes acrossthe EU, they did not have any key to get it, in particular because they did not get any support
from EU bodies for it. In terms of institutional procedure, one way forward could be an initiativefrom a sufficient number of countries accepting to establish “concerted cooperation”.
2.4.2.

National developments

In some cases, a fiscal scheme based on CO2 has been developed as a continuation of an existing
system. This is in particular the case in Portugal, to a lesser extent in Spain, with a shift from one
previous criterion, often engine capacity, to CO2. Therefore, the earlier diversity among countries
continues even if they modify their scheme.
However, in a number of countries, the CO2 scheme was developed independently of a previous
system. This was the case of France, Belgium, and Slovenia. In these cases, the systems were
established without any concern of consistency or similarity with other countries, leading to this vast
diversity.
2.4.3.

Regional implications

Additionally, other diversity appears sometimes at regional level. This makes for even more
fragmented markets, with quite unique specificities.
In Belgium, there is one system at the national level and another at the level of the Wallon region.
In some countries, taxes rates differ by region. This most often concerns registration taxes but
generally differences are not very significant. However, this may have some impacts at the marketinglevel for distribution companies.

2.5. Specific and new domains of taxation on vehicles
In addition to the above items, there are other elements subject to economic incentives or taxes,
with an impact on the orientation of markets. These cover alternative fuel vehicles and taxation offuels, in particular in connection with biofuels. These two items impact significantly on manufacturers
because they require specific development of engines, with resource implications. The visibility ofthese policies is rather low, and they correspond to national choices creating further significant
fragmentation in the EU market.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201019

2.5.1.

Alternative fuel vehicles

Numerous countries have specific incentives for alternative fuel vehicles, without any common
scheme, resulting in a very fragmented market among the EU States. The continuation and ending ofsuch schemes is a permanent uncertainty, in particular when State budget are constrained drastically.
The motivations for Member States to develop these fuels can differ:-

Either energy diversification, in particular in countries that have specific energy resources.

-

Or environmental benefits. It is to be noted that certain alternative fuels allowed significantly
lower polluting emissions in the past, but the gap with conventional fuels was reduced with
the new Euro standards.

Alternative fuel vehicles remain not actually marginal, but represent low volumes in thesecountries in most cases. It is difficult for manufacturers:-

To anticipate which policies the Member States will implement, and to which extent thesepolicies will be robust and continue, and lead to a viable market or not, with several examples
of abortion of alternative fuel policies (biofuels, CNG, LPG).

-

To arbitrate in their development of engines, in a context of limited resources both in workforce and for investments. Eventually, they are forced to adopt strategies limiting market
risks, which might be far from optimal.

2.5.2.

Energies, biofuels taxation developments

Road fuel taxation brings in important tax revenues for EU Member States, with commonly 2/3 to
3/4 of the final price of the fuel made up of taxes. Fuel price are quite different, however, between
countries, with specific policies and exemptions adapting to national situations, i.e. lower-thanaverage purchasing power, or specific dependency on road transport for necessary mobility of thecitizen, or national energy sourcing policy. Depending on the country, differences among fuel prices,
i.e. between gasoline and diesel, or between LPG and gasoline, can vary significantly among
countries, some having specific policies for or against a given fuel, beyond average fuel taxation.
Fuel price drives the cost of usage of vehicles directly and is therefore an important criterion forcustomers, and manufacturers permanently monitor and forecast them, in order to assess their impact
on the competitiveness of their products.
The purpose here is not to oppose fuel taxation, that is unavoidable for various reasons, but toreaffirm that a minimum of visibility on fuel prices and consistency within the European Union
regarding the taxation of the different fuels is important for manufacturers, independently of oil pricevariation impacts. This parameter indeed drives the balance among types of powertrains on the market,
some times over the short term, and manufacturers feel impacts in terms of both engineering andmarketing.
The overall tax rates on the major fuels do not usually show strong variation over time in mostcountries but the oil price itself adds strongly to the instability of the fuel prices. Regarding the taxes
on and the price of road fuel, three evolutions are currently possible, that would have eventuallysignificant impacts.

20

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

2.5.2.1. Taxes supporting Biofuel
Consistently with the EU climate policy, Member States are implementing policies to develop
biofuels. Without expanding on the controversial subject of biofuels, or on the car technology aspects
related to them, it is worth mentioning that:-

There is no common or visible policy in the EU in regard to these fuels, except for average
incorporation targets to be met at national level.

-

The existing standards for biofuels, in particular for blending biodiesels in diesel fuel, areinsufficient to guaranty a sufficient fuel quality.

-

As a consequence, various fuels, not always fulfilling all standards, are already distributed in
the EU, and manufacturers are forced to develop their product offer without being able toanticipation the future development of the market. Examples are B 7 and even B 20, or E 10
available in some countries.

-

In some countries, biofuel development policy relies on tax/penalty systems that ultimately
increases fuel prices. Example in France, where UFIP (Union Française des Industries
Pétrolières, French Federation of Oil Industries) indicated prices would increase by 0.02 to
0.03 €/litre in 2010.

2.5.2.2. Commission draft amending the Directive on Energy Taxation
Current taxation of energy in the EU is based on a specific Directive (2003/96/CE) from 2003),
that fixes minimum taxation for each type of fuel. The commission is currently preparing a draft for arevision of that Directive, with a view to align taxation with the overall CO2 emission reduction
policy.
Some elements have already been discussed. In particular, the taxation of road fuels would bebased on two parameters, the Carbon content and the Energy content of the fuel, on a volumetric basis,
and a progressive alignment of national taxation would be required.
This evolution would lead to a significant increase of diesel prices, which is counterproductive to
CO2 emission reductions. Basically, taxing road fuels on a basis of energy/litre or carbon/litre
disregards the significantly (15 to 20%) better energy efficiency and higher energy density of diesel.
Even if performance of gasoline vehicles is expected to improve in the coming years with new
injection technologies, they are not expected to equal those of diesel.
This revision of the Energy Directive might therefore induce significant changes in the medium
term in fuel prices that would add to the difficulties in manufacturers’ planning and investment for
reducing CO2 emissions.
2.5.2.3. Carbon tax
Several EU Member States have set or are setting « carbon taxes » that also weigh on fuel prices:
Sweden, Denmark, Finland and now France. The concept consists in applying an additional tax,
correlated with the CO2 emissions of the energy used by the consumer. This is an additional pricesignal for CO2 emission reductions. Exemptions exist, for example industries, including those eligible
for inclusion in the European Emissions Trading System (ETS) can be exempted.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201021

This tax raises several issues:-Competitiveness effects compared to imported products. It should be considered howeverthat this would not be the single regulation possibly creating distortions of competition andhampering the competitiveness of the EU.

-

Visibility for economic operators, either in the energy supply or with energy intensive
activities. In France, the initial level is set at 17 €/ton of CO2, but the initial recommendation
was more than 30 €/ton, and it might reach much higher figures in the middle of the decade.

2.6. Some elements of their effects and some concrete examples
2.6.1.

The effects of economic instruments on CO2 emissions

As mentioned in the introduction, after a certain stagnation since the middle of the decade,average CO2 emissions from new passenger cars have decreased in the EU since 2007 much more
quickly than previously. They decreased by 7 g/km in 2009 compared to 2008, and by 5 g/km in 2008
compared to 2007 (source: AAA, preliminary data for 2009 that might be refined in the coming
months). Compared to the previous trend, this is a rapid acceleration, as the decrease was previously
close to 1 g/year.
All the elements above – taxation, scrappage scheme, oil prices – have contributed to thissignificant decrease, and the contribution of each of them is not directly measurable. However, insome countries, some direct effects can be appraised. Two examples are given below, based onmonthly average CO2 figures (see figure):
In Germany, while a significant trend of decrease was visible on 2007-2008, a gap of about
8 g/km can be observed at the setting of the scrappage scheme at the beginning of 2009, even if thescrapping scheme wasn’t based on CO2. It will be of interest to monitor how CO2 will evolve when
this measure ends.
In France, the introduction of the Bonus/Malus and the setting of the scrappage scheme at the endof 2008 are visible, even in a car market with already very low average CO2 emissions: about 9 g for
the Bonus-Malus, and additionally 6 g for the scrappage scheme.
In both cases, the decrease was mainly linked with a change in technologies. It can be estimatedthat in 2006–2009, improvements in technology was responsible for approximately two thirds of theCO2 reduction in Germany, and three quarters of the improvement in France, the remaining comingfrom the change in the product mix in the market. What cannot be identified among these decreases isthe effect of the fuel prices, in particular with the peak in the summer of 2008.

22

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Monthly evolution of CO2 G and F 2007-2009
180
175
170

CO2 average value

165
160
Germany

155
150

France
145
140
135

Ja

n.
20
M
07
ar
s
20
0
M
7
ai
20
07
Ju
l.
20
07
Se
p.
20
07
N
ov
.2
00
Ja
7
n.
20
M
08
ar
s
20
08
M
ai
20
08
Ju
l.
20
08
Se
p.
20
08
N
ov
.2
00
Ja
8
n.
20
M
09
ar
s
20
09
M
ai
20
09
Ju
l.
20
09
Se
p.
20
09
N
ov
.2
00
9

130

Months

2.6.2.

France: multiple developments since 2007, a complex imbroglio

France has introduced several new instruments since 2007. Before this period and since 2002,
there was neither purchase nor annual circulation tax, only a limited registration tax. The current
package of taxes treats private owners and companies on a different basis due to a very significant
additional tax on companies.
France has defined a target for the fleet of all vehicles on the road of 120 g/km in 2020, compared
to approximately 180 g/km in 2007. The different measures are designed with a view to reaching thatlevel.
The table below summarizes the key tax elements that apply to gasoline and diesel passenger
cars:

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201023

2.6.2.1. 2007: TVTS
The annual TVTS tax applies to passenger cars (M1) owned by companies, with various, total orpartial exemptions (i.e. single person or small companies). It replaced an earlier tax in 2007 that was
based mainly on the “puissance fiscale” (administrative power), a coefficient based on a mix of Engine
Power and CO2 emissions, that discriminated between vehicles relatively softly, with a threshold
approximately in the D class. TVTS is exclusively based on CO2.
It is highly discriminating as, on the overall market, it is equivalent to € 1000/ton of CO2(100 g/km  400 €/year; 200 g/km  3 400 €/year). Furthermore it is strongly discontinuous, withsteps of 800 €/year at 160 g, and 700 € at 140 g.
It slightly reduced sales of D/E classes (upper and upper-medium class cars) in its first year.
Combined from 2008 onwards with the Bonus/malus, it has since significantly impacted upper
category car sales, and changed policies towards company cars in large businesses.
TVTS is not differentiated between Diesel and Gasoline, with the consequence that almost all
vehicles sold in D and upper E classes are now diesel.
2.6.2.2. 2008: Bonus/malus
This « penalty & incentive » (or feebate) purchase tax was introduced on 01/01/2008 following
the “Grenelle de l’Environnement”, a broad consultative political forum that addressed numerous
environmental policies in 2007. The measure was designed to cover an initial period from 2008 to
2012, with a lowering of all the thresholds set by 5 g/ km every two years to preserve incentives andfiscal balance as the new car fleet adapts. Lowering the thresholds has been brought forward; theaverage CO2 emissions of new cars has fallen faster than anticipated, creating a significant budgetary
cost.
Bonuses and penalty charges apply on registration of new M1 vehicles. They are set as absolutevalues that depend only on the CO2 type approval test emissions figure. Charges range from a bonus
payment of 1 000 € for cars rated < 100 g/km to a fee of 2 600 € for cars rated > 250 g/km. A bonus
payment of 5 000 € applies for M1 and N1 vehicles with CO2 emissions value below 60 g/km.

24

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

France: 2008 Bonus-Malus system
Made initially to be budget-neutral. Actual cost ~ 200 M€ in 2008



Evolution of thresholds: - 5 g in 2010 and 2012

Low CO2 incentive due to stay until 2012 or 100 000 vehicles soldDeliberate, very high incentive for low CO2 emitters
3000
2000
1000
0

60

100

120

130
160

-1000

165

200

160

200

251

émissions+CO2 en g/Km

-2000
-3000
-4000
-5000
-6000

0

DAP / DPSVE

100

120

131

25/02/2009

251

15

The incentive provided by the bonus malus system is broadly equivalent to 150 €/ton of CO2. But
the thresholds with large steps of bonus or tax have caused major shifts in the market, with
(1) downsizing in the segment mix, (2) downsizing in power and (3) a move to diesel in certain
segments, as the system is based on CO2 certification values. The share of diesel engines in new car
market has reached more than 70%.
The system demonstrated high effectiveness: in 2008, CO2 emissions from new vehicles inFrance fell by 9 g compared to 2007, falling from 149 g/km to 140 g/km, most of the decrease
resulting from the bonus malus system. The measure has turned out to have a net cost for the State, as
the shift in the market was higher than anticipated: the budgetary cost was ~200 M€ in 2008 and~500 M€ in 2009. The measure successfully helped stimulate the market for low carbon vehicles, but
drove too strong a change in the mix of products, with cost implications for industry.
2.6.2.3. 2009: Scrappage scheme with CO2 criterion
Due to the economic crisis, France introduced a car scrappage scheme at the end of 2008, quite
early compared to other EU countries. One criterion for access to a 1 000 € subsidy for the purchase of
a new car was CO2 emissions below 160 g/km.
In 2009, CO2 emissions in France reduced by 6 g compared to 2007, from 140 to 134 g (thelowest level in the EU).
During the year with this scrappage measure, the market increased in volume (+10.7%) andshifted down in segment mix and CO2 emissions significantly. But it is not certain that the CO2
threshold itself actually had an effect, as the other CO2 measures already existed, and beneficiaries ofthe bonus malus system were essentially buying low-range cars eligible to also for the scrapping
incentive.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201025

2.6.2.4. 2010: A carbon tax, still under consideration for 2010
The law to introduce a carbon tax agreed at the "Grenelle de l'Environnement" was passed at theparliament but its introduction has been delayed because the Constitutional Council disagreed with it
not for the principles, but for implementation reasons. It would add to the cost of usage of cars.
2.6.2.5. Other economic instruments: technology incentives, biofuels, additional CO2 Malus-a technology incentive of 2 000 € for hybrid (HEV), CNG and LPG cars, with CO2emissions below 140 g/km;-

biofuel measures for E 85 and first generation biofuels, driven by a target for biofuels to
make up 7.5% of auto fuel sales (by energy content) in 2010. For the EU the target is 5.75 %.
Measures to ensure compliance include financial penalties for distributors. This resulted in(limited) fuel price increases in 2009 and possibly in 2010;-

in addition to the bonus/malus system at registration, an additional annual malus wasintroduced in 2009 for vehicles with CO2 emissions higher than 250 g/km. However, theshare of such vehicles in France is extremely limited, less than 2% of sales, and theeffectiveness of the measure can therefore be questioned.

2.6.2.6. Effects on CO2 and on the market?
The chart below presents the evolution of the car market by segment in France in recent years. A
significant downwards shift is obvious, starting in 2008. The share of “D and above” cars fell from
~22% to ~16%, the share of A+B increased from 46% to 58%.
While environmental effects are well identified with CO2 reductions there are also otherimportant impacts:-

economic effects, as the average price of vehicles fell 8% between 2007 and 2009;-industrial effects for local manufacturers, in plants that were producing “D and above” cars;-

to a certain extent, trade balance effects as for competitiveness reasons local manufacturers
had relocated production of A and B cars to other countries.

To be noted: the scrappage scheme in France (1000 € for the purchase of a new car emitting lessthan 160 g/km and the scrapping of a car older than 10 years) had a very positive effect on the volume
of cars sold, with the 2009 new car market up 11% on 2008.

26

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Evolution of the Mix of sales on 2006 - 2009 - France
100%
90%
80%

% per segment

70%
Unknown
LUXE
E
D
C
B
A

60%
50%
40%
30%
20%
10%
0%
vol. 06

vol. 07

vol. 08

vol. 09Years

2.6.2.7. How might these taxes evolve?
With the range of economic instruments introduced in the past 3 years, the question of theirevolution is crucial for car manufacturers, and particularly those for which France is a major market.
The Bonus/Malus system is planned to keep its current configuration until 2012. This stability isvery helpful, despite the recent decision to advance the date for shifting lowering the limit values. For
other components of the package there is no indication as to the extent to which they will remainunchanged, or be strengthened, and if strengthened by how much. Manufacturers have to analyse thepossible evolution of these instruments at their own risk (See 3.2).
2.6.3.

Germany: a long-awaited, cautiously prepared evolution of the current scheme

2.6.3.1. Former system
German car taxation formerly relied on an annual circulation tax, proportional to engine capacity,
the value of which is correlated with the emission standards and fuel type, with significantly higher
taxes for diesel vehicles. No company car tax exists in Germany, a major difference to France and theUK.
The rate of the tax is linked to Euro emissions class of the vehicle, effectively links it to the ageof the vehicle a Euro standards are revised every few years. The tax therefore provided an incentive
for renewing the oldest vehicles.
2.6.3.2. New system
The new tax systems rely on both CO2 and engine capacity, with a differentiation between diesel
and gasoline. The CO2 part remains relatively low compared to the part related to the engine capacity,in particular for diesel vehicles.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201027

A threshold acts as a “trigger”, vehicles below that level pay no tax at all. This threshold starts at
a level of 120 g/km and will decrease with the time, to 95 g/km in 2014. This provides visibility
until 2014. Except for the threshold, the scheme provides linear incentives.

GERMANY : new Annual circulation tax•

Combines CO2 emissions and engine capacity– Gazoline : 2 € x CO2 + 2 € x (Eng Cap / 100)
– Diesel : 2 € x CO2 + 9,5€ x (Eng Cap / 100)••

CO2 threshold 120 g in 2010  95 g in 2014
CO2 below threshold  No tax

95

120
CO2
Gasoline- 500€
per year

Diesel2014

2009

Looking at the way this scheme will function for manufacturers, the threshold will discriminate
only between segments and products that reach it and those that don't: in the short term, A, B and C.
Some higher range vehicles may fall below the threshold in the future (Hybrids or Plug-in HEV) thatmight anyway be more expensive. This scheme might therefore strongly increase the competition in
the lower range of products, eliminating those that exceed the trigger value, with a potential effect ofdieselization in that segment.
2.6.3.3. 2009 scrappage scheme
In response to the economic crisis, a car scrappage and replacement scheme was introduced
in 2009, with a powerful effect in boosting sales on the market in Germany:28-

Support was provided for the purchase of 2 M vehicles, leading to a new car market of
3.8 M vehicles, whereas initial forecasts were for the order of 3 M vehicles.

-

There was a strong impact on the mix of vehicles sold, with A+ B cars close to 40%
compared to below 25% in previous years, and “D and above” below 30% instead of nearly
40% of the market, with corresponding impacts on the economics and industrial organisationof the manufacturers.

-Comparing semester 2 of 2008 to the average for the year 2009, we observe a decrease of
9 g/km in the specific CO2 emissions of new vehicles sold.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Germany - Monthly average CO2 emissions - mid 2008 to end 2009
166
164
162

CO2 average160

9g reduction

158
156
154
152
150
148
146
Août
2008

Sep.
2008

Oct.
2008

Nov.
2008

Déc.
2008

Jan.
2009

Fév.
2009

Mars
2009

Avr.
2009

Mai
2009

Juin
2009

Jul.
2009

Août
2009

Sep.
2009

Oct.
2009

Nov.
2009

Dec.
2009

Evolution of the Mix of Sales 2006 - 2009 - Germany
100%% per segment

80%

Unknown
Other
LUXE
E
D
C
B
A

60%

40%

20%

0%
vol. 06

vol. 07

vol. 08

vol. 09Years

2.6.4.

UK: a strengthening of the current ACT and a tough company car tax

Two elements characterize car taxation in UK, an ACT and a company car tax.
The Annual circulation tax is scheduled to significantly strengthen for 2010 first registeredvehicles, especially for vehicles rated above 160g/km.
Currently, ACT increases progressively from 100 g/km to beyond 255 g/km, with the slope of theincrease corresponding to approximately 3 €/g, that is equivalent to ~ 200 €/ton (see figure).
The threshold for the new scheme is increased to 130 g/km with a significantly steeper slope,corresponding to approximately 7 €/g, equivalent to ~500 €/ton.
Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201029

UK : Annual Circulation Tax Evolution
1 200 €

2011 :
7 € / g CO2= ~ 500 € / ton
1 000 €

ACT - € / Year

800 €

600 €

400 €

2009 :
3€ / g CO2= ~ 200 € / ton

200 €

0€
0

50

100

150

200

250

300

350

CO2 values

20092010 - 04

2011

Company car tax in the UK applies on the person benefiting from use of the vehicle. Its
calculation depends on the retail price of the vehicle, on its CO2 emissions and on the income tax band
to which the beneficiary is subject, which depends in turn on revenue. Making some assumptions forthese parameters the intensity of car company tax is estimated in average around ~ 1 000 €/ton, but issignificantly lower on smaller vehicles and higher on D and upper segments.
2.6.5.

Netherlands: several steps announced until 2013, towards a radical change to road pricing

For several years, the Netherlands has implemented environmental policies for cars with a strong
influence on the market. Several instruments are employed including a labelling scheme and a tax onhigh CO2 emitters. The main instrument is a registrations tax (BPM) and there is also and annual
circulation tax (MRB). In the 3 last years, average emissions of new cars sold decreased by 17 g, from165 to 148 g/km.
Overall taxation is a high compared to other EU countries and France and Germany in particular.
The BPM system is shifting sharply from a tax based on the retail price to a tax based only on CO2,
with a high intensity. The change will be implemented progressively between 2009 and 2013. BPM
was set at a basic rate of 40.2% in 2009. In 2010 this was reduced to 27.4% with the difference taken
up by a CO2 element. The average intensity based on the CO2 share is expected to grow from ~150 to~500 €/ton CO2 between 2009 and 2013,
The MRB will increase in the coming years and the Netherlands is also considering moving to akilometre-based, so called “pay as you drive” tax.
The system is currently strongly differentiated between diesel and gasoline vehicles, withsignificantly higher taxes on diesel; this differentiation will continue and increase in the future. The
system is characterised by a “trigger" threshold of 110 g/km for gasoline and 95 g/km for diesel.
If vehicles are under that threshold, they do not pay tax, 27.4% of the retail price plus CO2
charge. Therefore the trigger effect is large makes vehicles that are actually fuel efficient, but which
figure is just above the CO2 threshold, unmarketable.

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Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

2.6.6.

Other countries with interesting features

2.6.6.1. Portugal
Portugal has developed its registration tax with a progressive shift of the basis of taxation fromengine capacity to CO2 emissions, with a high Diesel/Gasoline differentiation. The CO2 incentive isintense, pushing products with medium or high CO2 emissions out of the market.
Purchasing tax on a diesel car emitting 200 g is as high as 10 000 €. At these levels someproducts are no longer marketable and some customers cannot afford products to meet theirrequirements. The intensity of the Portuguese RT corresponds approximately to 500 €/ton, which isvery high in relation to the modest purchasing power of the population.
2.6.6.2. Spain
Spain introduced at the end of 2008 a new registration tax. The previous system was based onengine capacity classes; the new system is based on CO2 classes, with more differentiation. It isdifficult to analyze the effect in 2009 due to the crisis that strongly affected the market, but 2009
showed renewed improvement in CO2 emissions from new cars (2006-2008: -4 g; 2008-2009: -7 g).
2.6.6.3. Belgium
Without entering into details, it is worth mentioning that the two Belgian regions have each
adopted different fiscal rules in relation to CO2. This makes the marketing of vehicles in that small
market more complex and the rules possibly less efficient.

2.7. Conclusions
In summary, taxes can be a powerful tool to reduce CO2 emissions, but, as they are not managedwith a view to harmonization in the EU, they render the idea of Single Market for cars in the Union
meaningless. They generate high costs and perturb planning of manufacturers to such an extent that
cost-effectiveness is seriously undermined.
In terms of effect on competition, models that are brand new and recently engineered can benefit
from CO2 incentives so long as they fall the right side of thresholds and steps in the system of
incentives. Consider now a manufacturer selling in a country a model engineered some years ago but
still with a planned life-time of several years. New tax rules may force either additional investment toadapt the car, or a decision to stop the sales of the model there. In either case the manufacturer will
endure an economic loss on that model as a result of a tax that was unknown at the time the car was
designed. This is an example of an unpredictable, very severe change that accelerates drastically theobsolescence of vehicles with negative economic and commercial impacts on the OEM.
Taxes impact manufacturers very differently, depending on their mix of products, of customers
and of the markets in which they operate. They cause CO2 competition particularly in lower ranges ofvehicles that tend to be more price-sensitive. In some cases, high taxes favour upper range vehicles, as
customers for these vehicles have fewer affordability constrains.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201031

Manufacturers accept taxation on the basis of CO2 emissions, but contest the way taxes have been
implemented nationally with a diversity that generates economic inefficiency, and not only from anindustry perspective. What is required of CO2 taxation is linearity, continuity, transparency andharmonization.

3. HOW OEM CAN MANAGE THE TAXATION?

Markets are now strongly orientated by the very diverse economic instruments implemented by amajority of Member States in the EU. Three issues require attention in analysing how manufacturers
respond: how customers behave in response to taxation, how manufacturers adapt in the short term,
how can manufacturers try to adapt to uncertainty over the evolution of taxes in the future.

3.1. Diverse customers with very diverse behaviours in relation to CO2 incentives
3.1.1.

Customer diversity

The first issue for manufacturers is to analyze how customers will evaluate taxation andincentives related to CO2 emissions in their purchasing decision process, in addition to the effect of thefuel costs that are also CO2 related.
Professional users and leasing companies are “simple customers”:-

They base their assessments on systematic, predictable, rigorous assessment processes,
including all the costs of usage of the vehicle and assumptions on the resale value based on
statistics. Resale value also depends to a degree on fuel consumption and fuel prices.

-

They base this assessment on given ownership duration and mileage. In their assessment,
they usually include what they know about current taxation, and about future values if
available.

-

Most of the professional users and leasing companies keep their vehicles about 3 years to
optimize the resale or buy-back value against maintenance costs.

In contrast private users are “very diverse and complicated customers”:

32-

They do not have precise assessment methods, and have very different ownership durationand mileage patterns which vary by country and product segment.

-

They tend not to weigh annual taxation and even fuel consumption over their total ownership
period in their purchase decisions, which makes registration taxes much more important thanfuel or annual taxes in their decisions.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

-More importantly, for most of the buyers of lower range and economic cars, purchase pricewill outweigh a full rational, economic assessment, in an EU market where competition isvery broad and price competition on these products very sharp.

-

The economic situation of buyers strongly influences purchase patterns, in particular when
considerations of social status play a role.

3.1.2.

Impact of economic instruments

CO2 incentives in vehicle taxes affect costs for motorists in EU markets as much as fuel prices. In
other terms, a consumer in the situation of purchasing a car should assume on average that CO2 taxes
can cost as much as fuel tax. But if this is valid on average, some customers may face no taxes beyond
fuel tax, while others might have to multiply what they pay in taxes by more than 3 or 4 to arrive atwhat they will pay in fuel taxes and vehicle CO2 taxes together.
3.1.3.

Diversity of customers in relation to price and affordability

In lower segments, the dominant purchase criterion for customers is price. This leads the large
number of manufacturers competing on the lower range of the market to fight firstly on costs, tooptimise the affordability of their products. Upper segments are driven by performances, safety,
technology and, to a lesser extent, overall cost of ownership and use more than price, in particular forcompany cars.
As a consequence, in countries that have adopted high intensity CO2 taxation, there is more
response in upper range cars with versions strongly improved regarding CO2 emissions, sometimes atsignificant additional cost with the price premium off-set by taxation benefits. Rapid improvement ofupper range vehicles is a significant trend that will merits attention in CO2 monitoring in the future).

3.2. How to adapt in the short term
3.2.1.

Continuous monitoring of taxation in all countries

Due to the weight of the economic instruments on markets and their unpredictability,
manufacturers must continuously monitor policy in the EU countries. They can rely either on
consulting companies for this service, or use their own organisations and distribution networks.
Results are considered commercially sensitive.
This kind of monitoring may involve different departments of OEMs in particular finance andpublic affairs departments. Depending on the size of the country, on whether the OEM is important or
not, in particular whether he has industrial activities, the monitoring can be easier.
One recurrent difficulty is qualifying the accuracy of information as the process from proposal toentry into force of a new tax is often long and uncertain. When marketing or engineering decisions are
dependent on a new tax or changes to an existing tax accuracy is critical and requires sufficientunderstanding of the decision making process and of the grounds for the taxation. Some decisions are
hidden and made in a very short time, others are the result of a long public consultation process.
Examples of both are cited above.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201033

3.2.2.

Short term adaptation to taxation

Industrial lead-times are well understood and vary little. With current trends in regulation, and torespond to the economic crisis, the engineering departments of OEMs have significant workloads, if
they are not overloaded. Challenges include Euro 5/6 regulations, CO2 regulation requiring thermal
engine downsizing and new emission control technologies. OEMs can adapt their products, but rarely
have a large potential for adapting to short term changes that hamper product competitiveness. In somemarkets where the volume to production of a vehicle or a version is limited, there is no economic
justification for an engineering investment to adapt the vehicle to new regulations.
To a certain extent, manufacturers are forced to adjust to short-term changes in taxation. Several
responses are possible: changes in the mix of the products or in the mix of versions within a productline; increase or decrease of manufacturing capacities; adjustment of retail prices or commercial
policy. In these cases, taxation’s role as an economic agent determining company behaviour is direct
and profits decline if products do not fit the new market conditions.
Not only is there an effect on product margins but on engineering and industry planning costs.
This makes unpredictability in changes in taxation a significant burden on industry, and in particular
on OEMs more involved in the lower range of the market where cost and price competition reduces
the flexibility to anticipate changes.

3.3. How to deal with economic instruments in the future?
3.3.1.

Projections

Looking at products entering the product planning and the engineering departments today:-

Their sales will start in three years, end of 2012/beginning of 2013, at the time of the start of
implementation of EU CO2 emissions standards for fleet average of new cars (130 g/km from2012 with a phase-in period to 2015).

-

Their sales will end, normally, 6 to 7 years later, close to 2020. This is the date for the longterm target for average new car fleet emissions in the EU, set at a level of 95 g/km, associatedwith penalties of 95 €/g/km for each vehicle, equivalent to ~ 500 €/ton of CO2 approximately.

This illustrates how the car landscape might evolve in the next ten years, with high risks for OEM
in particular regarding the commercial life of their products: if taxation and oil prices increasesignificantly, products might become obsolete much quicker than in previous periods, withsignificant consequences for profitability and industrial restructuring.
Economic instruments have demonstrated their effectiveness in the EU market, particularly overthe past two years: they significantly oriented the market towards low CO2 emitting vehicles,
accelerating the trend in reducing average new car emissions. They acted in parallel with otherkey drivers: the crisis, measures to support industry pass through the crisis, oil prices, thegrowing awareness of citizens and consumers about climate change and oil price risks.
These different criteria will continue to weigh on the market and fuel competition. Among thesedrivers, taxations and incentives related to CO2 may become dominant. No one anticipates aweakening of policies to limit CO2 emissions from transport.
34

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Manufacturers must define their product and technology policies with very thorough economic
assessment and complex arbitrages: they have limited resources; the competitiveness of themarket does not allow for overburdening the cost of producing vehicles, particularly in low range
segments. Therefore, manufacturers must anticipate the potential impact of economic instruments
over the longer term, and try to protect themselves against the uncertainties that result from thesepublic policies.
3.3.2.

Own appraisal of possible changes

For a manufacturer, its evaluation of the future evolution of taxation is confidential and hascompetitive value, as it drives product, technology and marketing strategy. When looking at the CO2
strategies of OEMs for products launched over the past two years, very different strategies can be
identified, some of which benefit greatly from recent tax changes. This is particularly visible forgroups operating in upper segments with more flexibility on prices.
Because information on potential changes is not available, some car manufacturers elaborate
scenarios for future taxation, to provide guidelines for the engineering of future products. When
analyzing potential evolution of taxation in a country, different criteria can be taken into account,depending on local circumstances:-

Factors for the continuity of policies, in terms of schemes and levels of taxation: stability ofrevenues for the State, management of the cost of mobility for citizens that is politicallysensitive, importance of the car industry in the country.

-

Factors for increasing the stringency of the policies: climate policies; potential increase needfor tax revenues (but even maintaining tax revenues may require increased stringency as
products change and markets shift to lower carbon vehicles; energy policy and trade balance;
willingness to progressively restrict individual mobility for several reasons encompassing
various environmental and transport concerns.

Significant changes in the structure of taxes are very difficult to anticipate, and can require morelead-time for their implementation than simpler tax evolutions. This is true of new policies like thefuture introduction of congestion charging. This does not mean that all severe changes can be
anticipated. In France, the TVTS, stringent Company Car tax, was defined late in 2006 for quite
immediate implementation.
In general manufacturers do not anticipate a decrease in the intensity of the CO2 taxation, andconsider that a progressive increase in the overall taxation on CO2 will be driven by both thestrengthening of climate policies and compensation for an overall reduction in fuel consumption intransport.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201035

4. ECONOMIC INCENTIVESFOR FUTURE EV AND VERY LOW CO2 VEHICLES?

4.1. Policies regarding very low CO2 vehicles
Numerous national Governments and regions worldwide have announced support measures forthe development of Electric Vehicles and low CO2 emitters. These measures address, depending on the
countries, some or all of the different items that will contribute to market take-off: R&D, engineering,industrialization, for electric vehicles (EVs) and Plug-In hybrid electric vehicles (HEVs), charging
infrastructure and batteries. As with economic instruments for conventional vehicles, there is already awide diversity of measures:-Support for market development (Numerous countries).

-

Development and industrialization of the batteries (France, Portugal, UK, Germany).

-

Development and industrialisation of vehicles and their specific components (France,
Germany, to a lesser extent Spain).

-

Network deployment (Numerous countries, but also regions and cities).

-

Experimentation programmes (Numerous countries, but also regions and cities).

Depending on the State, measures rely on direct aid (most case of market support), financing of
R&D and engineering for vehicle development, components and batteries, or loans for specific, heavy
investments like infrastructure and batteries manufacturing. The choice by Member States as towhether to support one or another item depends on a variety of elements:-

the ambition of the country regarding low CO2 car development;-

its situation in terms of engineering and manufacturing of vehicles, and its vision and interestfor the future automotive industry;-

the mix of energy supply performances in terms of CO2 emissions in its energy production
and capacity in renewable energies, in particular for electricity.

Levels of support from economic instruments for these vehicles also varies widely, from nothing
to incentives as high as 9 000 € for an electric vehicle in Belgium, and even more in Denmarkwith tax relief at purchase.

36

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

4.2. How incentives will impact the EV and low CO2 car market
4.2.1.

Which comparison is relevant?

Incentives supporting the development of sales of low CO2 cars differ from one country toanother country. What is important for market introduction (and for the manufacturers) is not the
incentive itself, but the difference in incentive between EVs and P-HEVs and its competitors on themarket. For instance, looking at a B-segment EV, the difference of taxes with the most efficient B caron the market is the figure that matters.
To illustrate the point:-

In France, all cars with CO2 emissions below 95 g/km now, 90 g/km in 2011–2012, will
benefit from a 1 000 € incentive, reducing the real value of the 5 000 € incentive available for
an EV to 4 000 €.

-In Spain, the most recent Spanish tax scheme exempts cars emitting less than 120 gCO2/km
from the RT. As can be seen below, the more the car emits and is expensive, the higher the
tax advantage. That makes incentives very attractive for expensive/upper range cars, while
the market for low emitting vehicles receives smaller incentives comprise of:o An incentive for electric vehicles, representing 15% of the retail price.
o Differentiated registration tax, that is also proportional to price, and at the same timeincreases with CO2 emissions.

EV versus conventional cars, 2009 spanish tax regime
CO2 Emissions of conventional vehicles as a reference

RETAILPRICE
ofvehicles

10 000

15 000

20 00030 000< 120g0%Registration Tax ofconventional cars

0

Fiscal Incentive forElectric Vehicle

1500

Registration Tax ofconventional cars

0

Fiscal Incentive forElectric Vehicle

2250

Registration Tax ofconventional cars

0

Fiscal Incentive forElectric Vehicle

3000

Registration Tax ofconventional cars

0

Fiscal Incentive forElectric Vehicle

4500

120g >160g

160g>200g

200 and more

4,75%

9,75%

14,75%

500

1500

2000
1500

750

2250

1500

3000
2250

2250

1000

3000
3000

3000

5000
3000

1500

6000
3000

3000

6000
4500

4500
2250

2000

4000

4500

2250

3750

4500

7500
4500

9000
4500

Uneven incentive per tonne of CO2 reductions depending on the car segment
DAP / DPSVE

25/02/2009

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

1937

4.2.2.

Already a very large diversity of incentives

As mentioned above, a large diversity in incentives is already anticipated. To illustrate thatdiversity the graph below presents current expectations in 9 EU countries in relations to two criteria:-

Vertically, the intensity of the incentive for purchasing for an EV (“Zero emissions from tankto wheel”) vehicle against the comparable, CO2 efficient ICE vehicle, usually among thediesel vehicle with low CO2 emissions that currently either benefits from incentives or areminimally taxed.

-

Horizontally, the expected duration of the incentive. This point is crucial for manufacturers as
durable incentives are essential for creating a market for low-CO2 vehicles.

Comparisons of incentives for EV and ICE comparable car
Intensity of incentives at purchasing: € / véhicle
Visibility : period of announced validity of the incentives
Width of bars : importance of market
9000

Denmark

8000

Intensité (euros)

7000
6000

UK

5000

F

4000
3000

D

Spain

It

NL

2000

Port
Ir

1000
0
2009

2010

2011

2012

2013

2014

2015

Visibilité

4.2.3.

Many uncertainties for the future

For manufacturers involved in developing very low CO2 vehicles and EVs, three
uncertainties are cumulative when assessing the impact of economic instruments:

38-

How will the economic instruments EVs evolve? As seen in the figure, countries are planningpolicies up to 2012 or 2014. EVs will start to enter the market by late 2010 or 2011, andsignificant volumes are not expected until 2012.

-

How will economic instruments for conventional, CO2 efficient vehicles evolve? Ifsignificant incentives are maintained, the attractiveness of EV may be reduced.

-

How will oil prices, taxes on fuels and total fuel prices evolve? Again, this parameter might
impact on the attractiveness of the EV.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

But most importantly, transparency as to how long the economic instruments will continue tooperate is a key parameter:-

While the first electric vehicles will be launched in Europe in 2010 in limited volumes, theEV market will only really stabilise later, 2015 at the earliest.

-

The engineering and other investment costs for vehicles, batteries, infrastructure and newcomponents will be extremely high and the decision to produce EVs represents business risks
requiring sufficient transparency and probably public support.

4.3. How States should evaluate policy value of these vehicles
When considering support to EV and P-HEV, Governments must assess whether long term
support is justified on the basis of direct environmental benefits. This does not seem necessarily to be
the case.
Beyond conventional assessment, a study was made by the CIRED (Centre International deRecherche sur l’Environnement et le Développement, Paris) at the end of 2009, under the guidance of
Dr Jean-Pierre Hourcade, on the effects of a policy anticipating the introduction of EVs. This study
was based on modelling analysis (Model IMACLIM-R). It concluded that supporting anticipated EV
deployment would provide high benefits through the potential effects that such a policy would have on
climate change. The risks of deploying these vehicles quickly would be largely off-set by the gains ofachieving earlier emissions reductions (always assuming EVs use low carbon electricity). There may
be benefits from ambitious strategies for the deployment of EVs and very low CO2 emitters in terms oflightening mitigation measures in the long term.

4.4. Which public policies to support the deployment of very low CO2 vehicles and EV
At this stage, considering that the development of EVs and very low CO2 emitters will start soon,
and assuming Governments confirm the benefits of accelerating deployment, three key
recommendations should be taken into account by States that intend to develop these products, whensetting their incentive policies:-

Sufficient visibility as to the duration of incentives. The development of these vehicles incompetition with products that are economically and technically optimized will depend on
progressive cost reduction of key new components. Considering the likely production
volumes of these vehicles, sufficient market and fleet size does not seem likely by 2012 oreven 2015. Long term policy incentives are therefore indicated.

-

Sufficient incentives for these vehicles in comparison to conventional cars. Schemes should
provide sufficient incentives for EVs and very low emitters to make them attractive incomparison of the most CO2 efficient ICE vehicles. These conventional vehicles will also
improve with the time.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201039

-

Link incentives directly to the CO2 benefits resulting from use of these vehicles. The form of
incentives/taxes should relate more to the benefits expected than with the cost of a product orwith a specific technology. The effectiveness of a policy will depend on massive
development of efficient products.

With the changes that will occur in the market regarding lower CO2 emissions of conventionalcars and emergence of very low or zero CO2 emitters, current economic instruments need profoundreview to simultaneously adequately support new products and maintain balance in State budgets.

5. CONCLUSIONSThis paper describes key features of EU car taxation and its consequences for manufacturers.
Some elements of the analysis, in particular those related to very low CO2 emitters, are also valid forother countries. Some conclusions can be drawn.
Current economic instruments create strong environmental incentives, driving a decreasein the CO2 emissions of the new car fleet
In sum the various taxes applying to fuels and vehicles create a strong economic incentive to
reduce CO2 emissions. The size of incentives is much higher than the comparable policy instruments
applied to other sectors of the economy. In some case they can be considered disproportionate.
Beyond its role of generating revenues for State budgets, the taxation of fuels represents the firstelement weighing on vehicle choices and vehicle mileage.
Total cost of taxes on automobiles varies by country across a very wide range. New car average
CO2 emissions vary according to the intensity of incentives in comparison to national incomes andincome distribution. The recent economic crisis and the measures implemented to limit its impact on
industry induced a strong acceleration in new car CO2 emissions reductions, which might partiallyreverse in the short term.
Trends in EU Member States reveal the strong effectiveness of taxes in advance of any effectfrom EU Regulation on new car CO2 emissions finalized late in 2008 for implementation from 2012. If
tax incentives had been developed more widely early after the industry’s Voluntary Commitments had
been agreed, they would have greatly enabled the efforts of industry. The absence of fiscal incentives
in most EU Member States between 1998 and 2008 weighed against effective CO2 reduction, in theabsence of regulatory CO2 limits in that period.
The current fragmentation of incentives has a significant cost
The diversity of incentives created by economic instruments within the EU is such that no Single
Market for cars exists from an OEM perspective: products and marketing strategy requiredifferentiations between Member States.

40

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 2010

Due to the diversity of instruments and the unpredictability of changes in taxes and tax systems,
OEMs have no robust basis on which to arbitrate between the costs and benefits of investing in CO2 &fuel consumption reductions in their project planning. The first purchase criterion for a majority of
consumers remains the price of a car, particularly in the lower segments of the market.
This uncoordinated situation forces OEMs to implement short term adaptations in marketing for
CO2 improvements that are not cost-effective for industry. Competition between OEMs has driven
down CO2 emissions, but a more predictable framework with coordinated incentives would have beencertainly less costly and possibly resulted in larger emissions cuts.
Incentives should as directly as possible correlate with the CO2 and environmental
performance of vehicles
Taxes and environmental performance are not always systematically linked, in particularincentives for specific technologies or alternative energies. In the long run, instruments that are notcalibrated to benefits fail to be cost-effective vis-à-vis environmental results.
The various thresholds introduce discontinuities that do not correspond to the functioning of theindustry, which is basically linear, and can create market disruption.
Bonuses related to the retail price of a vehicle may introduce bias as they over-incentivise more
expensive vehicles that in some cases are not consistent with the intended policy – one example isprovided by the system of registration taxes and bonuses in Spain.
When considering CO2, incentives and taxes, in particular on fuels, one should not disregard the
intrinsic efficiency of diesel technology. Current projects to base taxation of fuels on energy per litre
will work against CO2 reduction.
In a mature industry producing competitive conventional vehicles, new, innovativetechnologies will require extensive support
Electric and very low CO2 emitting vehicles will enter the market in the next two years in acompetition with conventional vehicles at an advanced stage of development. The new products will
require new batteries and new components that will compete with extremely optimised, mass
production products.
The initial cost of these new vehicles will be significantly higher than conventional vehicles andthe pace of cost reduction is unpredictable. The overall initial expenses to ensure their launch andmarket development will be extremely high.
Member States that (1) fight for EV industry localisation in the future and (2) foresee
considerable benefits from accelerated deployment of these vehicles, should consider continuous,
long-lasting support policies. They may ultimately have to consider rebalancing their fiscal systems tofinance such support in a period where fuel consumption should start decreasing with the improvementof the average CO2 efficiency of the whole vehicle fleet.

Bastard — Discussion Paper 2010-8 — © OECD/ITF, 201041