Executive summary
Key findings:
- Pricing instruments on road transport CO2 emissions are widely applied in Europe, although there are significant differences between Member States. More broadly, Member States also differ to the level by which their road transport sectors meet the ‘polluter-pays’ and ‘user-pays’ principles.
- The European Commission has presented proposals to intensive the pricing of CO2 emissions of road transport by introducing emission trading for this sector as well as by revising the Energy Taxation Directive. One of the aims of the latter is to incentivise the uptake of low-carbon energy carriers by the transport sector.
- Pricing instruments (particularly emission trading and fuel taxes) are effective in reducing CO2 emissions in the road transport sector. They may, however, also have significant distributional impacts, which should be carefully considered in order to gain social acceptance for this type of instruments.
Fair and efficient pricing in transport is one of the core elements within the European Commission’s vision to decarbonise the transport sector. By using a mutually compatible and complementary mix of pricing instruments, like emission trading, infrastructure charges, energy taxes and vehicle taxes, transport users should be incentivised to make more sustainable transport decisions. This briefing provides a general overview of the current and proposed pricing instruments on road transport CO2 emissions in the EU.
State of play of pricing instruments on road transport CO2 emissions
Pricing instruments on road transport’s CO2 emissions are widely applied in the EU. All Member States levy fuel taxes, although tax levels differ significantly between countries. Most countries also apply purchase and ownership taxes for passenger cars, but the extent by which these taxes are CO2 based differs widely. For heavy goods vehicles (HGVs), only (non-CO2 based) ownership taxes are applied in the majority of the countries. Finally, about half of the Member States apply a road infrastructure charge (i.e. a toll or vignette) for passenger cars, while these charges are applied in almost all countries for HGVs (with an increasing number of countries replacing a vignette scheme by a distance-based road charging scheme). Although road user charges are not differentiated to CO2 emissions in any of the Member States, they may indirectly have a CO2 reducing impact by curbing overall transport demand and incentivise transport efficiency.
Because of the wide differences in the type of pricing instruments applied, the tax/charge levels set and the level of differentiation to CO2 emissions applied, Member States differ significantly in the extent by which CO2 emissions of road transport are effectively charged. In general, CO2 emissions of passenger cars are more heavily charged than emissions of vans and HGVs. This is because of higher fuel taxes on petrol than on diesel, and because CO2 differentiated vehicle taxes are more often applied for passenger cars. More broadly, Member States also differ to the level by which their road transport sectors meet the ‘polluter-pays’ and ‘user-pays’ principles. Although in almost none of the EU countries external and infrastructure costs of road transport are fully covered by taxes and charges, some countries have made much more progress in this respect than others.
EU legislative framework
Transport pricing is mainly a Member State competence. The current EU legislative framework is mainly focussed on harmonising (to some extent) the design of national instruments. The Energy Taxation Directive (ETD) harmonises national fuel taxes by setting minimum rates[1]. However, as these minimum rates have not been indexed since 2003, their effectiveness has diminished over the years. Furthermore, the current ETD presents some voluntary and mandatory exemptions of fuel taxes, e.g. the mandatory exemptions for aviation and maritime shipping. Road infrastructure charges in the EU are harmonised by the Eurovignette Directive. Although this Directive does not oblige Member States to implement a road charging scheme, it does provide some rules that should be followed once a country decides to implement such a scheme. In the recently adopted revision of this Directive, a mandatory switch from time-based to distance-based road charging for heavy duty vehicles is introduced, to be implemented by 2030 at the latest. Furthermore, a mandatory CO2 differentiation of charges for HGVs is introduced as well, incentivising the use of low- and zero-emission trucks.
In order to better align the EU legal framework on transport pricing instruments with the decarbonisation objectives of the EU, the Commission recently proposed to revise the ETD by removing the disadvantages for clean technologies and introducing higher levels of taxation for inefficient and polluting fuels. Furthermore, the Commission proposed to launch a new, separate emission trading scheme (ETS) for road transport (and buildings).
[1] The ETD covers the taxation of all energy products, but in this briefing we only consider the rules set for transport fuels.
Impacts of pricing instruments
Pricing instruments have a broad range of impacts on the transport sector and society in general. Some relevant impacts are:
- Impacts on road transport CO2 emissions. Pricing instruments are effective in reducing CO2 Fuel taxes and ETS can be considered as first best instruments, as they incentivise all relevant CO2 reduction options. CO2 based purchase taxes may provide a significant additional incentive for the uptake of low- and zero-emission vehicles.
- Impacts on budget revenue. Transport taxes contribute, on average, about 5-10% to the overall tax revenues of national governments in the EU. The rise of the number of low- and zero-emission vehicles may significantly lower the income from fuel taxes and CO2 based vehicle taxes. Keeping tax income at a stable level may become an important challenge for national governments in the next decade.
- Impacts on transport prices. Current transport taxes and charges contribute significantly to transport prices for passenger and (to a lesser extent) freight road transport. The introduction of an ETS for road transport and the revision of the ETD will have a limited additional impact on transport prices (about 4% to 10%, based on CO2 price of EUR 50 per tonne).
- Distributional impacts. Pricing instruments on road transport CO2 emissions will probably have a regressive impact, implying that the relative impact on disposable income is higher for low-income households as for high-income households. There may also be large differences in fiscal burden for people living in rural areas (who are more car-dependent) and urban areas. Because of these effects, some countries are more severely affected by pricing instruments than others.
- Impacts on competitiveness and employment. In general, pricing instruments on road transport CO2 emissions are expected to have relatively limited impacts on competitiveness of the road transport sector and the production sectors and on employment rates. However, more significant impacts may occur at the level of individual economic sectors (or countries), which may require mitigation actions.
Policy recommendations
To optimise the use of pricing instruments in decarbonising the road transport sector, it is important to:
- Develop a balanced mix of pricing instruments. Fuel taxes and/or an ETS would be the cornerstone(s) of an effective package of pricing instruments on CO2 However, CO2 based purchase taxes may provide an effective additional incentive for the uptake of low- and zero-emission vehicles.
- Integrate pricing instruments in a broader package of CO2 reduction policies. As pricing instruments are largely complementary to other climate policies, like CO2 vehicle standards, they should be preferably combined in an overall climate policy for (road) transport.
- Consider political and social acceptance of pricing instruments. Large distributional impacts may negatively affect the political and social acceptance of pricing instruments. Developing mitigation measures for these impacts is therefore key, e.g. by designing effective recycling channels for the revenues of pricing instruments.
- Regularly re-adjust the pricing instruments. In order to maintain the effectiveness and revenue of pricing instruments, regular updates of CO2 based pricing instruments are required, taking trends in the car industry (e.g. decreasing average CO2 emissions of vehicles) and consumer preferences (e.g. increased preferences for zero-emission vehicles) into account.
- Consider other transport externalities as well. An overall transport pricing policy should not only consider CO2 emissions, but also other externalities like air pollution and congestion. Differentiated distance-based road infrastructure charges may play an important role in this respect.
Link to the full study: https://bit.ly/699-641
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- Figure 1 presents the fuel tax rates applied for petrol in 2021. In all EU countries, the tax levels are equal to or above the minimum level set in the Energy Taxation Directive (ETD) (EU, 2003) (i.e. EUR 0.359 per litre petrol, which is about EUR 150 per tonne CO2). However, there are significant differences between countries in fuel tax rates, ranging from EUR 0.36 per litre in Hungary to EUR 0.81 in the Netherlands.
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- Diesel taxation is in most EU countries lower than petrol taxation, although in all countries the minimum levels (EUR 0.33 per litre diesel, which is about EUR 125 per tonne CO2) set by the ETD are met (see Figure 2). In Italy and Belgium diesel excise duties are the highest in Europe (about EUR 0.60 per litre), while Bulgaria and Greece have the lowest diesel excise duties (about EUR 0.33 per litre). However, the effective tax rates for diesel used for commercial purposes (e.g. HGVs) may be lower in some countries, as they apply refund schemes for a part of the excise duty. This is also the case in the three countries with the highest diesel taxes, i.e. Italy, Belgium and France (EC, 2021b).
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- The main vehicle taxes applied in the EU are the one-off purchase/registration taxes and the periodical ownership/circulation taxes . Purchase/registration taxes are applied for passenger cars in almost all European countries (see Figure 3). On light commercial vehicles (LCV) a purchase/registration tax is levied in a significant number of European countries as well, although in considerably fewer cases than for passenger cars (ACEA, 2021). A smaller number of countries apply purchase/registration taxes for heavy duty vehicles (buses, coaches and HGVs). For HGVs, only four countries (France, Greece, Ireland, and Italy) do levy this charge
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- Next to purchase/registration taxes, ownership taxes (also called circulation taxes) are applied in most EU Member States (see Figure 4). Almost all EU27 countries apply an ownership tax for passenger cars, except Estonia, Lithuania, Poland and the Czech Republic . HGVs are charged an ownership tax in all countries, because the Eurovignette Directive (EU, 2022) obliges all Member States to apply this type of a tax (see Section 3.1.2). An LCV ownership tax also exist in almost all EU countries (some exceptions are Estonia and Lithuania).
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- In addition to the rules set for infrastructure charging, the Eurovignette Directive also sets minimum levels for obliged ownership taxes on HGVs. This was also reflected in Figure 5 in Section 2.1.3, where it was shown that every Member State levies ownership taxes on these vehicles.
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- The external and infrastructure costs of passenger cars and HGVs are in almost none of the EU Member States completely covered by the taxes and charges levied , indicating that the ‘user-pays’ and ‘polluter-pays’ principles are not fully applied yet.
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- Although introducing transport pricing instruments is largely a Member State competence, the EU partly harmonises the design of these instruments through two Directives: the Energy Taxation Directive (ETD) and the Eurovignette Directive. As it indicated by the Figure 7, these Directives mainly cover the areas of energy taxation and infrastructure charging. Vehicle taxation is only very slightly regulated by the EU, via mandatory ownership taxes for HGVs. In the remainder of this section, we will briefly introduce the relevant Directives in more detail.
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- Figure 8 shows for 2015 that the average CO2 emissions of new passenger cars in countries with a CO2 based registration tax are significantly lower compared to countries with registration taxes based on other characteristics. The clear and significant price advantage on fuel-efficient vehicles that can be provided to consumers upon acquisition largely explains the high environmental effectiveness of CO2 differentiated registration taxes (FÖS & GBG, 2018) (ICCT, 2018). CO2 differentiation of annual ownership taxes, on the other hand, proved to be less effective in this respect (Nordic Council of Ministers, 2017) (ICCT, 2018). In order to maintain the environmental effectiveness of CO2 ¬differentiated vehicle taxes over time, regularly re-adjusting the design of the differentiation for technological developments in the car industry is required (ICCT, 2018).
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- Road transport taxes contributes significantly to the total tax revenues of EU countries. In the majority of the European countries, 5% to 10% of the total tax revenues are coming from transport taxes. Figure 9 illustrates this for a selection of countries. In all countries, fuel excise duties are the most significant source of income, followed by the ownership tax. Charge revenues from concessionary road infrastructure schemes are not added to the public budget in most countries, which explains why these revenues are not shown for some countries like, for example, Greece, Ireland and Spain.
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- The share of fuel taxes in petrol prices in the various EU Member States is illustrated in Figure 10, showing the expected situation in 2030 . As the prices in Figure 10 are corrected for differences in price level between countries , this figure also shows the actual impact of fuel prices (and taxes) on the purchase power of people in the various Member States. It makes clear that, although absolute tax rates in countries like Bulgaria, Hungary and Poland are relatively low (see Figure 1), these taxes have rather large impact on purchasing power of households in these countries.
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- Current taxes and charges have a significant share in the total costs of a passenger car. Figure 11 shows the breakdown of transport prices for a reference passenger car in a few European countries (PPP corrected). In most countries the share of taxes/charges in the total transport price is about 15% to 25%. In Denmark this share is considerably larger (about 48%), which is mainly the consequence of a very high purchase tax applied on passenger cars. In all countries, internal costs (i.e. purchase costs, maintenance and base fuel costs) take up the largest share of costs. Figure 11 also shows the impact of the proposed revision of the ETD and the introduction of an ETS for road transport (and buildings) on the total costs of a passenger car. These new policies result in slightly higher costs of using a car, about 1% to 4%. For this analysis, an ETS price of EUR 50 per tonne CO2 was assumed (see Footnote 28). Assuming an ETS price of EUR 100 per tonne CO2 would result in a cost increase of car use of 2% to 6%. As the transport costs are corrected for differences in purchasing power between countries, Figure 11 also shows that in relative terms the transport costs are considerably higher in countries like Romania, Portugal and Poland than in Germany. This again illustrates that comparable tax levels have a more significant impact on purchasing power in countries with lower income levels.
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- For HGVs, transport taxes/charges constitute, in general, 15% to 25% of the total transport costs (see Figure 12), The only exception is Denmark, where transport taxes only contributes for 10% to the total costs, as taxes/charges on HGVs are relatively low in Denmark. The possible contribution of the ETS price (assuming a price of EUR 50 per tonne) and the higher diesel tax rates due to the revision of the ETD is also shown in Figure 12. It is expected that in Denmark, Germany and Portugal these policy instruments would lead to a cost increase of 4%. For Poland and Romania, a cost increase of about 9%-10% is estimated. This larger increase is due to the fact that in these countries the diesel tax rates have to be increased significantly to meet the new minimum rates set by the revised ETD. Considering a higher ETS price (EUR 100 per tonne) would result in a cost increase of about 8% in Denmark, Germany and Portugal and 14%-15% in Poland and Romania. The figures 11 and 12 show that the costs for passenger cars and HGVs for a large extent exist out of internal costs. This will be the case for LCVs as well, since internal costs are comparable with passenger cars. As LCVs are, in general, eligible to fewer taxes compared to passenger cars, the share of taxes and charges on overall transport costs is expected to be lower than for passenger cars (and probably more in line with the situation for HGVs).
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- Pricing instruments may induce several CO2 reduction options
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