Clause 74

Finance Bill – in a Public Bill Committee at 4:30 pm on 3rd June 2008.

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Cars with low carbon dioxide emissions

Photo of Justine Greening Justine Greening Shadow Minister (Treasury), Vice-Chair (Youth), Conservative Party

I beg to move amendment No. 160, in clause 74, page 40, line 12, leave out subsection (3).

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment No. 161, in clause 74, page 40, line 16, leave out subsections (5) and (6).

Photo of Justine Greening Justine Greening Shadow Minister (Treasury), Vice-Chair (Youth), Conservative Party

I am delighted to speak to amendments Nos. 160 and 161 to clause 74 on capital allowances and cars with low carbon dioxide emissions. Under section 45D of the Capital Allowances Act 2001, 100 per cent. first-year allowances have been made for expenditure on cars with low carbon dioxide emissions between 17 April 2002 and 31 March 2008. Clause 74 extends that period for a further five years to 31 March 2013. I support extending the period, because it makes sense to lengthen the time over which the tax incentives will be in place, but I question the Government’s change in definition of a low carbon dioxide emission car.

In the same clause the Government’s approach demonstrates the contradiction of their overall problems with green taxation. On the one hand, the clause contains something that is welcome: an extension of the fiscal measure for a further five years. On the other hand, the very same clause contains measures that change the definition of a low-CO2 car to make it harder for cars to qualify for the same provision. It reduces the CO2 emissions figure that cars must not exceed in order to qualify from 120 g to 110 g per kilometre driven.

I understand that a transitional rule will also operate for car leasing contracts entered into before the CO2 reduction comes into effect on 1 April 2008 so that those contracts will be unaffected, which seems sensible. I do not understand, however, why the Government are making it harder and reducing companies’ incentives to use lower emission cars. It just seems contradictory: we are extending the period of a fiscal measure while weakening the measure intrinsically. It seems somewhat of an oxymoron, albeit in the form of a clause in the Finance Bill.

I should better understand the second aspect of the clause, which changes the definition of a low carbon emission car from 120 g to 110 g per kilometre driven, if there was already evidence, for example, that consumers and companies were making great strides towards lower emission cars—in other words, if we had had an initial target, there had been progress towards it, and it therefore seemed sensible to the Treasury to recreate the stretched target effect and encourage a further, new step. The Treasury’s projections for car emissions over the coming years do not seem to reflect that expected movement. I am not clear why the Treasury is now making the fiscal incentive harder to reach, rather than keeping it at the current level.

Let me illustrate briefly what I mean by touching upon the numbers of cars that will be affected by the provisions. I received parliamentary figures from  Ministers suggesting that the Government estimate that the number of cars emitting 120 g per kilometre or less will increase from about 435,000 in 2008-09—out of a total 15.6 million cars paying graduated vehicle excise duty—to about 674,000 by 2010-11, which by then would be out of a total 19.6 million cars paying graduated VED. If we retain the current definition of a low carbon emission car, that would represent a growth of about 240,000 cars. By the Government’s estimations, therefore, were we to reduce the level from 120 g to 110 g per kilometre, the number of cars expected to be affected and incentivised by the provision would fall considerably. I estimate the number to be 140,000 rising to 214,000 by 2010-11—a rise of about 70,000 to 75,000 cars. So it would dramatically curtail the impact of this policy.

Photo of Peter Bone Peter Bone Conservative, Wellingborough 4:45 pm, 3rd June 2008

Does my hon. Friend agree that this seems to be one of those occasions on which the Government put raising more money above their green credentials?

Photo of Justine Greening Justine Greening Shadow Minister (Treasury), Vice-Chair (Youth), Conservative Party

I think so. The broader context to the debates in this House and outside on VED centres around the fact that the changes in the Budget to graduated VED were pitched by the Government as environmental changes designed to drive a reduction in CO2. However, we know, from questions answered by Ministers, that that is not the case and that the changes announced this year will cut CO2 emissions from motor vehicles by far less than 1 per cent. So my hon. Friend is right to raise that issue.

If, as the Government appear to have admitted, the changes to VED will not have a dramatic impact on motor vehicle emissions, other fiscal measures will become all the more important. In that case, I could understand why we would need to consider more carefully remaining measures that could affect motor vehicle emissions and see whether they really work. That is why I have proposed amendment No. 160, which is the primary amendment in the group, because it essentially would retain the current definition of a low carbon emission car at 120 g per kilometre. Amendment No. 161 is a consequential amendment that would ensure that the clause remains correct in substance. Those are my concerns with the clause. We support what the Government are trying to achieve, but I question why they are making the incentive harder to achieve.

I would like to ask the Minister a couple of questions that will help to put this debate in a more fact-based context. Will the Minister say how many low carbon emission cars qualified for 100 per cent. first-year allowances between, for example, 2005 to 2007? Of the numbers of cars I have talked about that were outlined in the parliamentary question and answer I have received, how many low emission cars in both the existing and new definition proposed by clause 74 do the Government expect and project will qualify in 2009-10 and 2010-11? I am assuming that that is a subset of the total number of cars that we expect to be paying graduated VED at lower band levels.

Making the test for low carbon emission cars tougher and lowering the grams per kilometre from 120 to 110 will necessarily limit the number of cars that might qualify. Therefore, there is a danger that rather than encourage the use of low emission cars, which is  what the clause is intended to do and which we welcome, it will discourage the purchase of greener cars. Even Government estimates about how many of those kinds of cars they expect to be purchased and driven around over the next few years are not particularly confident—no massive jump in the sale of such cars is predicted. Most of the 4 million cars that the Government project will be bought over the next two to three years will clearly be in higher bands rather than the lowest emission bands. I shall close with those comments. I look forward to listening to the Minister’s response.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Before responding to the amendments, it might help if I explain briefly that the policy purpose of clause 74 is to extend the 100 per cent. first-year capital allowance scheme for a further five years—until 2013—for businesses that invest in the cleanest cars.

In response to the observations of the hon. Member for Wellingborough, this is an allowance, not a tax, and therefore it actually costs the Exchequer. The scheme is designed to try to improve the incentive for the cleanest cars that are available on the market to be bought by those businesses that operate fleets of cars or are involved in business travel. When considering the clause and amendments, it is important to focus on that particular area, rather than on the entire car fleet; otherwise, we might get ourselves into a bit of difficulty.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

There is a difference, is there not, in trying to drive fleets towards the cleanest cars or towards low carbon emission cars? As the Minister rightly says, we are going for the cleanest cars, but it is a disincentive to move towards the cleanest cars. That seems to be a change in the Government’s policy.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I do not agree and I shall explain why. The purpose of extending the 100 per cent. first-year capital allowances scheme for businesses that invest in the cleanest cars—not a clean car—for a further five years and stretching the target again by reducing it from 120 grams per kilometre of emissions to 110 grams is precisely to ensure that the objectives of the scheme as they were first designed are achieved. That is an effective environmental incentive for the presence in the car fleet of the cleanest emitting cars rather than good cars. The cleanest cars at the edge of technological advance will find their way into the car fleets and that will have an effect on the second-hand car market once they are leased, used and sold on. We have focused on a particular part of the market for a particular purpose. The idea behind the original capital allowance scheme, which is being extended and tightened again under the clause, was to keep things at the forefront of technological change.

The two Conservative amendments would prevent us from revising the original carbon dioxide emissions threshold down. We need to do that to ensure that the scheme reflects advances in emissions technology since 2002, when the first incentive scheme was put in place. The amendments would leave the original 2002 threshold unaltered and in place until 2013. However, massive technological change is already happening in engine technology and emissions.

As I said earlier, the scheme is meant to be an incentive and is intended to be at the forefront of bringing the cleanest engines to market in a way that guarantees that people taking a risk designing new technologies get a foothold in the market. That is the point of the 100 per cent. first-year capital allowances, which the hon. Member for Putney did not accept.

Photo of Justine Greening Justine Greening Shadow Minister (Treasury), Vice-Chair (Youth), Conservative Party

My understanding is that the point of the capital allowances was to encourage a change in behaviour rather than simply to track technological development for the sake of it. The figures that the Government have released suggest that they do not believe that the allowances will change behaviour. That is why I am pressing the Minister to explain whether that is so, not to explain whether there is a need to track technological improvements. I accept that having the most ambitious policy possible may be a consideration, but the ultimate aim needs to be changing behaviour. I do not see anything in the figures that the Government have released that suggest that they feel that such policies, particularly this one, will be successful.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

It already has been successful, which is why we are tightening it. The scheme to encourage investment in the cleanest cars was introduced in 2002. Since then the carbon dioxide emissions of the UK car fleet have markedly reduced. In 2002, only about 7,000 cars had emissions under the original threshold of 120 grams per kilometre driven, but by 2006—the latest available figures only reach 2006, because of how business car taxation works—the number of eligible cars in the fleets had increased more than fivefold and improvements continue to be made. Therefore to ensure that the scheme continues to secure its policy objective as an environmental incentive, which is to encourage business to invest in the cleanest vehicles at the edge of technological advance, not just to invest in a clean vehicle, and to prevent escalating Exchequer cost and mounting deadweight effects, the carbon dioxide threshold needs to be updated and stretched and made more challenging, as the hon. Lady said. That should be done to secure the policy aim of a generous 100 per cent. write-down of the cost in the first year. The potential cost to the Exchequer of maintaining the carbon dioxide emissions threshold at the previous level of 120g/km to 2013, as the Opposition amendment would provide for, is estimated at £450 million.

The first-year allowances scheme is intended to incentivise business investment in cars with the lowest carbon dioxide emissions: not simply low emissions, but the lowest. Given that policy purpose and the risk of high Exchequer cost and deadweight in relation to the amendments, I urge the Committee to reject the amendment.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I want to take up some of the things that the Minister has said. First, on the first-year allowance—the 100 per cent. write-down—I have been in business and I have had to make decisions about buying a fleet of cars and I certainly would be attracted to something that offered 100 per cent. first-year allowance. I may have already based my fleet on the 120 g per kilometre and because I am into that fleet  structure, I cannot and am not going to change that fleet to 110 g per year. Therefore, I am going to be penalised later on for going into something that the Government encouraged me to do in the first place.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 5:00 pm, 3rd June 2008

There is a transitional arrangement that means that access to the allowance will not change because of the changed threshold for the length of that lease, so the hon. Gentleman’s point is wrong.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I can only say, from my practical experience, that we might expand that fleet year by year and I certainly would not switch vehicles. I would keep my fleet the same for a considerable period. The issue about the first-year allowance and the cost, which the Minister said is £450 million, is about cash flow. It reverses either when the car is sold or in each and every year because one is not getting the writing-down allowance. Therefore, it is not an overall cost; it is purely a cash-flow issue.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

On that basis, does my hon. Friend have any idea where the Minister got the figure that she just quoted on the cost of the Opposition amendments? As he rightly points out, balancing charges on the disposal of the vehicle mean that it is simply a cash-flow issue.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I am grateful for that intervention. I can only assume that that was the cost estimated in the first year, because in the following years it would reverse. It will be interesting if the Government can explain that that cost may be a negative figure of £450 million in year one, but it will be positive in the following years.

The real issue that I want to draw attention to is that we are hiding from the cutting edge of technology. If the Government are really keen on green issues—I do not believe that they are because they do not have the track record that my party has of wanting to improve the environment—they would keep it at 120 g per kilometre because it would encourage more cars. As my hon. Friend the Member for Putney has pointed out already, the proportion of these vehicles will be lower in the future than it is now. Therefore, while we want to see the actual numbers of low carbon emission cars increasing in fleets, for all the reasons that the Minister has said, it is a mistake to reduce the permitted level.

The Government are missing a trick and I believe that that is entirely for financial reasons—they think that it will cost them too much to keep the allowance at this level. It is up to the Government to accept this very minor amendment. It would show extremely good faith for the first time in the Committee if they accepted it.

Photo of Justine Greening Justine Greening Shadow Minister (Treasury), Vice-Chair (Youth), Conservative Party

I am not wholly convinced by what the Minister has said. I do not understand where the calculation of the £450 million has come from. The Minister claimed that the impact was a fivefold increase in cars—from 7,000 to 38,000 out of a current car population of 15.6 million—which does not indicate that behaviour has changed dramatically when one thinks of the amount of that 15.6 million that would have been purchased by companies. Again, on this and other measures in relation to green taxation,  and especially to cars, the Government are in a mess. I will not press the amendment to a vote, but it is almost certain that we will be coming back to these issues in the future. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 74 ordered to stand part of the Bill.

Clauses 75 and 76 ordered to stand part of the Bill.