Report

Charging Drivers by the Pound: The Effects of the UK Vehicle Tax System

May 19, 2017 | Davide Cerruti, Anna Alberini, Joshua Linn

Summary

Using data on UK vehicle registrations, taxes, and characteristics of new cars, we estimate the effect of the carbon-based Vehicle Excise Duty (VED) system on new vehicle registrations and carbon emissions.

Key Findings

  • Under the VED, a vehicle’s annual registration tax depends on its carbon dioxide (CO2) “band,” with higher taxes imposed on high-emitting vehicles.
  • Using highly detailed new car registration data, we find that CO2-based vehicle taxes increase registrations of low-emitting vehicles.
  • The VED has primarily affected registrations of the very lowest- and highest-emitting vehicles, only slightly reducing average emissions rates across all new car sales.
  • Comparing the actual VED with hypothetical alternatives, the VED is more effective at reducing emissions than a proportional vehicle tax, but is less effective than a carbon tax.

Abstract

Policymakers have been considering vehicle and fuel taxes to reduce transportation greenhouse gas emissions, but there is little evidence on the relative efficacy of these approaches. We examine an annual vehicle registration tax, the Vehicle Excise Duty (VED), which is based on carbon emissions rates. The United Kingdom first adopted the system in 2001 and made substantial changes to it in the following years. Using a highly disaggregated dataset of UK monthly registrations and characteristics of new cars, we estimate the effect of the VED on new vehicle registrations and carbon emissions. The VED increased the adoption of low-emissions vehicles and discouraged the purchase of very polluting vehicles, but it had a small effect on aggregate emissions. Using the empirical estimates, we compare the VED with hypothetical taxes that are proportional either to carbon emissions rates or to carbon emissions. The VED reduces total emissions twice as much as the emissions rate tax but by half as much as the emissions tax. Much of the advantage of the emissions tax arises from adjustments in miles driven, rather than the composition of new car sales.