Diesel price hike and motor tax overhaul proposed for Budget 2021

"The recorded average emissions of new car registrations during the last decade has been based on the discredited laboratory based NEDC emissions test"

Increasing the price of diesel at the pumps and overhauls to the motor tax regime are among the recommendations of the Tax Strategy Group’s pre-budget review, published on Monday.

Among the changes it proposes is the equalisation of diesel and petrol excise duties, suggesting a 2.32 cent/litre increase per year for the next five years, or a 1.16 cent/litre rise over the next decade.

On motor tax, it suggests increasing the number of Vehicle Registration Tax (VRT) tax bands from 11 at present to 20. The new rates would vary from 7 per cent for vehicles with CO2 emissions up to 50g/km, to 39 per cent for cars emitting 191g/km or over. The group also suggests adjusting the NOx surcharge bands applied to newly registered cars so the lowest band is 1-40 mg/km of NOx instead of the current 1-60 mg/km of NOx.

The paper states: “Essentially there is an argument that VRT charges were far too low during the last decade as the rates applied were based on vastly underestimated CO2 values.”

“The recorded average emissions of new car registrations during the last decade has been based on the discredited laboratory based NEDC emissions test which has been shown to be a very poor gauge of the real world emissions performance of cars.”

With the NEDC system being replaced by a new system, known as WLTP, the tax strategy group says any reforms should seek to maintain a level playing field between cars tested under the two testing regimes for tax purposes.

In terms of grants for electric and hybrid vehicles, it proposes that for vehicles with a price over €40,000, the current €5,000 VRT relief would be tapered off, cutting off relief on cars priced at €50,000 or more.

Motor tax

On motor tax it estimates that the fall in the average rate per car – from €443 in 2015 to €346 last year, had led to a drop in Exchequer revenue from €880 million five years ago to an estimated €707 million for this year.

“Motor tax will have to be adjusted to account for the new WLTP emission testing mechanism from 2021.”

The group says the policy objectives for motor tax reform are to ensure "as close to a level playing field as possible between NEDC and WLTP tested cars, and to deliver on the Climate Action Plan commitment to reform the tax structure in light of more accurate emissions testing.”

Its preferred reform would be that separate tax regimes would apply depending on when a vehicle was first registered. Therefore, cars registered pre-July 2008 will still be taxed on engine size, while cars registered up to December 31st this year will be taxed on the outgoing NEDC testing system.

From then onwards all tax will be applied on newly registered vehicles based on their WLTP figures. It estimates that changes proposed would mean 1 per cent of cars would see a €20 rate reduction, 88 per cent would see no rate change, for 7 per cent there would be a €10 rate rise per year, while the remaining 4 per cent would see a rate increase of between €30 to €50 per year.

Scrappage schemes

In light of the impact of Covid-19, the Irish motor trade has called for a new scrappage scheme. However, the group’s paper says such schemes “deliver poor environmental outcomes”.

It also dismisses claims by the motor trade that renewing the Irish car fleet more quickly will lead to a significant drop in overall emissions. “Fast car fleet renewal, when assessed on a life cycle basis, can significantly add to overall emissions due to the relatively high emissions embedded in the manufacturing and end-of-life cycle of a car,” it states.

In the longer term, it warns that with the scale of the proposed ‘electrification’ of the national vehicle fleet, “there are significant annual Exchequer revenues at risk”.

Established in the early 1990s, the group is chaired by the Department of Finance, with membership comprising senior officials and political advisers from a number of departments and offices. Its research papers are used to inform budget strategy.