Danish tax man favours luxury cars

Oh Lord, won't you buy me a Mercedes Benz

By BBC News Online's Jorn Madslien

The German car makers Porsche, Mercedes and BMW probably could not believe their ears when they were told that the tax ministry in neighbouring Denmark has called for sharp tax cuts for large luxury cars.

My friends all drive Porsches, I must make amends

But that is in effect what it has done, in a seemingly obscure move to improve the environment.

In a report, it insisted that such tax measures could cut carbon dioxide (CO2) emissions by a whopping 21%.

At least if they were combined with sharp tax increases for some more affordable cars from other companies.

Tax the dirty dozen

The idea behind the proposed tax restructuring is to change the way car charges are calculated.

Worked hard all my lifetime, no help from my friends

At the moment, car taxes are based on a vehicle's original price, with no mention of green factors in the formula.

As a consequence, many well built, fuel efficient cars are heavily taxed because they are expensive to make.

These include so-called hybrid cars which are more expensive to produce because they have a green, electric engine in addition to their petrol engine, the report pointed out.

Meanwhile, cheaper cars that are known to pollute are taxed less.

These would include models produced in Korea and Japan, both countries whose car industries have traditionally produced dirtier cars than European manufacturers, the report said.

Green incentives

This is not to say that luxury cars are always more environmentally friendly.

Oh, Lord, won't you buy me a Mercedes Benz. (Janis Joplin)

Indeed, more expensive cars tend to have larger engines that pollute more than small engines, and as such the current system does encourage environmentally friendly choices to some extent, according to the report.

But the working group has come to realise that if car tax was calculated merely on the basis of green credentials, then luxury car buyers would not be paying, say, twice as much tax as buyers of average family saloons - since these cars do not pollute twice as much.

So under the current system, there is no direct economic incentive to drive a greener car - or at least not one that is linked to the levels of CO2 emission released by different models.

Closed car showrooms

If the working group's proposals were to be implemented, it could slash the tax paid on a large, million-kroner Mercedes by about 100,000 Danish kroner (£8,200, $11,400).

While a much cheaper family car with a not particularly fuel efficient engine could see its price rise from under 200,000 to more than 250,000 kroner as taxes are raised.

Such tax changes would almost certainly eradicate certain car brands from Danish roads, while other brands would see their market share plummet.

But the luxury cars would remain the preserve of rich drivers even after such dramatic tax cuts, since most of them would still cost significantly more than the average family car.

Not likely

The working group's proposals are not likely to be implemented, at least not in their present form.

For starters, the positive effects of doing so would not take effect for another decade-and-a-half.

And even then, the CO2 emission cuts would probably not be as massive as the optimal estimate.

The working group acknowledges that it is more likely that the cuts will be in the region of 0.5% to 5%.

Diesels would benefit

Furthermore, tax changes based solely on CO2 targets would favour cars with other negative attributes.

From Copenhagen...

The definition of an environmentally friendly car depends on which environments are considered, the report said.

For example, diesel cars would be cheaper under the proposed changes, even though they produce sulphur dioxide.

Cut CO2 emissions

But the working group's report was part of Denmark's efforts to reduce CO2 emission by 7% before 2010.

to Brussels.

So it seems likely that the report will influence the government's thinking on car tax and pollution.

The European Commission (EC) has urged member governments to use economic tools to achieve such goals.

Under current EC targets, fuel efficiency should be improved so that cars with petrol engines should be able to drive 20 kilometres per litre while diesel cars should cover 22 kilometres per litre by 2010.

The EC's Expert Group on Fiscal Framework Measures is working to develop common guidelines for EU member states on how to introduce fiscal incentives aimed at reducing CO2 emissions.

The guidelines should make up a catalogue of ideas for a Community Reference Tax System that aims to encourage green cars.

The system will be offered as a service to EU member states and will not be binding.