Could a diesel scrappage scheme solve the air quality issue?

Last week, it was reported that the Department for Transport is considering introducing a diesel scrappage scheme. Under this policy, the government would give cashback to motorists who trade in their old polluting diesel vehicle. A diesel scrappage scheme would help to accelerate the shift away from diesel vehicles, removing one of the biggest sources of harmful air pollution from the roads for good.

What’s the problem?

Readers of this blog will be familiar with the issue: each year around 40,000 premature deaths in the UK are linked to poor air quality. A recent EU report found that in the UK six million workdays were lost each year to air pollution and that the health-related externalities totalled €28 billion. Air pollution is damaging people’s health, and adding costs to public services and businesses in the process. The source of the problem in pollution hotspots is road transport, which produces over 95% of the toxic fumes in these areas. And diesel vehicles in particular are responsible, as they emit many times more nitrogen dioxide than petrol alternatives.

The Government urgently needs to find a solution to this problem, following their latest defeat in the High Court last year. The judge ruled the Government’s air quality plan was inadequate. The Government now has until April 2017 to produce a new draft plan to bring the UK into full legal compliance by 2019 at the latest. This strategy must be confirmed by July 2017. Air pollution is also being driven up the agenda by the Government’s decision to allow a third runway at Heathrow. Local campaigners say they are planning to use the air quality concerns to block the project in the courts.

Context for the scrappage scheme

The UK had a vehicle scrappage scheme in 2009, introduced in response to the financial crisis. Rather than an environmental measure, it was a stimulus for the domestic car industry, which had seen new vehicle registrations fall by 30% between the first quarter of 2008 and the same time in 2009. Under the scheme, vehicles over 10 years old could be scrapped in return for a £2,000 discount off a new vehicle. The Government allocated a £400 million budget for the scheme.

The idea of a scrappage scheme for polluting diesel vehicles has been around for a while. But, until now, the Government has always been dismissive on the grounds of cost. In April last year, a source from the Department for Environment, Food and Rural Affairs was quoted saying that there was "no proportionate way to appropriately target such a measure to the areas where it would be most needed and it would be prohibitively expensive, as well as an ineffective use of resource to offer a scheme indiscriminately".

Factors to consider when designing the scheme

The effectiveness of a diesel scrappage scheme will depend on its precise configuration. There are three issues in particular that the Government has to consider: first, how it is going to pay for it; second, how it is going to target it geographically to ensure the scheme eases pollution in hotspots; third, what types of vehicle trade will be eligible for a grant.

First, a diesel scrappage scheme has the potential to be very expensive, unless it is part of a suite of policies that is revenue neutral. One suggestion is to increase Vehicle Excise Duty (VED) on new diesel vehicles to fund the scrappage scheme. This would also serve to disincentivise purchases of new diesels, most of which continue to fail to achieve EU air pollution limits when tested under real-world conditions. Another approach could be to levy a “toxicity charge” on motorists entering pollution hotspots in old, polluting vehicles, like the Mayor of London is introducing in the capital later this year. This levy would ensure motorists pay the full social costs of their pollution, as well as providing a revenue to fund charges.

Second, a diesel scrappage scheme must be targeted to remove dirty vehicles from where pollution is illegal. If an old diesel car that only ever drives around rural English villages is taken off the road, then it won’t help bring cities like London and Birmingham into compliance with the law. One approach could be to restrict eligibility for the scheme to vehicles registered to properties in or near a pollution hotspot. However, there would be no guarantee that these will be the only vehicles travelling into hotspots. The Government could also explore ways of linking the scheme to its new Clean Air Zone network so that the cashback is available to those who are affected by their introduction.  

Third, the Government must carefully consider which vehicle trades are eligible for cashback. One condition could be that the old diesel must be exchanged for an ultra-low emission vehicle, such as a pure electric car. But some drivers of old diesel cars may want to scrap their car altogether and switch to just cycling or using public transport. Others may still need a vehicle with an internal combustion engine because of the long distances they are driving. But while a petrol car would reduce air pollution relative to a diesel, it would not help cut carbon emissions, another important government policy objective. The less flexible the scheme is, the fewer old diesels it will successfully take off the road.

Conclusion

If implemented correctly, this policy could form a big part of the Government’s response to the air pollution problem. It should complement smart regulation, such as an increase in the number of low emission zones. Bright Blue has campaigned for central government to devolve more powers and funding to English cities to enable them to set up low emission zones in pollution hotspots.

Replacing diesels in the vehicle pool is a major challenge: there are over 11 million diesel cars on the roads in the UK, or 38% of the whole car fleet. In terms of new vehicles, sales of diesels have started to decrease, with the most recent data showing a 4% drop relative to the same month in 2016. This is gradually unwinding efforts by policymakers since the 1990s that encouraged diesel over petrol, because of perceived lower carbon emissions. For instance, the then Chancellor of the Exchequer Gordon Brown cut vehicles taxes for diesels in the 2001 Budget.

The benefits of this shift away from diesel are broader than the purely environmental. As the industrial strategy confirmed last month, ultra-low emission vehicles are a priority sector for the Government, and crucial to the UK’s long-term economic prosperity. Now is the time for the Government to be ambitious with its domestic policy framework, so that it can establish a leading position in these new technologies.

Sam Hall is a researcher at Bright Blue

A turbo-charge statement for electric vehicles

This week’s Autumn Statement brought some good news for proponents of electric vehicles. With lower than expected tax receipts and a worsening economic outlook due to Brexit, the Chancellor did not have much cash to give out. The new spending that he did announce was focused on infrastructure, a long-term approach that he hoped would be rewarded by increased tax revenues in the future.

This is intended to tackle one of the fundamental weaknesses of the UK economy that the Chancellor rightly identified in his speech: Poor productivity growth. ‘Productivity’ measures how much economic value is created from a fixed period of labour. Strong productivity growth signals long-term wage rises and economic growth. Concerningly, under this crucial metric, the UK lags well behind Germany and the US by some 30 percentage points. Infrastructure investment helps to improve productivity. For instance, investment in transport can reduce workers’ journey times, freeing up space in the day for more economically productive activity.

The Autumn Statement measures

This is where electric vehicles come in. As part of the £23 billion National Productivity Investment Fund, £390 million of funding over the next four years will be spent on developing future transport technologies. This includes £80 million for electric vehicle charging infrastructure and £150 million of support for low emission buses and taxis.

In addition to this new spending, there were several tax changes to incentivise uptake of electric vehicles. Companies will be given 100% first-year capital allowances for investments in new charging infrastructure until 2019, allowing businesses to deduct the cost of new charge points from their corporate tax bill. And although the Chancellor heavily pruned back salary sacrifice schemes in his statement, the perk was retained for schemes supporting electric vehicles. There were also changes to company car tax, creating lower bands for electric vehicles.

What should come next?

Bright Blue has two further policy recommendations that would drive uptake of electric vehicles, at little additional cost to the Treasury. First, the current plans for five Clean Air Zones in Derby, Nottingham, Birmingham, Leeds, and Southampton should be expanded. Earlier this week, the Government was told by the High Court it had until April 2017 to draw up a new draft air quality plan, as the previous one took too long to bring the UK into compliance with the legal limits.

We recommend devolving more funding and powers to city councils to enable all of them to set up Clean Air Zones where pollution is a problem. As well as charging the most polluting vehicles, Clean Air Zones will give preferential access to city centres to electric vehicles, such as priority at traffic lights and designated parking spaces. Academics have found that, in Germany, where there is a national network of over 70 low emission zones, owners of older, polluting vehicles have traded them in for cleaner ones. So a network of Clean Air Zones could stimulate the electric vehicle market in the UK too.

Second, this week’s Autumn Statement extended the lifetime of the UK Guarantees Scheme until at least 2026. Under this policy, the Treasury guarantees loans to private sector investors, giving them access to capital to fund new infrastructure. Since it was launched under the Coalition Government, it has given out £1.8 billion of guarantees, supporting over £4 billion of investment. We believe these loan guarantees could also be offered to drive investment in a network of charging points for electric vehicles.

Why is this important?

Accelerating the electric vehicle revolution offers many potential benefits, in addition to improving air quality. The Government is currently drafting its Emission Reduction Plan, which will set out how the legally-binding carbon budgets will be met. Transport now has the highest carbon emissions of any sector in the economy. What’s more, these emissions have actually risen for the past two years. Electrifying the car fleet would help the government make progress in decarbonising this stubbornly high-emitting sector.

Boosting electric vehicle uptake is also likely to be a key plank of the Government’s forthcoming industrial strategy. The UK is already the largest market for electric vehicles in Europe. Nissan, for instance, has invested over £420 million in the UK to build its electric vehicle, the Leaf. In 2015, the number of electric cars on the roads globally surpassed a million, more than doubling the total in 2014. This was also the year when electric vehicles’ market share of new purchases in the UK rose above 1%. Electric vehicles are a major economic opportunity for the UK to seize.

Electric cars are still near the start of their journey. But, as a result of the Chancellor’s measures this week, they have moved a few miles further towards the destination.

Sam Hall is a researcher at Bright Blue

Electric vehicles: driving future growth

Greater uptake of electric vehicles (EVs) will be important for decarbonising Britain’s transport sector, since it will mean a reduction in the use of petrol and diesel cars. Air quality will also be improved as harmful emissions such as particulate matter and nitrogen dioxide are reduced.

In addition to these environmental and health factors, there has been a number of recent studies about the economic impact of EVs on the UK. One of the aims of Bright Blue’s Green conservatism project is to advocate green policies that enhance Britain’s prosperity. This blog will examine the potential for EVs to contribute to jobs and growth in the UK economy.

Current performance

The electric car industry is currently enjoying phenomenal growth in the UK. There are two main types of EV: a plug-in hybrid, which has both an electric motor and an internal combustion engine, and a pure EV, which just has an electric motor. According to the Society of Motor Manufacturers and Traders (SMMT), 2015 saw a 50% increase in sales for pure EVs compared to the previous year. Tesla’s new model of electric vehicle received 276,000 pre-orders in three days of launching. Last week, Nissan Europe reported record sales of EVs in 2015, an increase of 45% in the previous year. They ascribe much of this increase to businesses looking to decarbonise their vehicle fleets.

There is still a long way to go before EVs properly penetrate the automotive market, however. Large percentage gains mask the fact that EV sales are starting from a very low base. Even among new car sales, EVs make up just over 1%. They are also still very dependent upon government subsidy to compensate buyers for the greater upfront cost. In December 2015, the Government committed to spending £600 million on the plug-in car grant system over the next five years. Under the revised scheme, buyers of pure EVs receive a subsidy of £4,500, while new owners of plug-in hybrid vehicles get £2,500. The Department for Transport’s target is for 100,000 drivers to benefit from this support.

Future success

In its report on the fifth carbon budget, the Committee on Climate Change has said that EVs need to constitute 9% of new vehicle sales in the UK by 2020 and around 60% by 2030, if the most cost-effective path to carbonisation is to be achieved. This is very ambitious growth, and will require significant reductions in the upfront cost. There is evidence that this will be achievable. The CCC’s finding that EVs will become cost-effective in the mid-2020s is supported by Bloomberg New Energy Finance's recent analysis of this market. They studied particularly the costs of batteries, which are one of the main factors driving the price of EVs. Lithium-ion batteries have fallen in cost by 65% since 2010, with costs expected to fall further to around a third of their current level by 2030. Their report found that 2025 was the year the cost of EV ownership fell below that of conventional vehicles.

Green jobs

This boom in EV sales with have a major impact in the UK, both in the automotive industry and the wider economy. A study published this month by Loughborough University found that the electric vehicle industry in the UK could support 320,000 jobs and generate £51 billion of economic activity by 2030. This is contingent on further government investment in electric vehicle infrastructure and training of skilled mechanics. Cambridge Econometrics has also tried to quantify the direct economic benefits of EVs. In a report from 2013, they forecast that there would be 7,000 to 19,000 net additional jobs by 2030 under a low-carbon transport transition. This is because the UK petroleum industry is not very job-intensive. Moreover, as the UK is now a net importer of oil, the switch to powering vehicles with British-produced electricity will accrue more revenue for UK energy companies.

Because of the importance of the price of oil to the wider economy, the increased uptake of EVs in the UK will have an impact beyond the automotive sector. Last week's report by Cambridge Econometrics found that policies to tackle climate change, including the transition away from combustion engine vehicles, will reduce demand for oil across the EU and therefore lower the price compared to what it otherwise would have been. They find that this lower price will increase real incomes and enable more consumer spending on UK-produced goods and services. This model of course is predicated upon a number of assumptions, but it provides confidence that the transition will be broadly economically positive.

The UK automotive industry has enjoyed a renaissance in recent years. If this important sector, and the jobs that depend on it, is to thrive in the low-carbon economy, the UK must ensure it become a world leader in electric vehicles.

Sam Hall is a Researcher at Bright Blue