Diesel tax may be increased in Budget 2018

Tax on diesel fuel may have to be increased to limit a trend that has seen the number of private cars powered by it rise significantly in recent years, the Department of Finance has warned.

Officials have said that an “unintended consequence” of changing the system of motor tax and widening the gap in taxes paid between petrol and diesel has substantially increased the number of diesel cars on the road.

This has led to concerns about air pollution, especially in cities.

The rate of excise on petrol is 58.7 cent per litre, including a 4.6 cent carbon charge. The corresponding rates for diesel are 47.9 cent, with a 5.3 cent carbon charge.

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The department outlines a pathway to equalising taxes on both fuels, and suggests it could be done over a five-year period to provide “certainty for business and consumers alike to make informed decisions”.

Such a move would see excise on diesel fuel rise in this budget to 50.08 cent per litre, which would yield €68 million to the exchequer. The total cumulative benefit to the State of bringing petrol and diesel fuel taxes into line by 2022 would be €337 million.

Health outcomes

“Dieselisation continues to be a growing issue and, if left unaddressed, will result in negative environmental and health outcomes,” a paper from the Department of Finance’s tax strategy group, which outlines budget options for the Government, says. The possibility of closing the gap by cutting the cost of petrol to the price of diesel is not considered in the paper.

Increasing tax on diesel over five years would provide a greater incentive for people to adopt natural gas as a fuel, the paper says. The motor tax system for light commercial vehicles could also be amended to further reward low carbon dioxide emissions, it says.

Before the motor tax system was changed in 2008 from one based on engine size to one based on carbon dioxide emissions, the proportion of private petrol-powered cars – out of of all vehicles on the road – stood at 62 per cent, compared to 15 per cent for diesel cars.

By 2015, this had changed to 44 per cent of the 2.5 million-strong fleet of vehicles across the country being private petrol cars, with diesel cars at 33 per cent. The remainder is comprised of good vehicles, tractors, motorcycles and other vehicles.

In the period between 2008 and 2015, an extra 471,711 diesel cars took to the road while the number of petrol cars decreased by 425,903. Furthermore, diesel cars outsold petrol cars by a ratio of 2.5 to one last year.

Economic crisis

The department says the gap in excise duty between petrol and diesel fuels was due to the fact that diesel “had traditionally been viewed as the fuel of business”. It was widened during the economic crisis to limit “the impact on the competitiveness of business”.

However, the move towards diesel cars has “negated” the initial intention of this move and is causing health concerns, particularly in cities.

Bringing the taxes on both fuels into line has already been suggested by the EU and the Organisation for Economic Co-operation and Development (OECD). The EU called the excise gap “environmentally unjustifiable” while the OECD said it failed to account for the social and health effects of diesel combustion.

“The OECD have recommended at least an equalisation of excise rates on petrol and diesel to address negative externalities caused by the combustion of these fossil fuels,” the paper says.

France and the United Kingdom intend to ban the sale of petrol and diesel cars by 2040 and Ireland has been urged to follow suit by the Climate Change Advisory Council, an independent group of 11 experts set up by the Government.

Cities such as London, Paris, Madrid, Athens and German cities are moving to remove diesel cars from within their boundaries.