Reforming existing taxes into an environment related tax can accelerate the transition to low carbon vehicles and reduce road transport emissions

The transport sector is arguably the most difficult and expensive sector in which to reduce greenhouse gas emissions. The largest contributor to transport greenhouse gas emissions is road transport. To limit and reduce the emissions in this sector will require policy makers to encourage a shift to fuel-efficient and lower carbon vehicles. The problem of introducing a new tax to reduce greenhouse gas emissions is public acceptance, when the benefits of this policy cannot be seen until future generations. The thesis examines reforming existing taxes into an environmental related tax that can provide a double dividend by raising revenue for the government and reducing greenhouse gas emissions. A carbon differentiated vehicle purchase tax imposed at the time of purchase can provide a strong price signal at the time of purchase that either rewards choice for 'low carbon' or penalises for 'high carbon' vehicles. This policy instrument ensures vehicle fuel efficiency and environmental performance becomes an important consideration and does not 'drop-off' at the time of purchase. Current literature finds consumers undervalue fuel efficiency against the rational economic model and apply on average a very high discount rate or an equivalent eighteen-month payback period for fuel costs. (King 2007). Van Dender (2009) says consumers are reluctant to pay up front for fuel efficiency in return for uncertain reduction in fuel expenditure. In effect, the market will be reluctant to invest in the research and technological advancement of lower carbon vehicles. The presentation will examine whether reforming vehicles taxes is an effective measure in reducing GHG in road transport and what policy design will accelerate the transition to low carbon transport without reducing government revenue.