1. Annex 9
Internalisation applied to NOx Emissions from Cars. The cost-effectiveness of different
fiscal instruments
A least-cost approach to reducing NOx emissions should explore as many leverage points as
possible (see Annex 8). The results of a simulation exercise recently undertaken within the so-
called Auto Oil programme show that incentives which trigger changes in only a few of the 11
channels listed in Annex 8 are systematically less cost-effective than those that trigger reactions
in a larger number of factors.
One of the most frequently cited options to reduce transport externalities is an increase in fuel
excises. However, fuel excises only have a direct impact on the fuel efficiency of vehicles (which
generally come at a cost) and, indirectly, reduce mileage. Fuel taxes are largely ineffective on the
emission of NOx, because a vehicle's specific fuel consumption is more or less independent from
its NOx emissions per kilometre. The reason why fuel taxes reduce conventional emissions
slightly, is because they reduce driving. In terms of the list presented in Annex 8, the tax targets
none of the factors directly, but has some effect on factors 2, 9 and 10. Overall, an increase in
fuel taxes that reduces NOx emissions from vehicles by 1.5 percent, causes EU-wide welfare
reductions of 25 billion ECU (in discounted costs over the period 2000-2010 and leaving aside
benefits).
A somewhat better instrument for NOx reduction is simply increasing existing annual circulation
taxes. Its main effect is that it induces people that drive old and therefore often highly polluting
cars to scrap these vehicles. This is, because compared to the low value of old cars the tax is
proportionally higher than on new cars. Although the tax is a general tax, it therefore hits hardest
the group of car owners most responsible for emissions. The tax therefore influences in a major
fashion factor 4 of the list, with some minor impact on factor 10. As can be seen in the table, by
increasing circulation taxes, a 3 times larger NOx emission reduction can be achieved at the same
cost (Minus 4.9 percent for 25 b ECU). The problem of existing circulation taxes is that they do
not encourage the purchase of cleaner cars. Basing the circulation tax on a vehicle's emission
factors produces a quantum leap in the scheme's effectiveness, because it induces changes in
technology (it becomes attractive for manufacturers to equip vehicles with anti-pollution
equipment because demand for these vehicles increases), which in the case at hand, are relatively
cheap. At a cost of 25 BECU, emission reductions of 21 percent can be achieved.
Finally, emissions are obviously also a function of the annual mileage. A circulation tax that
takes not only emission factors but also mileage into account, leaves people more choice in how
they can reduce emissions. This system generates lower costs because the fee is tailored both to
people who do not want to change their driving and buy cleaner cars and to those that want to
keep a somewhat dirtier vehicle, but reduce their driving. Such a tax scheme lets people choose
the optimal combination between factors 3, 4, 9, 10, and 11. Extending choice allows a 26
percent emission reduction to be achieved at the same cost. Such a fee could be implemented, for
example, within the framework of an annual inspection program that checks the vehicles
emissions factors and registers the driven km from the mileometer.
This tax can theoretically only be improved upon by a tax on actual emissions, which opens
changes in the driving style and speed as further channels through which adjustments can take
place, would make people demand low emission fuels, and change their travelling plans to avoid
traffic jams, possibly avoiding also reduce driving in winter. An tax on actual emissions would
add the missing factors 6 and 7 to the list of possibilities. The fees in the example were ranked
such that the base for the tax increasingly approximates the externality (NOx emissions). With
every step, consumers are given more options through which they can adapt to the tax incentive
and pick the least cost combination. The example shows clearly that the efficiency loss of a bad
proxy can be substantial. In our example, a fuel tax is a 17 times more expensive option than that
of a circulation tax based on mileage and vehicle emission factors.
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2. How much NOx emissions reduction can be quot;boughtquot; for 25 billion ECU (in discounted costs over the
period 2000-2010 - excluding the value of environmental benefits)
- Increase in fuel tax - 1.5%
- Increase in annual vehicle tax - 4.9%
- Restructuring of and increase in annual tax on - 21%
circulation - depending on vehicle emission
parameters
- Restructuring of and increase in annual tax on - 26%
circulation - depending on vehicle emission
parameters times actual mileage driven
Source : Commission Services. Doc II/576/95
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