4 August 2010

South Africa: Fuel Emissions


Johannesburg — NEXT MONTH, if the government gets its way, cars and bakkies in SA are going to get more expensive. The government wants to introduce a new once-off tax on these vehicles, paid at purchase, and related to the amount of carbon dioxide the vehicle emits.

The government claims this is an environmental measure aimed at reducing emissions and protecting the environment. Prof Philip Lloyd recently established, on these pages, the likelihood that the legislation will, in fact, increase emissions as people are taxed out of the market for a new vehicle, and thus keep running older, dirtier engines.

The proposed law is punishing, adding R75 to the purchase price of a car for every gram of CO2 per kilometre it emits over 120g/km. This figure would then be subject to VAT, leaving the buyer in the invidious position of paying tax on a tax. The figure of 120g/km is extremely low and, if passed, this law would mean that only 12 vehicles for sale in SA today would escape additional tax. None of them is a bakkie. Most are city cars unsuitable for families or freeway driving.

A new tax has serious implications for small enterprises. In all its negotiations with the industry, the notion of slapping a carbon tax on light commercial vehicles (LCVs) was never mooted by the Treasury. No such tax has ever been levied in the world and even in places such as the European Union (EU) there are no plans to do so. However, last month, when the draft law was released here, the tax appears to include LCVs and minibuses. This is potentially hugely damaging.

Take the bog-standard GWM (Great Wall Motors) bakkie, a one-tonner that comes with a cloned Toyota 4Y motor - that bomb-proof 2,2l engine in old Hiluxes across Africa. It has no frills, and it costs R95000. Its popularity among small business owners is evident from the number of them on the road. Unfortunately the cheap technology that resides under the bonnet will attract tax in spades. The carbon tax will add 14%, or R13965, to the price.

Such a tax (from 130g/km, and only on cars) is on the cards in the EU - but only from 2015, despite the fact that in the EU all cars and fuels adhere to stringent Euro 5 standards. SA's fuel, by contrast, languishes at Euro 2, a 16-year-old standard.

As a result, the tax is also profoundly unfair. In SA, we are increasingly driving cars with outdated technology, not through any fault of the manufacturers, but because of our outdated fuel quality.

Euro 5 standards, which came into force in Europe in 2008, require that diesel contain no more than 5ppm (parts per million) of particulate matter. In SA, fuel retailers like to pretend their 50ppm diesel is in some way advanced, and that the "standard" 500ppm diesel is normal. It isn't.

Fuel-saving technology that dramatically cuts CO2 emissions is available elsewhere, but we're not getting it here. BMW makes a version of the 3 Series 2l diesel that, in Europe, produces just 109g/km. So poor is our diesel, however, that BMW has to adjust the engine for sale here, taking the car's output up to 140g/100km, and adding R2394 to the price of the car under the new tax. BMW's Guy Kilfoil confirms the extent of the problem: "The biggest impact would be had by cleaning up our fuels. If SA had Euro 4- compliant fuels, we'd be able to offer a 14%- 17% improvement in economy and COÂ' emissions across the 1 Series, 3 Series, 5 Series and X5 ranges." As a result of poor fuel, BMW cannot introduce other environmental technologies. "If our fuel is not improved, it won't be economically viable for manufacturers to continue producing engines for the market. The engines we sell here are already very different from the ones we sell in Europe."

Mercedes-Benz , too, produces a car called the C220 CDI, with a four-cylinder diesel motor that, in Europe, emits 119g/km. In SA, after adjustments for our poor diesel, it emits 153g/km, putting the car into the tax band and adding R2821,50 to the price.

The new carbon tax will be based on official EU emissions data, which, as is evident, are completely inaccurate after engines have been modified for local fuels. The government has said it will do testing as required. If it is serious about getting the correct data, the state needs to run an emissions test on every single model available in the country.

A full test on a car takes four days and costs R20 000. There are about 1570 model derivatives on sale in SA, and very few facilities that can do the test.

The motor manufacturers find the tax highly discriminatory. Toyota's Leo Kok: "We just don't have the fuel for it. There's been no investment in fuel infrastructure and Toyota has long been critical of this."

Audi's Rudi Venter echoes this. "Because of the fuel situation we think the only way you can see this tax is as a sin tax."

Venter says he doesn't see the legislation changing behaviour at the luxury end of the market, but only at the budget end, where cars usually emit far less CO2 - in effect taxing the fuel-sippers off the road and doing nothing about the gas guzzlers.

If Venter is correct, what is the purpose of the law? Certainly, it won't change behaviour - purportedly the point of the tax.

Kilfoil agrees. In some competitive segments, manufacturers, he says, will not allow the tax to "price them out of the market", meaning they'll need to find a way to absorb the tax. This won't change consumer behaviour either.

So, the new tax is arbitrary, damaging and discriminatory. It taxes private cars but leaves aviation and shipping untouched.

A carbon tax should have three objectives: it ought to push consumers toward greener technology; push manufacturers into making such technology available; and have a positive environmental outcome. The proposed tax fails on all three counts. Consumers will carry on as before either because there's no real choice or because the manufacturer has absorbed the tax. Car manufacturers have brilliant technological solutions to emissions, but cannot implement them because of SA's fuels, and the environmental effects will, in fact, be negative.

While at a Chrysler factory in Jefferson North last Friday, US President Barack Obama spoke in support of the "cash for clunkers" policy employed in the US. "That programme was good for auto makers," Obama said. "It was good for consumers. But ... it was also good for the environment. It was more successful than we ever imagined and it saved at least 100 000 jobs, giving dealerships sales numbers they hadn't had in years and communities an economic boost they wouldn't have otherwise seen."

SA could do with a bit of that.

Another concern is the potential effect the tax could have on inflation. With the carbon tax adding as much as 6% to a new car's price (and an average of 2,3%), and as much as 15% to a new bakkie's price, there are potential implications for monetary easing, especially with car sales in an impressive recovery.

Brian Khan, of the Reserve Bank's monetary policy committee, says the tax is "just another pressure to keep an eye on" that would "affect the headline number", if not monetary policy itself.

If anyone needs to be leaned upon, it's the fuel retailers who need to be taxed into 2010, not BMW and Mercedes and Toyota, who are already there. Within two years, cars in India will have moved to Euro 4-compliant fuels. In SA, there is no real plan at all.

The "carbon tax" is a poorly disguised wealth tax aimed at motorists and small businesses, a laughably transparent tax grab that will net the state an extra R1,7bn a year, according to National Association of Automobile Manufacturers of SA estimates.

As we claw ourselves out of recession with hundreds of thousands of jobs lost, an increasingly voracious Treasury should avoid imposing another damaging and inflationary burden. This is a tax we cannot afford and do not need.

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