Is the new road tax a good idea?

The Chancellor's 2015 update budget surprised many, some of us with the new Vehicle Excise Duty (VED) that George Osborne introduced. Even though one has to acknowledge the simplicity of the new rules, this looks more like an oversimplification which will be bad news for the environment. 

Since 2001 the UK has used a Vehicle Excise Duty with a clear objective in encouraging consumers to consider environmental impact of vehicle use into their purchasing decisions. Roughly this looks like this (with minor variations for alternative fuel vehicles): 

Band	CO2 (g/km)	Annual Tax (£)
A	Up to 100	£0
B	101-110	£20
C	111-120	£30
D	121-130	£110
E	131-140	£130
F	141-150	£145
G	151-165	£180
H	166-175	£205
I	176-185	£225
J	186-200	£265
K*	201-225	£290
L	226-255	£490
M	Over 255	£505

This approach worked well in the past but more recently it has received criticism for two reasons. 

Firstly for the fact that it narrows down the environmental impact of vehicle use to the vehicles CO2 emissions ignoring all other relevant pollutants such as NOx, PMs, VOC etc. The focus of this criticism has been that although petrol and diesel vehicles perform similarly (perhaps slightly more favorably for diesels) when it comes to their CO2 emissions, diesel vehicles contribute significantly higher PMs. It is fair to say that new Euro 5 and Euro 6 diesel vehicles have PM filters that capture PMs successfully when they are maintained properly. In addition to that as identified in recent real conditions research diesel engines tend to emit significantly higher NOx emissions in real world traffic. All that means a lot for the UK where 9 urban cities have been named by the World Health Organisation (WHO) for breaching air pollution safety limits for PM10.  

Secondly the previous vehicle tax regime has come under pressure by the Government who realised that already a quarter of new vehicles are not liable for any VED as they fall below the 100g/km threshold. The Government also realised that continuous energy efficiency improvements and wide adoption of hybrid and plug-in hybrid powertrains will result in a substantial decrease of income. Therefore the new VED (valid 2017 onwards) excludes from any tax only zero emissions vehicles. Everyone assumes that this category refers to electric motor vehicles only, excluding for example plug-in hybrids but I have not seen any clarifications. The Government has previously encouraged plug-in hybrid vehicles by including them in £5000 purchase grant scheme and will continue to do so with the updated scheme post-2015. All non-electric (or non- plug-in hybrids) will pay a flat £140 with cars costing higher than £40,000 paying an extra £310.  

So, is this a change for the better? Will it encourage adoption of low emissions vehicles?

I would have much more preferred to see a new regime only intervening on the tax costs bringing them up by a couple or so bands in order to maintain Governmental income as required. That would have for example introduced a separate zero emissions category (for electric only vehicles) that would pay zero tax and ask for increased tax progressively with higher emissions. A system like that could for example charge ~£60 for a second generation Prius (currently £10 ~ 104g/km); ~£40 for a third generation Prius (currently £0 ~ 89g/km) and £20 for plug-ins (currently £0). This would certainly encourage the hybrid, plug-in hybrid and electric segment of the market develop accordingly. At the same time it would encourage combustion engine manufacturers to produce more efficient engines (like they already do very successfully). 

If plug-in hybrids are included in the zero rate then the Government has successfully managed to encourage the zero and nearly zero emissions market segment. However, introducing a flat £140 tax for everything else only looks into Governmental income without advocating any policy or encouraging innovation or lower emissions. Simply put, road tax would be the same for a hybrid mini car that emits 75g/km and a large SUV that emits 200g/km. This is not an environmental friendly policy...

Furthermore, if my assumption is not correct and plug-in hybrids are not included in the £0 band then they will also be treated equally to all other conventional vehicles despite their clear emissions savings. 

Most electric vehicles do not provide a suitable substitute for combustion engine vehicles mainly due to range and cost. This will require several years to change. Despite technological improvements we will not see £15k electric vehicles that can do 300-400 miles at a charge and we will not see fast charging points everywhere in the next 3 years. Even if we were to see these developments followed by a massive uptake of electric vehicles, the electricity generation and supply infrastructure of this country would not be able to cope. 

The Government has rushed into a policy that does not provide the right incentives that are needed today; the incentives that will encourage adoption of lower emissions vehicles and the gradual exclusion of old combustion engines from the market.