Energy Efficiency Policies around the World: Review and Evaluation

3.7 Policy Instruments for Cars Energy Efficiency

The policy instruments for cars include measures to improve the energy efficiency of vehicles and also measures that influence the use of cars. The measures considered here are; road pricing, CO2-labeling of cars, incentives for car scrapping, subsidies for the use of bio-fuels and fiscal measures (taxes or subsidies) on car purchases, car ownership and motor fuels.

3.7.1 Road pricing

Road space is often a scarce commodity. For the vast majority of roads there are no road user charges and so there is no pricing system to balance supply and demand. The results are traffic jam, congestion, time loss and pollution. One way to share this scarce commodity is to charge the users for road use.

According to the spatial extension and complexity of road charges there is a categorisation of three stages of road-user pricing: corridor scheme, area scheme and national scheme:

• The corridor approach involves a toll for the use of a stretch of road, tunnel or bridge where access can easily be controlled. The main objective is to generate revenue that will recover the costs of constructing and maintaining the road. Electronic tolling is now well spread around the world, and in some countries about half of all charges are now collected in this way. 
• The area scheme implies pricing for an integrated local road network. The reasons for implementing such a scheme are not only the financing of road infrastructure and the improvement of traffic conditions, but also the reduction of the costs of congestion, pollution and noise. Singapore is the pioneer of the area scheme since 1975. The area scheme has also been implemented with good results in Norwegian cities (e.g. Oslo, Trondheim and Bergen) and got a new boost with the successful implementation in London in 2003 (Box 3.1 below). Stockholm had a successful trial in 2006 .
• National schemes extend the charged area to a wider road network, rather than an individual area. Therefore, the emphasis is on charging for the distance travelled rather than for targeted bottlenecks. In some countries like Austria, Switzerland and Hungary the highway users have to buy a vignette, which allows them to use the highway-network for a certain period. In other countries, e.g. France or Italy, the driver pays according to the driven kilometres. In many countries, such schemes have been implemented using different types of technology for example onboard units combined with GSM or infrared devices. In many European countries the discussion is focussed on expanding these technologies to private car-traffic.

Box 3.1: Toll area schemes: examples of Singapore and London

Road user pricing will become an important issue in the future, with the rapid development and massive cost reduction of road pricing technologies, with the increasing car traffic that cannot be satisfied with additional road infrastructure, and the environmental needs to slow down the car-traffic.

3.7.2 Car labels for fuel consumption and CO2 emission

Introducing labels for new cars, which display information on fuel consumption and/or CO2  emissions, is a relatively simple measure, provided that most car manufacturers on the global market have such information already available and standard test cycles (like those established in the European Union) are being applied. It is advisable to promote such labelling schemes with adequate information campaigns and eventually promote low-energy cars through fiscal or financial incentives. Fuel efficiency and CO2 labelling schemes are currently implemented in EU member countries following a European Directive. They are also in operation in Australia.

The EU Directive (1999/94/EC) obliges car manufacturers and distributors to display information on fuel consumption and CO2 emissions of new passenger cars in showrooms and within any marketing activity (CO2 label). It also makes it mandatory to publish annual guides on fuel economy and CO2 emissions, with data for all new passenger car models available on the national markets .

Some EU member states have started additional promotional campaigns around the labelling schemes and have monitored the impacts of their national activities on consumer behaviour. The use of labels could lead to a reduction in fuel consumption of 4-5% due to consumer awareness.

The labels include mandatory data on CO2 emissions (g/km), fuel consumption (l/100km and/ or km/l). In some countries an efficiency rating system and additional data like noise, emissions standards, tax and other technical data are included.
The EU directive allows the member states plenty of room for national implementation; as a result, the labelling systems differ within Europe. Two types of comparison methods are used, which hamper harmonisation (see Figure 3.12):

• The absolute comparison method, in which the energy efficiency/CO2 classes (6 or 7) are defined by fixed values  (e.g. Denmark, Belgium, France, Germany, Austria, UK, Portugal).
• The relative comparison method, in which the energy efficiency classes are related to the stock average  (e.g. The Netherlands, Spain or Switzerland).

In the EU directive the labels are not required to show any comparative information that could allow consumers to draw conclusions about the fuel efficiency of a certain model in relation to the overall market. With the relative comparison method, consumers mostly select a new car within a certain range that is primarily determined by size, price and needs. So they are interested in the fuel economy of a certain car with respect to other cars, which are the same in their eyes. It proved difficult to develop a consistent and fair method for a relative comparison, which would be accepted by all involved parties, especially the car manufacturing industry.

The advantage of the absolute system is that it is the most simple comparison method to handle and the easiest to understand for consumers. It avoids the arbitrary and contentious issues of defining the categories of classes.

CO2 labelling is a practical method to inform consumers about the fuel economy and environmental standards of the new cars. But as the buying decisions are strongly influenced by costs, size, power, manufacturer and safety of the car, the impact on the consumer decision is quite low. For this reason, relative comparison methods on the labels are preferable. CO2 labelling may lead to a growing awareness about environmental impacts of car use. And in combination with tax incentives (e.g. the "Green motor tax" in Denmark), it may already help shifting consumer decisions to more environmental friendly cars.

CO2 labelling for used cars imported by developing countries could inform consumers about the fuel economy and environmental standards of the used cars and thus influence their decisions. Nevertheless, the fuel price in relation to the personal income in the countries importing used cars, plays an important, even a crucial role, which might have a strange impact on the decision of buying a car.

3.7.3 Car scrapping

Several countries within and outside Europe have implemented car scrapping schemes during the 1990s to increase the rate of renewal of the car fleet and to improve environmental conditions . Scrapping old cars is a possible instrument for reducing transport-generated air pollution, because they disproportionately contribute to pollution, but it has proved difficult to design a scrapping policy without side effects.

The direct impact of scrapping schemes is to reduce emissions caused by cars, since they substitute older, more polluting vehicles with newer, cleaner ones. However, they may have a negative effect as they shorten the average car's life and, therefore, if the schemes are permanent or repeated over time, they increase the amount of energy and materials used and emissions produced during manufacturing. As the actual difference in environmental performance between some older and newer vehicles is substantial, and the energy input and environmental damages are much higher in car use than in car production and car recycling, the positive environmental effect is likely to prevail for most of the schemes implemented.

Two main types of scrapping schemes are used:

• Cash-for-scrapping gives a certain reward for any scrapped car, whatever the subsequent replacement decision taken by the consumer. The bonus is awarded even if a replacement vehicle is older than the scrapped one, or if no car is bought to replace the scrapped one.
• Cash-for-replacement gives a bonus conditional upon a specific kind of replacement - typically, but not necessarily, a new model car.

The major findings of evaluations of cars scrapping schemes are the following:

• There is not much empirical evidence about the cost-effectiveness of scrapping programmes;
• When the selection of vehicles to be retired is made carefully, cash-for-scrapping schemes may achieve emissions reductions at a reasonable cost. 
• Small scale programmes are more efficient than large-scale ones. The number of vehicles retired by either type of scheme should not go beyond a certain number of vehicles selected among the 'gross emitters' in the fleet. Otherwise, the cost per tonne of emissions avoided increases considerably. 
• By bringing forward a large number of scrapping and replacement decisions, the schemes may cause considerable distortions on the car market. For example; older vehicles may migrate to other parts of the region as a result of the market response. 
• The cash-for-replacement schemes implemented up to the present time appear to have been much less cost-effective, as they constrained the consumers to purchasing a new car. In doing so, they have excluded lower-income groups who cannot afford to purchase new cars even with an incentive bonus. This makes the schemes somewhat inequitable, but more importantly, prevents them from attracting many of the oldest cars in the fleet, used typically by lower-income families intensively, as their principal means of transport. These schemes, therefore, have not properly selected the vehicles to be retired, leaving in use a large proportion of the 'gross emitters'. Moreover, higher payments are necessary to influence the decision to purchase a new car, rather than simply scrapping a car (which might be replaced with a used car or not replaced at all). As a consequence, these schemes have a high average cost per tonne of pollution avoided and they do not compare favourably with other alternative policy tools on purely environmental grounds.
• The scrapping programmes in the EU have produced the highest emissions reductions when implemented along with the introduction of new technologies with significantly lower emissions, e.g. the three way catalytic converter and particle filters.
• Inspection and maintenance is a much more generally applicable instrument to reduce the emissions from the existing car fleet.
• In developing countries, where cars older than 10 or 20 years and more are in use, a car scrapping program may have more positive environmental effects than in the industrialised countries. It is evident that not only cars and their emissions and energy efficiency standards but also the fuel quality is a precondition for positive environmental effects.
  

3.7.4 Biofuels

Biofuels are considered as a corner stone for reduction of greenhouse gases in transport, to limit the impact of rising oil prices and to improve the security of supply . The recent years showed a boom in biofuels production and new political strategies all over the world to promote a future market. With increasing oil prices, new strategies to promote biofuels have been developed and investment in new biofuels facilities have boomed in Brazil, Europe, the United States, and elsewhere .  In Europe, the European Commission launched the Biofuels Directive (2003/20) that requires all member states to ensure a minimum proportion of 5.75% of biofuels in total road fuels by 2010. Another directive gives the member states the possibility to grant tax reductions or exemptions in favour of biofuels. Most member states have started implementing a biofuels policy, through tax reductions; new large-scale investments are being planned to increase the production capacity.

The two most prevalent biofuels are ethanol, currently produced from sugar or starch crops, and biodiesel, produced from vegetable oils or animal fats. World production of ethanol more than doubled between 2000 and 2006, while production of biodiesel quadrupled. In total, biofuels now provide around 1% of the world's liquid transport fuels. Another biofuel is biogas from organic waste fermentation with the potential to reduce (or to be mixed with) the natural gas.

Although very attractive, a large scale development of biofuels raises certain issues.

• Apart from a few cases, they are still more costly than diesel or gasoline and need subsidies; however, with increasing oil prices some biofuels are becoming competitive even without tax reductions.  Ethanol from Brazilian sugarcane is the cheapest fuel.
• The energy output from biofuels is lower than from fossil fuels: for 1 litre biodiesel the equivalent is 0.92 litre diesel and for 1 litre ethanol it is 0.7 litre gasoline.
• Biofuels require large land areas, which may compete with other land uses (e.g. food production)
• Large scale biofuels production may lead to an increase the price of food.
• Intensive production of biofuels may have many environmental impacts; erosion, pesticides, water etc.

The greatest potential for biofuels lies in the development of new technologies that will significantly expand the range of biomass feedstock, increase conversion efficiencies, and lower production costs .

International trade in biofuels is currently limited by the fact that many countries maintain high tariffs for these fuels. This is likely to change in the years ahead. Many of the rich countries that consume large quantities of transportation fuels (e.g. Europe and Japan) have limited land available for growing biomass feedstock, which leaves them unable to generate more than a fraction of their transportation fuels from domestically produced biofuels.

For biofuels to make a large and sustainable contribution to the world energy economy, governments will need to enact consistent, long-term, and well coordinated policies. These policy priorities include:

• Biofuel policies should focus on market development, creating an enabling environment based on sound fiscal policy and support for private investment, infrastructure development and building of transportation fleets that are able to use the new fuels.
• Policies are needed to expedite the transition to the next generation of feedstock and technologies that will ensure dramatically increased production at lower cost, while reducing negative environmental impacts.
• Maintaining soil productivity, water quality, and other ecosystems is essential. National and international environmental sustainability principles and certification systems are important for protecting resources as well as maintaining public trust in the merits of biofuels.
• Government fiscal and land use policies will help determine how broadly the economic revenues from biofuels are spread and how they will shape rural economies.
• Continued rapid growth of biofuels will require the development of a true international market unconstrained by the trade restrictions in place today. Freer movement of biofuels around the world should be coupled with social and environmental standards and a credible system to certify compliance.
• Biofuels should be developed within the context of a broad transformation of the transport sector aimed at dramatically improving transport efficiency.

Fiscal Measures on Cars

The share of car-related expenditure in household budgets (around 15%) suggests that fiscal measures should have an influence on the key drivers which affect energy use and CO2 emissions of cars: ownership levels, annual mileage, and specific consumption/emissions. Fiscal policies include taxes or subsidies on car purchases, on car ownership and on motor fuels.

Car Purchase Tax

The first level of taxation is on car purchases (Figure 3.13). Some countries rely only on the value added tax (VAT) system, with cars taxed at the normal rate, and low registration fees. This is generally the case in car producing countries (e.g. France, Germany, the UK, Italy, and Sweden since 1997). The VAT on cars may have a large range from 5% (Singapore, Japan) to 25% (Denmark, Sweden).

In other countries, there may be a specific tax on car purchases, which give incentives to the consumers to buy less energy consuming cars or cars with a lower specific CO2 emissions or, more recently, efficiency/CO2 emissions. This is presently the case in several European countries: Austria (since 1992), Denmark (since 2000), Norway (since 1996), the UK for company cars (since 2002), France for "powerful" cars (since 2006) and the Netherlands (since 2006). Some countries are planning the introduction of similar green taxes (e.g. Portugal, Spain). Incentives are given in some countries for low-polluting cars, such as diesel cars equipped with a particle filter (e.g. Austria) or for clean cars (e.g. Germany for cars meeting the Euro IV emissions standard), either through a bonus, which is deducted from the purchase tax or from the circulation tax.

High taxes result from long-term policies designed to deter people from buying a car - this is the case in Singapore, Denmark, Norway and Finland, and also in some developing countries where cars are an important component of imports. Even though these taxes may be based on technical characteristics, their level is mainly dependent on the vehicle's price. The pre-tax price of the car reflects indirectly the level of consumption, since consumption is related to weight and power.

There is some concern about unintended effects from such taxes. First, high taxes can deter consumers from changing cars, and thus the penetration of new technologies is slower. Second, a high level of tax on car purchases concentrates the new car market on the most affluent part of the population, whose tastes may be more oriented towards energy intensive cars. Finally, with the introduction of new technologies, new cars may be more expensive because they are more efficient; a US$600 additional cost at market price for improved fuel economy may translate into US$1,500 when taxes are included in the Danish system, for example.

High car purchase tax has an impact on the motorisation rate. Countries with high car purchase tax have a motorisation rate significantly lower than countries with similar level of development (e.g. Denmark with a motorisation rate 25% below the EU average or Singapore with a very low motorisation rate).

Nevertheless, a high motorisation rate does not only depend on a low taxation of the car purchase but also on the transport scheme (public transport offers; land-use and urbanisation) and on the cultural and economical differences. Thus a low motorisation rate in Singapore or in many large cities (e.g. Paris, Tokyo, New York) is also influenced by the high quality of public transport and the scarcity of land.

Car registration tax

The second level of taxation is the annual registration tax (or tax on car ownership) (Figure 3.14). Consumers will take into account such a tax in their car-buying decisions (whether a new or a used car). In most countries, this tax varies depending on the power of the car, which is linked to the fuel consumption . In an increasing number of countries this annual car tax also includes environmental or energy efficiency aspects. In several EU countries, the tax varies according to the fuel consumption and/or CO2- emissions: Denmark since 1999, Germany since 1997, the UK since 2001, France since 2006 (for company cars), and Sweden (since 2006 for new cars)

Taxation of Motor Fuels

The third level of taxation is related to motor fuels. There are large differences between countries in the taxation of motor fuels, both gasoline and diesel. It ranges from subsidies for motor fuels to high taxation.

In Europe, such taxes are much higher than in the rest of the world, for three reasons:

• Most European countries are oil importers.
• Revenue from motor fuel tax is an important source of income for the government budgets (infrastructure).
• There is a strong commitment to meet Kyoto targets, and one way of doing this is to regularly increase the tax on motor fuels. In some countries, this is being achieved by adding CO2/environmental taxes (e.g. Norway, Sweden, Finland and Germany). Such, green taxes are more acceptable to the population, especially if part of the revenue is recycled to support energy /CO2 efficiency measures.

The level of fuel taxes can be compared to the per capita GDP, considered an indication of national wealth.  For Europe this indicator shows a clear hierarchy: it is lowest in Luxembourg and Switzerland and then come most of the older EU countries on a quite similar level. The new EU member states from Central and Eastern Europe have a ratio twice or three times as high, which explains the lower levels of car ownership and use (Figure 3.16).

Fuel taxes can have a high impact on national revenues. For example Venezuela spends 17 % of its total state revenues on subsidising fuel. On the other extreme South Korea receives 33 % of its total state revenues from fuel taxation and EU countries between 10 and 15%.

There are two aspects to motor fuel taxes: the average level of taxes, and the difference between fuels (gasoline and diesel). The second aspect of the tax differentiation between gasoline and diesel may be of no importance, for example in the USA, where there are very few diesel cars. In Europe, this was of little importance until the end of the 1970s, because diesel use was limited to large cars with specific uses (taxis). However, this aspect gained in importance in the 1980s and 1990s, because consumers were offered diesel versions of cars, both at the top and the lower end of ranges.

On the one hand, the specific consumption and emissions of diesel cars, compared to equivalent gasoline cars, are slightly lower (despite the carbon content of diesel being higher than gasoline).  Diesel cars are usually driven over much larger distances annually. In France, where the tax differentiation is high, the annual mileage of a diesel car is around 20,000 km, compared to around 11,000 km for gasoline cars. As a result, the annual emissions of a diesel car are higher than a gasoline car.

Is this difference directly linked to the price? There is a debate between experts on this point. Some experts consider that travel needs are constant, and for those with high needs, diesel is more cost effective because the lower fuel cost more than balances the higher price of the car. Other experts consider that the difference in the energy price per kilometre explains at least part of the difference in the distance travelled .

With regard to the average price level, many studies have demonstrated a link between the fuel consumption of cars and the price. Their results are consistent, and converge towards a long-run elasticity of fuel consumption to fuel price of  0.64 . In the long run, a 10% increase in the price of motor fuel leads to a total reduction in consumption of 6% (Table 3.3) (of which 2.5% reduction in the car stock, 3% reduction in the mileage per car, and 11% increase in fuel efficiency) .

The intervals of variation around the mean value of these estimates are relatively large, which means that other policy demands (other types of fiscal and non-fiscal measures) and the change over time in personal incomes are of importance as well.

The elasticities in Table 3.3 show a clear reduction of car mileage in relation to the fuel price. The empirical data in Germany, when the fuel taxation was significantly raised from 1999 to 2002, show a reduction in the total mileage per year. Looking at the energy consumption (based on fuel sold at the petrol fuel stations), the data show a higher reduction, due to border sales.

Conclusions and policy recommendations

As regards car purchase taxes, countries with high taxes (Denmark, Finland, Norway, the Netherlands, Ireland and Portugal) have lower rates of car ownership (per inhabitant or per unit of GDP) than the European average. Countries with no significant registration fees have higher car ownership rates. However, high levels of taxes on car purchases do not influence the consumer drive towards more efficient cars.

Fuel taxation has different effects, both in short and in the long-term:

In a short term, a comparatively low elasticity shows that a dominating share of the trips made are trips with a low elasticity: The daily trip to work or to school, the trips for shopping, for personal services and for leisure are "ritual" trips, often optimised in a daily time budget. Only, if the opportunity is given to shift to public transport or to use other, nearby shops, personal services etc., vehicle mileage can be reduced easily by the consumers. Thus the accessibility of different activities is important; and vice versa, the influence of the transport system (i.e. accessibility) and the urban structure are significant factors in assessing the effects of pricing in the transport system.

In a long-term, the accessibility through a reorganisation of the spatial structures and through the introduction of new services in public transport might have a secondary effect on pricing of the transport system (road pricing, fuel taxation, and car taxation). The long term elasticity in fuel pricing and vehicle mileage is higher. It seems evident that pricing policies need to be linked to a public transport policy as well as spatial planning.

The total taxation of car use (purchase, ownership and fuel) is another important indicator. Countries with high purchase or ownership taxes as the Netherlands, Norway or Denmark also have high taxes on fuel, whereas UK has high fuel taxes but a low purchase tax and comparatively low ownership taxes. It is evident that the total costs of car use per yearly mileage, including all taxes, might be the only figures used for comparison. 

The taxation of fuel should follow an escalator approach with periodical growth rates. Thus the behaviour of car use could be influenced in the longer term. This approach has been applied in Germany and UK. Otherwise, consumers tend to get used to the higher prices in the longer term and the short term effects of a rise in taxes are counterbalanced.