Johannesburg — THE introduction of the vehicle emissions tax, which has sparked much public debate in recent weeks, is part of the government's commitment to reducing SA's greenhouse gases by 34% by 2020 and 42% by 2025. The energy and transport sectors are key to achieving these targets.

The Treasury has been researching various fiscal measures to support environmental reform since 2003, resulting in the policy paper published in April 2006. This work was given further impetus by a proposal by the then minerals and energy department in 2004 to encourage the use of more fuel-efficient vehicles by taxing "gas guzzlers" - vehicles such as double cabs and 4x4s, which have high engine capacity, use more fuel per kilometre and therefore emit more carbon dioxide (CO2).

2 Emissions have become the leading basis of assessment for car taxes in most European countries, where the taxation of ownership and use of cars is increasingly designed to pursue environmental objectives. The Treasury first proposed the inclusion of a CO2 emissions component in the 2009 budget when reforming the ad valorem excise duty on motor vehicles (both passenger cars and light commercial vehicles).

As with all tax policy proposals, the Treasury then engaged in extensive consultation with stakeholders, the National Association of Automobile Manufacturers of SA in particular. It was precisely because we listened to the concerns of the industry that the implementation of the tax was delayed by a year, and amended into a specific tax, ensuring it targets emissions more directly and is not linked to the price of the vehicle. The industry also requested that the tax be limited to passenger vehicles because there were no data on CO2 emissions for light commercial vehicles.

The revised proposal, made by the finance minister in the 2010 budget, therefore refers to passenger vehicles. It is to take effect on September 1.

At the crux of the industry's objections to the emissions tax is the definition of a passenger vehicle. It was always the intention of the Treasury that the definition would include double cabs, and by inference, small bakkies. The one legal technical difficulty is that the harmonised system used to describe, classify and code vehicles in terms of the Customs and Excise Act classifies double cabs as light commercial vehicles. The VAT Act, however, classifies double cabs as "motor cars", in line with the fact that they are typically used as passenger vehicles.

As it is not possible to use the VAT definition of a motor car for the purpose of implementing the CO2 emissions tax under the Customs and Excise Act, it was decided to include in the definition of a passenger vehicle all categories of light commercial vehicles, as defined in the harmonised code of classification, but excluding light trucks.

Since most small single-cab bakkies and their double-cab equivalents have similar engine sizes, these two categories of vehicles should be treated the same for the purpose of the vehicle CO2 emissions tax. It would not be equitable to exclude them from the 2 emissions tax.

The Treasury continued to discuss the proposed tax with the motor industry before and after the 2010 budget. In May public hearings were also held in Parliament where the Treasury presented its tax and excise proposals, providing another opportunity to comment. The Treasury responded last week in Parliament to all comments submitted. Significant amendments were made to the 2010 tax proposals.

This consultative approach is a matter of routine, as we are mindful of the effect of taxes on economic growth, job creation, poverty alleviation, inflation, and environmental and social outcomes. Decisions made subsequently must be accepted as an outcome of a democratic process.

While most taxes are aimed at raising revenue for the government, environmental taxes are not. Carbon taxes are designed to correct market failures and ensure that the polluter pays, thus discouraging behaviour that is harmful to the environment. In line with good tax policy objectives, the revenue for any tax is not earmarked for spending in the sector generating that revenue - earmarking taxes is inequitable, inefficient, not transparent and bypasses the democratic process. All spending should be approved by Parliament, through which funds are transparently allocated.

No single intervention can achieve all desired environmental outcomes. We need a variety of mechanisms, including phasing in investments in energy efficiency measures and alternative low-carbon fuels and technologies, to facilitate our transition to a low- carbon development path.

Efforts to reduce emissions in the energy sector have already begun in earnest. Measures introduced include a levy on electricity generated from nonrenewable sources, accelerated depreciation allowances for investments in renewable energy, and the exemption from tax of income from the sale of certified emission reduction certificates derived from the clean development mechanism projects. Clearly, there's more work to be done in the medium to long term to reduce our dependency on coal.

In considering appropriate measures to reduce the transport sector's contribution to greenhouse gases, we also have to take steps to improve public transport by offering viable alternatives, and by dealing with the spatial problems inherited from apartheid. The Gautrain, the bus rapid transport system, and taxi recapitalisation are some of the measures.

Beyond public transport, other steps taken over the past few years include fuel taxes, which have been increased above the prevailing inflation rate. Work also continues on improving fuel specifications. Lead was phased out a few years ago. New fuel standards to deal with other impurities are under way. Discussions on higher fuel standards, led by the Department of Energy, must be expedited, as the oil industry and the government consider how best to ensure new investments in the liquid fuel industry.

Other interventions identified in the 2006 policy paper include higher vehicle taxes, licence fees (which differentiate between emitters, and hence apply to older cars), and higher vehicle and fuel standards. The Treasury has always noted that appropriate taxes and/or licence fees should be imposed on all vehicles in line with the "polluter pays" principle. The licence fees on older vehicles could be adjusted to link it to vehicle emissions. This would require consensus with provinces.

The government has and will continue to implement measures to deal with environmental challenges, including local air pollution, water pollution, climate change, solid waste disposal, and the loss of biodiversity. That we cannot do everything at once should not be an excuse for doing nothing. A step-by-step approach is more appropriate, allowing society and the economy time to adjust without major disruptions. The Treasury discussion paper on carbon taxes, to be released soon, will elaborate on steps to broaden their imposition to the rest of the economy.

The issue about the definition of passenger cars is a red herring, and must not be allowed to undermine the principle of the CO2 vehicle emissions tax. We will continue to discuss the issue of light commercial vehicles, provided such discussions occur in good faith. Leaving gas guzzlers (which are used as passenger vehicles) free to pollute the environment will create an unfair playing field and violate the fundamental principle that taxation should be neutral.

Momoniat is deputy director-general: tax and financial sector policy at the Treasury.