Proposed changes to the VRT system to reflect CO2 emission levels may leave the average consumer no better off, writes Paddy Comyn
By retaining the fundamental elements of Vehicle Registration Tax (VRT) but adding some carbon dioxide (CO2) emission element, will the Government just be giving us a horse of a different colour?
While there were no changes in the VRT system at this year's budget, there was the announcement that Minister for Finance Brian Cowen would be inviting interested parties to make submissions throughout 2007 regarding the proposed revision of the current VRT system to take greater account of environmental issues, in particular CO2 emissions.
These changes would then take effect from January 2008. Mr Cowen said he wanted to change the current rating system to "relate it more closely to environmental policy objectives, in this case reducing carbon dioxide emissions".
The news, on the day of the budget, was greeted enthusiastically by commentators, as it appeared that we would be getting a revision to the much-criticised VRT system that would reward us for buying cleaner cars and punish those who choose cars that damage the environment.
But read between the lines and it does not appear to be that promising.
Ireland is committed under the Kyoto Protocol of the United Nations Framework Convention on Climate Change to reduce greenhouse gas emissions to 13 per cent by 2008-2012, compared to 1990 levels.
The car industry is playing its part in reducing the emissions from new vehicles, and has voluntary agreements with the European Commission to achieve a target for average CO2 emissions for new passenger cars of 140g CO2 per km by 2008 (European manufacturers) and 2009 (Japanese and Korean manufacturers).
The current VRT system provides VRT relief of 50 per cent for flexible-fuel vehicles that can run on bio-ethanol-based fuels and hybrid electric cars, and will continue to do so until at least December 31st, 2007.
But apart from this, the current system does not take into account the environmental impact of the cars being bought by Irish drivers. Cars are taxed on engine size, regardless of how clean they might be.
The average CO2 output of Irish cars currently stands at 167g/km and with car sales showing no signs of slowing down, the Government is therefore keen to drastically reduce the CO2 emission figure - but, and this is the crucial point - they are keen to retain the lucrative annual windfall from VRT. As they say, "given the size of the yield from VRT, a change should not put a significant proportion of the revenue yield at risk, at the one time".
A document, which is available on the Department of Finance's website, www.finance.gov.ie, makes a number of suggestions on how to introduce CO2 emissions into the VRT system.
Most of these include widening the current VRT bands and rewarding owners for buying low-emission cars and punishing those who choose high-emission ones.
The result could be a base VRT rate of 10 per cent, but a top rate of 40 per cent. The difficulty is that by retaining a VRT system that is based on engine capacity, the Government would be missing the point.
Take a potential buyer going out to buy a Volkswagen Passat. If someone buys the 1.6-litre petrol model, they will buy a car that puts out 182g/km of CO2 and will return 37.2mpg. This car would be subject to 25 per cent VRT using the most likely option proposed.
But if a buyer wants a 2-litre TDI Passat which puts out 159g/km of CO2 - significantly less than the 1.6-litre petrol version, and will return 47.9 mpg, thus requiring less fuel stops - the fact that it is a 2-litre means it would get a 30 per cent rate of VRT, despite putting out less CO2 and using less fuel.
Effectively we would be no better off.
We would not be rewarded for buying the cleaner car in the range, as there is still the presumption made that engine size is a direct link to emissions.
With the average Irish car still putting out 167g/km, then unless we all changed to very small engined cars, which can be impossible if you need to buy a people carrier, then the VRT system would seem to be largely unchanged.
Compared to petrol, diesel vehicles have significantly lower CO2 emissions per km travelled because of the higher efficiency of diesel engines and hence have a lower impact on climate change.
Diesel vehicles also emit lower levels of CO2 and hydrocarbon (HC) than equivalent petrol vehicles.
However, diesel engines emit greater levels of nitrogen oxide than new petrol vehicles.
In the UK, where there is no registration tax, a number of steps have been taken to promote the purchase and use of more fuel-efficient vehicles.
Since March 2001, a system of graduated Vehicle Excise Duty (VED) has been in operation for new cars based primarily on their level of CO2 emissions.
Since April 2002, company car tax has been based on the CO2 emissions of the vehicle provided to an employee for their private use. In March this year a new top rate of vehicle excise duty of £215 (€318) was introduced for cars emitting more than 225g of CO2 per km. Here at least the taxation system tackles CO2 emission directly and is transparent.
Conor Faughnan of the Automobile Association says that they would be "broadly happy with a situation which removed VRT as a purchase tax and replaced that with usage based taxes. We are looking forward to the consultation process".
SIMI chief executive Cyril McHugh told The Irish Times that the society had not yet formulated their submission to the consultation process, but says: "At least they are giving people the chance to comment in advance."
He maintains that "we have to question the role of VRT at all and the EU is questioning that. Part of this is to pacify the EU on this issue and the CO2 issue. If the Government were really serious about reducing CO2 emissions they would once again introduce a scrapage scheme to replace old cars with new ones.
"There are half a million cars over eight years of age. If they got rid of these cars they would reduce CO2 emissions by 50,000 tons."
If Ireland is to meet its obligations under the Kyoto Protocol for cars, it needs to get Irish buyers into cleaner cars, but at the same time the Government is not prepared to budge on VRT despite mounting EU pressure.
The net result could be that buyers of the smallest, cleanest cars could make savings.
But the average buyer in the average car may be no better off than before. As this is a consultation process, the lines are now open for your suggestions.
The brief appears to be simple.
The Government will change the system to make our environment cleaner, as long as change doesn't lose revenue.
Submissions may be e-mailed to: VRT@finance.gov.ie or posted to "VRT Consultation", Excise Policy Section, Budget and Economic Division, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2.