Encouraging Environmentally Friendlier Cars via Fiscal Measures: General Methodology and Application to Belgium

Abstract: In this paper, a Belgian tax reform plan is elaborated to respond to the EU proposal that requires member states to restructure passenger car taxation systems, preferentially based on the CO₂ emissions of the car. A tax orientation on CO₂ emissions alone might however favour diesel vehicles, characterised by a higher fuel efficiency, whereas they release more polluting emissions (PM and NO_x) than comparable gasoline vehicles. This paper introduces a methodology, the Ecoscore, as a potential tax assessment basis. The Ecoscore is based on a well-to-wheel framework and enables a comparison of the environmental burden caused by vehicles with different drive trains and using different fuels. A new proposal for a fixed vehicle taxation system, based on the Ecoscore, is launched. In addition, its impact on the life cycle cost of conventional as well as alternative fuelled cars is measured in order to examine its steering effect towards a cleaner vehicle choice. The overall result is that current tax distortions can be corrected by restructuring the vehicle registration tax and annual circulation tax, based on the Ecoscore. To stimulate behavioural changes, such a fiscal policy should however be paired with additional policies that act on the other important aspects that determine the car purchase decision.