The Government is examining a proposal to replace vehicle excise duty (VED), with a one-off environmental tax on new cars that would impact benefit-in-kind (BIK) calculations.

Tax revenues from the current system are predicted to fall in the next few years and liberal think tank Centre Forum argues that an upfront charge based on CO2 emissions would be good news for the Treasury and the environment.

It recommends the Government should set a CO2 ‘pivot point’ equal to the average emissions of the best-performing 1% of cars the previous year, measured by sales.

The first registration fee would apply only above this pivot point level, at a rate per gram calibrated to ensure that the yield from the charge remained constant over time.

Cars below this pivot point would receive a subsidy, at the same rate per gram.

If the scheme had been introduced in 2012, there would have been a £50 charge per gram of CO2 over a pivot point of 94g/km.

Cars emitting less than 94g/km would have received a subsidy of £50 per gram below this level.

The threshold above which the charge will be payable would fall in future years, which the report’s author Tim Leunig says will create a “ratchet effect whereby the cost of ‘doing nothing’ increases over time”.

He calculates this would cut emissions by around 20% over three years, in addition to a 12% reduction that is forecast on current trends.

In addition, Leunig claims the policy would improve fuel efficiency by around 10mpg and reduce emissions from new cars to around 93g/km over the same period.

The CO2 average on new cars sold in 2011 was 138g/km, according to the Society of Motor Manufacturers and Traders.

Fleets and their company car drivers are no strangers to a CO2-based tax designed to make greener motoring cheaper.

However, Leunig suggests that including the upfront charge in BIK tax calculations would persuade more company car drivers to choose low emission vehicles by reinforcing existing incentives.

Currently, company car drivers pay BIK tax on a percentage of the P11D value of their car, which is made up of the manufacturer’s list price, plus VAT, delivery, number plates and any optional extras.

The percentage of tax paid is decided by the CO2 emissions of the car and fuel type based on a sliding scale.

Using the example of a 94g/km pivot point and the £50 per gram charge, a 114g/km Vauxhall Insignia 2.0 CDTI Ecoflex 130 Exclusiv, with stop-start, would see its P11D price of £22,195 rise by £1,000 to £23,195.

Falling into the 16% BIK bracket, the inclusion of the new upfront charge would increase the benefit from £3,551 to £3,711.

A 20% taxpayer could therefore expect to pay £742 as opposed to £710 – an extra £32 a year in tax. A 40% taxpayer would see a £64 rise from £1,420 to £1,484.

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