We all want to make the world a better place. Hence governments aim to help consumers to buy cars with lower CO2 emissions. One way of doing this is by reducing taxes on cars. Ideally, such a tax is directly linked to the actual CO2 emissions of the car because then the polluter pays for the environmental damage. Unfortunately, taxes are often not implemented in this way. Some governments have introduced tax advantages that vary proportionally with the purchase price of the car. Hence, the tax reduction on a very expensive car with low CO2 emissions will be much higher than the tax reduction on a very cheap car with the same level of CO2 emissions. This tax reduction is particularly important for company cars.
In Europe, around half of new vehicle registrations concern company cars. Company cars are offered by employers to employees and mainly serve their private travel needs. A large part of the costs of employers for the provision of the company car can therefore be viewed as a fringe benefit. When the employee would have to pay for the company car himself, he would not spend so much money on it, resulting in an overconsumption of expensive cars and therefore a welfare loss.
In many European countries the company car market is a main diffusion channel for plug-in electric cars. To reduce CO2 emissions, several European governments stimulated demand for electric cars by providing very substantial tax reductions for company car drivers. In the Netherlands, a 7% company car tax rate was applicable for plug-in hybrids and a 4% one for full electric cars in 2014. These rates compare with a median company car tax rate of 20% for conventional cars. These tax incentives have resulted in a relatively successful penetration of electric cars in the Dutch car market. Not surprisingly, the large majority of plug-in hybrid and full electric cars registered in the Netherlands by the end of 2014 were company cars.
The environmental benefits of a greener car fleet are much less than the welfare losses resulting from too low company car taxes. For the tax rates applicable in the Netherlands in 2014, we found that green tax incentives for company cars cost society between 42 and 95 million euros per year, i.e. between 70 and 160 euros per car. Increasing the tax rates on green company cars will therefore be beneficial for society. Therefore it is a step to the right direction that the Dutch government recently proposed to raise the tax rates of plug-in hybrid vehicles to 22% in 2019.
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