Putting the cart before the horse

With a “green” carbon tax soon to be implemented on certain classes of vehicles including double cabs and small bakkies what is the outlook for the success of the tax? And, all things considered, does it actually make sense?

The vehicle industry will find it very difficult to avoid putting up the price of new passenger vehicles, including double cabs and small bakkies, when a new carbon dioxide (CO2) vehicle emissions tax is introduced on 1 September. Besides the fact that the motor industry is only just emerging from a recession and this will undoubtedly impact it, the likely effects of a policy that could earn Treasury R1. 7 billion a year are unclear.

From 1 September new passenger cars will be taxed based on their certified CO2 emissions at R75 per gram per kilometre (g/km) for each g/km above 120 g/km that an engine is certified as emitting. Grams per kilometre is a measure of the amount of CO2 gas a vehicle emits for each kilometre travelled. Vehicles certified below the
120 g/km threshold will incur no tax, but there are precious few of those.

 The aim of the CO2 vehicle emissions tax is to encourage South Africans to move towards more energy-efficient and environmentally friendly vehicles. “The main objective of this tax is to influence the composition of South Africa’s vehicle park to become more energy efficient and environmentally friendly,” said minister of finance, Pravin Gordhan, during the 2010 budget speech. A Business Day editorial recently summed up the purpose of the act as being ‘to create a disincentive so that potential buyers avoid inefficient vehicles that produce large amounts of carbon.’ Estimations are that this tax would add around 2.5% to the price tag of new vehicles.

 The policy followed a torturous route. According to National Treasury the law has its origins in a 2004 proposal by the then Department of Minerals and Energy to encourage the use of more fuel efficient vehicles through the taxation of “gas guzzlers”, meaning vehicles with a high engine capacity such as double cabs and 4x4s which are not fuel efficient. So it was that in the 2009 Budget, the Minister of Finance announced an ad valorem excise duty on motor vehicles to include a CO2 emissions component. This was amended in the 2010 Budget where it was agreed that the implementation of the proposed CO2 vehicle emissions tax would be delayed until September 1, and reformed into a specific tax.

 Whatever form the tax takes there are a lot of disturbed, annoyed and confused industry players out there. Business Day recently alleged that despite consultation occurring around policies, including the CO2 vehicle emission tax, “regulations that result frequently have an ad hoc look to them, as if the officials concerned were merely paying lip service to the need for consultation and had their own agenda all along.” A number of problems with the proposed tax have been identified.

 For one, overcoming the fact that new vehicle sales fell to six-year lows in 2009 will not be aided by the tax. The National Association of Automobile Manufacturers of South Africa (Naamsa) stated in comments on the impending tax that, “the CO2 tax regime will undoubtedly have a negative effect on the industry and will do nothing to promote the achievement of South Africa’s industrial policy objectives.” They and the Retail Motor Industry organisation (RMI) are seeking, as of early August, “a joint meeting with the Ministers of Finance and of Trade & Industry to address remaining policy differences and to consider the need for a more logical and effective integrated approach to reducing vehicle emissions in South Africa.” They are joined by trade union Uasa who have also expressed concern about the effect of the emissions tax.

 The reason the tax isn’t logical are laid out below. If manufacturers are able to soak up the cost of the tax in the interests of maintaining consumer loyalty, by not passing it on to the consumer, the tax will not be achieving its stated aim. Some like Jeff Osborne, CEO of the RMI, feel that “Instead of solely penalizing new car buyers – as implementation of the new tax will do – Government should look to tax all polluters by incorporating a green levy in the price of fuel. Motorists who use less fuel – and thereby emit less CO2 – pay less tax.”

Similarly, according to Naamsa it is a mistake to include the tax at the point of production or the point of importation because if the amount is not applied at the point of sale it will not be visible to the customer since it will be part of the selling price, and will defeat the intended objective. All the National Treasury says on this matter is “It will be good practice if dealers could reflect on the invoices to their clients the CO2 emissions of each vehicle and the estimated total CO2 emissions tax.”

 One effect of the policy could be that of encouraging people to stick to second hand cars. Osborne noted recently, “In its present form, implementation of the new tax regime is discriminatory, designed to drive consumers to the second hand market which is dominated by older vehicles that are less fuel efficient than new ones.” According to Business Day, an expert has calculated that chances are good that the legislation will have the reverse effect of actually increasing emissions “as people are taxed out of the market for a new vehicle, and thus keep running older, dirtier engines”.

 This law will mean that only 12 vehicles for sale in SA today would escape additional tax according to Business Day’s Alexander Parker. What will the effect at the top end of the market be; to reduce demand, but not toward greener options. If the consumer of motor vehicles, double cabs and small bakkies identifies the fact that they’re being charged extra because of the emission levels of their engine; do they have a realistic choice of vehicle to turn to? Even if consumers wanted to not all those who would theoretically change to a greener option can. This raises the most damning of all issues in this debate.

 The vehicle manufacturing industry would like to comply with government’s “green” wishes – presumably customers would also – by introducing lower carbon emitting engines, but the quality of South Africa’s fuel does not allow it. It is a confused and unfair tax because it asks motorists and many small business owners to change their motoring preference while not admitting that this is not something manufacturers can physically respond to. This is why the tax has been called a mere revenue collection exercise. It will be implemented but has no chance of achieving what it purportedly sets out to achieve.

 Parker uses the example of one manufacturer to illustrate this point. “BMW makes a version of the 3 Series 2l diesel that, in Europe, produces just 109 g/km. So poor is our diesel, however, that BMW has to adjust the engine for sale here, taking the car’s output up to 140 g/km, and adding R2 394 to the price of the car under the new tax.” Osborne says, “To my knowledge, South Africa is the only country in the world to have introduced a green tax without allowing motorists the option of switching to cleaner vehicles – and the irony is that some of those cars are made here for export.” Industry cannot introduce the desired models of engines because the fuel available does not allow it.

 According to Nico Vermeulen of Naamsa, “vehicle producers and importers are presently constrained, as a result of the unavailability of Euro 4/Euro 5 enabling fuel in South Africa, in offering the latest highly fuel efficient products to the domestic market.” Jabulani Sikhakhane National Treasury spokesperson, says “There is simultaneous ongoing work by government on improving our fuel specifications. Lead was phased-out a few years ago and new fuel standards to deal with some of the other impurities are under consideration. The vehicle carbon emissions tax could also expedite the introduction of further improved fuel standards.” But the fact remains that the current fuel standards don’t support the intentions of the carbon tax.  So even if the consumer decided he would like to opt for a low emission vehicle on account of the extra cost of “gas guzzlers” he would be limited to a very small range. That will limit the tax’s effectiveness.

 This same logic applies across all vehicle types because it is the fuel available that is the issue. According to Sikhakhane, transport and logistics companies will, for the moment, not have to pay emissions tax on commercial vehicles. “Commercial vehicles will not be subject to the CO2 vehicle emissions tax for now. The option of extending the tax to commercial vehicles may be explored in future, but this would require further research and consultation with relevant parties,” he said.

 If the research continues in the same direction it has so far, consumers of other light commercial vehicles (LCVs), medium commercial vehicles (MCVs), heavy commercial vehicles (HCVs) and extra heavy commercial vehicles (EHCVs) will likely find themselves faced with a similar dilemma.