Clause 15 - Cars registered on or after 1st March 2001: rates of duty

Finance Bill – in a Public Bill Committee at 9:45 am on 16th May 2002.

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Photo of Michael Jack Michael Jack Conservative, Fylde 9:45 am, 16th May 2002

I beg to move amendment No. 32, in page 10, line 20, at end insert—

''( ) In paragraph 1B(b) of Schedule 1 to the Vehicle Excise and Registration Act 1994 (c.

22) the words 'or the premium rate' are omitted.''.

Photo of Joe Benton Joe Benton Labour, Bootle

With this, it will be convenient to take the following amendments: No. 33, in page 10, line 21, leave out

''the Vehicle Excise and Registration Act 1994 (c. 22)''

and insert ''that Act''.

No. 3, in page 10, line 27, leave out column 5.

No. 34, in page 10, line 35, at end insert—

''(1A) In paragraph 1D of Schedule 1 to that Act, the words 'and is not liable to the

premium rate' are omitted.

(1B) Paragraph 1E of Schedule 1 to that Act is omitted.''.

Photo of Michael Jack Michael Jack Conservative, Fylde

I regard the amendments as probing amendments that are designed to establish the logic behind the premium rate column in the table for vehicle excise duties in clause 15. The explanatory notes tell us that the clause principally amends the structure of the present arrangements for vehicle excise duty for cars first registered after 1 March 2001 to create

''a new low tax band for vehicles with emissions of 120 grammes of carbon dioxide per kilometre or less.''

I strongly applaud anything that encourages the improvement of automotive technology and reduces emissions, effectively making cars more environmentally friendly.

However, the thrust of the explanatory notes is to advise us that the principal objective of the clause is to reduce carbon dioxide emissions. It is interesting and slightly odd that the Treasury has decided, for reasons that I am sure it will explain, to discriminate in financial terms against the vehicle of choice given that carbon dioxide reduction is the principal objective even if the differential in the duty rate is only £10 between standard rate petrol vehicles and premium rate diesel vehicles.

I declare a personal interest: I drive a turbo-charged diesel Volkswagen and I have been assisted in producing some of the information that I shall put before the Committee by kind representations made to me by Delphi Automotive Systems, which makes the fuel injection equipment for, among others, Ford diesel cars.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the right hon. Gentleman let the Committee know whether his turbo-charged Volkswagen diesel has a particulate filter?

Photo of Michael Jack Michael Jack Conservative, Fylde

It does not have a particulate filter, but we will discuss particulates because the hon. Gentleman has some information about them. I am interested to hear his views on whether particulate measure PM10 or PM2.5 is the most appropriate to determine the

impact of particulates on air quality and health matters. I am sure that we will come to that point in due course.

The Volkswagen engine is highly efficient, but it is not the latest design. As we shall see, it does not produce the lowest particulate emission. The hon. Gentleman draws my attention to an important point. In any cohort of motor vehicles, there will be old ones that have inferior technology, those that have modern technology and those that have advanced technology. The real question to ask is what strategic reason the Government have for discriminating against diesel cars that will make even greater gains in emission technology than they have done already. We ought to encourage the development of improved vehicle technology. Had there been a sixth column, which praised the more modern diesel engine in monetary terms, I might not have tabled the amendment. However, there is no sixth column, so we have to concentrate on the fifth column.

I want to return to my initial point about carbon dioxide. Diesel vehicles produce 30 per cent. less carbon dioxide than petrol ones. If 50 per cent. of cars on the road in the United Kingdom were diesel, we would effectively be able to deliver a full 1 per cent. of our contribution towards the UK's Kyoto target commitments. That is important because we are considering Kyoto target achievements against the background that one of the major contributors, the nuclear power industry, is seeing the lifetime of current stations coming to an end. When the advanced gas-cooled reactors start to close after about 2010 or 2012, there will be some real problems to be borne, but I shall not digress.

I want to consider some of the key factors that are laid down concerning the parameters of emission outputs and their contribution to air quality. A number of European standards detail and guide us through what is happening in the world of diesel engines. In terms of emission standards, Euro II, introduced in 1997, Euro III, now currently being used, and Euro IV, a more advanced emission standard that comes into force in 2006, all clearly contain more demanding requirements for improved emissions of petrol and diesel. If we look at Euro II and its requirements on carbon monoxide—one of the key gases affecting air quality—we find that diesels are required to adhere to a standard of 1 g per km. In Euro III, that figure goes down to 0.64 g, and in Euro IV to 0.5 g.

What is interesting—this relates to the point made by the hon. Member for Wolverhampton, South-West (Rob Marris)—is that the latest technology, common rail diesel car engines, has already attained a rate of 0.3 g per km. Today's modern diesel engine cars are already beating the most stringent European standards on carbon monoxide, which are required to be introduced by 2006. The owner of a Ford Focus TDCi, the latest car from Ford with a common rail diesel engine, would pay a £10 premium. That is rather odd, because the car delivers a substantial advance in carbon dioxide reduction, makes a significant contribution to the conservation of hydrocarbon fuels

and more than beats even the most stringent carbon monoxide standard. On the measure combining hydrocarbons and nitrous oxide emissions, the figures—again, in grammes per kilometre—are 0.7 for Euro II, 0.72 for Euro III and 0.3 for Euro IV. The Ford Focus for 2006 is nearly there at 0.38.

The hon. Gentleman mentioned also mentioned particulates. If I understood the Financial Secretary's comments correctly when we were discussing biodiesel, we are dealing with a matter of considerable concern, and I recognise that. I do not want another long, detailed debate about air quality, given that many factors other than vehicle emissions affect it. However, it is evident that the measure of PM10, which describes particulate size and is currently used to delineate that aspect of vehicle performance, is a matter of debate even among the expert panel on air quality in this country. There is a question as to whether larger or smaller particulates have the worst health effects, but PM10 is the measure that is used at present.

The modern diesel car has made substantial progress in reducing particulate emissions. The table lists the standards—using the same nomenclature as before of grammes per kilometre—as 0.1 for Euro II, 0.05 for Euro III and 0.025 for Euro IV, which is the most exacting standard and will be introduced in 2008 for vehicles of up to nine seats. Already, the Ford Focus is at 0.03. The Ford diesel engine with the new common rail technology beats all the current standards and is just about at the technology for 2008. Again, if we are trying to encourage technological improvements so that we can deal with particulates, it is odd to discriminate against that particular technology.

There may be extremely good reasons to discriminate against the diesel engine. I hope that the Financial Secretary will provide the detailed analysis that justifies discriminating against an engine that achieves the principal objective of this clause, which is the reduction of carbon dioxide. My analysis shows that modern engines are already beating the standards.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

My right hon. Friend is making important points about the benefits of the latest generation of diesel engines. Does he share my anxiety that Government fiscal policy in recent years has removed—indeed, reversed—the price advantage that diesel once had at the pump, adding a further incentive for people to turn from diesel to petrol cars, which are less environmentally friendly?

Photo of Michael Jack Michael Jack Conservative, Fylde

I am certainly concerned about the matter. I have become somewhat of a diesel fuel price anorak since I acquired a vehicle with a diesel engine. In fairness, what is more of a problem than the Government's taxation on diesel is the way in which the oil companies maintain a 5p or 6p standing difference between petrol and diesel—that is the interesting issue. I have probed it with them. They tell me that it is all to do with the spot price of diesel on the Rotterdam market, but it is amazing that the

differential never seems to change. I sense an element of cross-subsidisation between diesel and petrol. It is not for this Committee but for the competition authorities, perhaps, to examine how diesel is priced. Anyone who crosses the channel will be in for a feast of low-price diesel.

10 am

On particulates, notwithstanding the technological aspects of the more exacting European standards that I mentioned a moment ago, I am reminded that today's cohort of diesel cars produces only 5 per cent. of the PM10 particulate measure that existed five years ago. Even without the benefit of common rail technology, diesel cars are becoming substantially better on perhaps the most sensitive of their emissions. For those reasons, I find it difficult to understand why the Government currently seek to discriminate financially, albeit in a modest way, against the diesel engine. I look forward to the Financial Secretary giving us a robust justification of the Government's position and an insight into why diesels have been singled out for that treatment.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The purpose of the clause is to establish a new lower rate of vehicle excise duty that recognises the benefits of cars with very low emissions of carbon dioxide.

Cars first registered on or after 1 March 2001 pay vehicle excise duty according to their emissions of carbon dioxide as measured during the EU type approval test. There are currently four tax bands based on carbon dioxide with three tax rates within each of those for petrol, diesel and alternative-fuelled vehicles. The purpose of that system is to send a signal to vehicle manufacturers and users about the environmental impact of the cars that they make and buy.

Listening to the right hon. Gentleman's discourse, which was a pleasure even at this time of the day, one gets a sense of the complexity of the task that the Government have set themselves when they set out to deliver messages of that sort. Technology is ever advancing, and it is important that one seeks to reflect that so far as one can—I shall come on to one particular area of technological advance in a moment. At the end of the day, one sends out messages, as best one can, as technology advances. It would be a mistake for the Government to pretend that sending such messages out was an exact science in which it were possible exactly to balance the issues around the levels of particle emissions and carbon dioxide in a totally satisfactory way. Some of the messages will be more satisfactory than others, and one has to seek to get the balance right without introducing undue complexities and burdens for retailers and users alike.

The clause adds a fifth band to that structure to increase the incentives to choose the very cleanest cars, which are defined as vehicles that emit 120g per km or less of carbon dioxide. The tax rates in the new band are £30 below the existing lowest band, which will increase the incentive between the least and most efficient cars to £100 per year—a not insignificant sum of money. In the first instance, that will benefit more than 30,000 vehicles, including the most efficient

versions of the Ford Fiesta, Vauxhall Astra and Peugeot 206 as well as the hybrid electric-petrol Honda Insight and Toyota Prius.

The right hon. Gentleman's amendment, which I am grateful to him for describing as ''probing'', would have the effect of undermining the principled position at which we seek to arrive in the clause by suggesting that the premium rate for diesel should be abolished, despite the fact that many diesels are already in the lowest carbon dioxide band because of their high efficiency. We pointed out in our 1998 consultation on the reform of vehicle excise duty and the need to ensure a cleaner environment through that reform, that tax can and should be used to promote environmental objectives, such as curbing the growth of emissions, with the caveats around sending messages that I have outlined.

In our view, the current system of graduated VED does just that, taking into account carbon dioxide emissions but also, quite rightly, the local air quality emissions of different vehicle types. That is why there is a £10 discount for alternatively fuelled vehicles, such as hybrids and those using road fuel gas.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

With hybrid vehicles, which might have a liquid petroleum gas engine and a petrol engine in the same car or an electric engine and a petrol engine in the same car, can the Minister explain what means the Treasury uses to assess the likely emissions? Cleary, each type of engine in those vehicles has entirely different performance and emission levels.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

There would be some difficulty in determining the emissions from such a car without knowing how the owner was gong to use it and which choices they would make. We would seek to ensure that we had a sense of the emission from each fuel supply and the balance between them. We would then tax on the basis of what the owner chose to fill up on. That is the basic principle.

The right hon. Member for Fylde (Mr. Jack) struck straight home on the issue of how to define the balance between carbon dioxide and local air pollutants. We have sought to reflect our targets for many different types of emissions, including those for carbon dioxide, as a result of the Kyoto protocol, and those set for local air pollutants through the national air quality strategy. It is important for Government fiscal policy to complement those targets, but it is not, as I said earlier, an exact science. We have never pretended that the £10 VED supplement for diesels is exactly equal to the extra-low local air pollution costs that are imposed.

The important point is to ensure that we monitor the development of diesel engines and make any changes considered necessary in the light of those developments in order to impact on vehicle emissions, and reflect that impact. On Euro IV diesel, one hopes that, in a couple of years, the right hon. Gentleman will be able to return to this Committee in exactly the same place that he is in now—I hope and pray that in four, five, six, seven or eight years' time he will return to the

House in exactly the same position—with a turbo-charged Euro IV diesel. By that time, we can expect to have ensured that, as the technology develops, the banding reflects those developments.

At the moment, on Euro IV—which will be as clean as its effective equivalent in terms of local air pollutants—we have taken the view that there are at present very few, if any, Euro IV diesel vehicles on the road. The tax system needs to take into account the existing stock of diesel vehicles, which are not Euro IV. We have not, therefore, made specific provision for Euro IV emission standards in the bands. However, the right hon. Gentlemen's point is perfectly fair. We shall ensure that we monitor developments in that field very carefully and shall, no doubt, reflect those changes in subsequent Finance Bills.

To return to the point made by the hon. Member for Epsom and Ewell (Chris Grayling), it will also be important to reflect developments in the technology of vehicles and mixes. For vehicles with two fuel types, the EU type approval process produces two CO2 figures and we take the lower. There will important developments and they will be monitored to ensure that subsequent Finance Bills take account of them.

I am grateful to the right hon. Member for Fylde for raising the matter. I hope that he accepts that we are sensitive to the points he properly raised and that he will not press his probing amendment to a vote.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

We discussed this matter on 14 May when I made some points about diesel. The Financial Secretary gave us the benefit, in part, of the Government's philosophy on the taxation of diesel.

There is some comfort--I wait to hear what the right hon. Member for Fylde has to say--in the fact that the Government are monitoring progress, especially of diesel technology, all the time. Although the Financial Secretary gave a fairly long time scale of five or six years and I hoped that it would be earlier, the Government are monitoring progress every year, particularly on Euro IV diesels. Ownership of those cars will become more common and I hope that, even before that, the Government will consider any changes that could be made in the duty regime to reflect the benign effect of the technology and to encourage further the manufacture and use of such engines.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful to the Financial Secretary for the way in which he responded to these probing amendments. At the conclusion of my comments, I shall seek leave of the Committee to withdraw my amendment because I am heartened by what the Financial Secretary said.

It is interesting that when the Government are slightly unsure of the basis on which they are acting, Ministers say a few words and then fall back on the technical knock-out clause: ''As I can't think of a better argument, I'll make sure the other side knows that there is a technical deficiency, so in no circumstances could the Treasury allow further progress.'' I was intrigued that the Financial Secretary did that after two sentences of argument on carbon

dioxide, but I would not want to be accused of undermining any economic signals that encourage the development of improved technology in motors vehicles. Quantum advances have been made to the efficiency of car engines, both petrol and diesel, during the past decade.

However, I was interested in the construction of the Financial Secretary's four lines of argument. In three of the four he rested his case on carbon dioxide being the principle measure by which vehicle emission improvement would be judged. Diesel engines, by any measure, win that argument hands down, whether the technology is yesterday's, today's or tomorrow's. That said, I acknowledge that measurements of air quality are complex and are not the province of motor vehicles alone. For example, bonfire night can rapidly transform the air quality of particular locations. That shows the difficulty of measuring air quality.

I am encouraged that the Government will monitor that, and I seek one or two assurances from the Financial Secretary. Will he assure me that between now and the next pre-Budget report, or Budget, he will meet with those who are more knowledgeable than I will ever be about diesel engine technology to discuss the change in technology as it applies to the cohort of diesel vehicles in the United Kingdom, so that the Government are as up-to-date as possible with what is happening from a trade point of view.

Secondly, and I would not blame the Financial Secretary if he were not able to assure me about this, will he reflect on whether the Government might be willing, if the newer technology is adopted at a more rapid rate than his current calculations suggest, to consider making further changes to the premium rate in order to encourage the best diesels while recognising that there may be problems with the older diesels?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 10:15 am, 16th May 2002

I am happy to give the first assurance, but I am unwilling to give the second.

Photo of Michael Jack Michael Jack Conservative, Fylde

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 ordered to stand part of the Bill.