Carbon tax for road vehicles
A carbon tax affects travel cost and hence leads to changes in passenger demand, mode choice and road network traffic flow. The two common ways to implement a carbon tax are fuel taxes and cap-and-trade systems that allocate CO2 emission permits to drivers, thus putting a price on such emissions. Most current carbon price signals in the road sector are due to fuel excise taxes. Economically similar to carbon taxes, they set an effective carbon price that may be as high as EUR 300 per tonne of CO2. It is important to note that most countries tax diesel at lower effective carbon rates than gasoline, and several countries, such as France, grant reduced rates to heavy duty vehicles. Carbon taxes, specific taxes on energy use (primarily excise taxes) and the price of tradable emission permits are the three components of effective carbon rates (ECR). Essentially, effective carbon rates represent the total price of CO2 emissions from energy use after application of market-based policy instruments.
Ambitious carbon pricing has been successfully implemented in only a handful of countries, including Canada, Denmark, Finland, France, Iceland, Ireland, Norway,Slovenia, Sweden and Norway. Germany is planning a national emission trading system covering the building and transport sectors.
Carbon taxes are aimed at reducing fuel consumption, which in turn results in decreased CO2 emissions from motor vehicle use. The taxes also encourage people to shift to cleaner fuels and more fuel-efficient technology, which also decreases CO2 emissions.
For example, CO2 emission reductions associated with Sweden’s carbon tax, compared to a no carbon tax scenario, amounted to 6.2%, or 0.17 tonnes of CO2 per capita, between the 1990 base year and 2005. The tax level was set at USD 30 per tonne of CO2 in 1991 and gradually raised to USD 132 by 2015. This was in addition to the 1990 VAT of 25% added to petrol and diesel prices.
Another study found that a USD 0.10 per gallon petrol tax increase would reduce US carbon emissions from the transport sector by about 1.5%.
In general, carbon taxes have low operational costs.
Carbon taxes result in increased government revenue. The amount depends on how the revenue is used, e.g. investing in climate mitigation programmes, offsetting revenue loss from lowering taxes in other areas or budgeting as general government income.
Free cap-and-trade permits entail a loss of public tax revenue, since permits are distributed at no cost and generate no revenue. However, auctions of tradable emission permits generate revenue, which is usually used for specific funds or purposes such as compensating energy-intensive industries and electricity providers for increased carbon prices and encouraging electric mobility and public transport.
With regards to the economy and industry, carbon taxes increase energy carriers’ production costs in the short term, especially if the profit margins are fixed and if the economy cannot shift from fossil energy to cleaner fuels. If an economy cannot produce the same level of non-energy goods and services without additional costs, carbon taxes will induce general price inflation and thus reduce aggregate demand.
A carbon tax in road transport can:
- lead to a decrease in travel, resulting in reduced congestion and air pollution
- influence consumers’ choice of vehicle technology and of private vs. public transport, with the conventional-fuel price increase potentially serving as an incentive to use public transport and choose more fuel-efficient vehicles
- increase the adoption of cleaner technology in general due to direct rebound effects, with energy efficiency improvements lowering the cost of using energy-related products and services, in turn boosting demand for such products or services.
Carbon taxes can cause inequity by affecting low-income groups more than high-income groups. The impact of carbon pricing can result in unfair distribution, making the measure less politically and socially acceptable. Such distributional effects depend on the nature of revenue recycling and treatment of transfer income. Carbon tax revenue should be explicitly used to correct undesirable distributional outcomes.
Some studies show that even when the revenue is used to correct the distributional impact, carbon taxes can initially have a slightly negative effect on gross domestic product.
Another possible adverse effect is fuel tourism. When differing tax rates cause motor fuel retail prices to vary between neighbouring countries, consumers may cross the border to buy fuel and thus avoid the increased fuel price effect of the carbon tax
ITF (2020) Transport Climate Action Directory – Carbon tax for road vehicles
https://www.itf-oecd.org/policy/carbon-tax-road-vehicles
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