Higher tax proposal only adds fuel to efficiency debate

Increasing the cost of petrol won’t wean people onto more fuel efficient cars. Chris Murray

New research by economists from the Australian National University claims that if petrol excise duty were linked to inflation, Australians would drive less and buy more fuel-efficient cars. But higher fuel taxes are not the way to put the public in the fuel-efficient driving seat.

A study of 132 countries around the world over a 13-year period examined the effect of petrol prices on the uptake of fuel-efficient vehicles. Dr Paul Burke, one of the economists involved in the study, said on Radio National on February 27, 2013, that “higher prices lead to consumers using less petrol and also consumers deciding to purchase cars that are more fuel efficient”.

Linking petrol excise duty to inflation will not necessarily shift consumers to more fuel-efficient vehicles. Petrol prices in Australia have doubled since 2000 and there has been no significant shift to fuel-efficient vehicles. In March 2000 the average retail price of regular unleaded petrol prices was around Aus$0.72 per litre compared to around Aus$1.42 per litre in 2011-12. This means that petrol prices will need to rise significantly to induce drivers to switch to fuel-efficient vehicles.

Decades of high fuel taxes in Europe have led to fuel prices typically two to three times those in Australia. But this did not by itself accelerate the shift to fuel-efficient or alternative vehicles.

The uptake of fuel-efficient vehicles in 132 countries is not only a result of raising petrol excise taxes at the same rate as inflation. Countries in the European Union differentiate their vehicle excise taxes on the basis of the fuels emissions, which provides feedback to households regarding fuel economy. Furthermore research literature and many empirical studies indicate that it is a combination of fiscal instruments and regulations that contribute to consumers buying more fuel-efficient vehicles. This raises the question of Dr Burke and Dr Nishitateno’s study as to whether the countries with a higher percentage of fuel-efficient vehicles differentiate their vehicle excise taxes on the basis of the fuel’s emissions.

In addition, did the Australian National University study consider if higher fuel prices were combined with environmental taxes, regulatory instruments and incentives in the 132 countries they studied? Were the more densely populated countries with smaller fuel-efficient vehicles offering incentives or rebates for acquisition of such vehicles, or imposing additional taxes and surcharges on vehicles that were environmentally unfriendly?

For example, from January 2013 Singapore is offering rebates between $5,000 and $20,000 for vehicles with carbon emissions of less than 160g/km and imposing registration surcharges from 1 July 2013 on vehicles with carbon emissions exceeding 211g/km.

The European Commission recognised the limited effects of higher fuel taxes. It adopted mandatory performance standards on automakers for new cars registered in the EU, requiring them to achieve 130 grams of CO2/km by 2015. If this is exceeded, the manufacturer concerned will be liable for financial penalties.

Why penalise consumers with higher petrol prices when our local motor vehicle industry receives significant Government funding to manufacture inefficient vehicles with average emissions of 230g/km in 2011? This is 64% higher than in the European Union (230g/km compared to 140g/km).

Raising petrol excise taxes is regressive. Higher fuel prices will raise the cost of living for consumers on low incomes who are not financially able to upgrade to a fuel-efficient vehicle. Nor are they able to reduce kilometres travelled if they live in an area that has limited access to public transport. Consumers and businesses entitled to claim a tax deduction for higher fuel costs may not be discouraged from buying high emitting vehicles and reducing kilometres travelled.

There is no question that the sale and purchase of high emitting vehicles needs to be addressed. The International Energy Agency reported that Australia had the least efficient road passenger transport and one of the lowest levels of new passenger vehicle fuel efficiency in the world, and the gap was expected to widen.

Part of the reason is, as Burke and his colleagues suggest, “richer households are more likely to purchase larger cars”. But the Australian Government has allowed this to occur. Failure to introduce fiscal instruments to discourage the acquisition of high-carbon emitting vehicles will allow the continuing growth of such vehicles. Strong sales of SUVs, increasing by 25.3% in 2012, shows that rising fuel prices seem to have little effect on consumer buying patterns.

While fuel economy is reported to be important in the early stages of car purchasing, its importance drops off nearer the purchasing decision. Then other preferences become more paramount, such as performance, image, size and safety.

The focus of policy should be on introducing environmental taxes to encourage Australians to look at innovative new car technologies, and mandatory performance standards to dissuade consumers from the importation of fuel-intensive vehicles. More tax on petrol punishes the poor, and does little to change behaviour.