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10 years on: Has CO2 changed fleet forever?

By / 5 years ago / Feature / No Comments

In today’s fleet market, and to a lesser extent the overall car market, CO2 rules just about everything: the initial VED and possible first-year registration fee, subsequent years VED, corporation tax levels and of course company car tax. 

Yet it can be hard to recall that just 12 years ago, the industry hardly recognised the term, and CO2 had no real place in the vehicle selection process. The upheaval of 2002, the introduction of the BiK system based on carbon dioxide emissions changed all of that – irrevocably.

But where did the CO2 tax system come from? The UK policies fundamentally changed as a direct result of the UK commitments made, ironically by “Two-Jags” John Prescott, at the Kyoto Summit in 1997. 

Throughout 1998 Government departments led by HM Treasury, headed by Gordon Brown as Chancellor, explored all the then-current tax elements and considered how they could be changed to be influenced by – indeed dependent on – a CO2 based tax system. Initial results were announced in the 1999 Budget with a bare outline of intent: both VED and BIK would become linked to the CO2 emission levels of the car. There were all sorts of considerations about vans as well – that proved a step too far at that time.

Consultation was launched to move BIK from a three-band variation on the P11D price (introduced in 1994; band thresholds based on business mileage in the year) to a 21-band system based on 5g/km increments of the CO2 rating. 

Interestingly, the 21 bands spanned exactly the same range of percentages-of-list-price – 35% for the “biggest benefit”, 15% for the “smallest benefit” – so it was relatively easy to map the changes – once the industry had access to the CO2 ratings.

That proved to be a struggle. Back then, focus on compliance with the EU Directive on availability of environmental performance was scant. Manufacturers generally published fuel consumption figures – but not the CO2 data. Catalogue information generally ignored this data. Dealerships generally held fuel consumption figures although most showroom sales people seemed reluctant to provide the information to potential clients – fleet or retail. 

The Association of Car Fleet Operators began a campaign to ensure that the data was readily available. Looking back from today’s perspective, it is funny and astonishing to think that most manufacturers were reluctant to comply with the legal requirement (and had been for some time) because of fears of non-competitiveness of their models. 

Even by late 2000/ early 2001 – with the new CO2-based VED system effective from March 2001 – some were dragging their heels and providing data only “on request”.

Once the VED system had settled down things got better – although many fleets failed to act, through failure to realise that the new system would affect all fleet cars in use by the change-date  – not just new ones bought later. Quite a few managing directors had severe shocks in the wallet, having bought kit like Jaguars and Range Rovers just before the new BIK rules came into force.

Undoubtedly part of the problem was that the UK led the whole world in these initiatives – and to some extent still does in the degree of CO2 integration into all aspects of vehicle taxation. With most of the big decisions about new drivetrain technologies in the European market made in European cities, there was a failure by some to recognise the extent of change in the UK fleet market. 

That started to change rapidly as the sales figures changed under the influence of the smarter fleet operators who recognised the impact not just on the drivers through the benefit-in-kind tax charges – but the cost to the employer through the corresponding Class 1A NIC charges. 

Suddenly, not only was there better access to CO2 data – but R&D on engine performance was greatly accelerated. Of course much of this was the result of other EU countries starting to think along similar lines to the UK for taxation streams – with the twin objectives of reducing emissions from transport and raising revenues.

So just a decade later, the CO2 rating of new cars is now one of the most important aspects of any new model – often released before the initial pricelist. With direct influence over initial and subsequent Vehicle Excise Duty rates, corporation tax effects, driver taxation and related employer NIC, the changes begun in 1998 and enacted in 2002 have changed the shape of the market probably even beyond the wildest dreams of the early taxation and political “inventors” of the systems.

 

Fleet influence of CO2: On fleet operators

Most fleets now have some recognition of CO2 thresholds in their policies. Some of this is for driver taxation, some for corporation tax rates. But the shape of the fleet market has changed significantly over recent years. 

Diesel has increased its overall penetration from a few bold all-diesel pioneers to now some 65 – 70% of all new fleet cars (and around 45% in the overall market). That’s because in broad terms a diesel will have lower CO2 and therefore tax burden than an equivalent petrol engine – but let’s not ignore the huge improvements in all aspects of engine technologies and refinements which focused on diesels across Europe. 

 

On Company Car Drivers

Driver intentions have changed considerably. There is certainly a much greater (if not quite total) recognition that the CO2 rating will impact on driver cost – but there is lots of evidence that the CO2 figure is taken in isolation, and not as a means to measure the actual taxation cost of any particular vehicle. 

So instead of doing the full calculation (list price times percentage based on CO2) drivers often look only at the CO2 – and ignore list price factors (and obviously the actual fuel consumption values). But this had led to a very considerable downsizing of the overall new-vehicle selection process.

 

On manufacturers & the market

Once manufacturers realised the advantages to sales of getting behind lower CO2, they have done amazing things. Of course, EU-level regulation and the individual tax systems have helped.

All the volume/fleet makes now offer some form of “Eco” system almost at sub-brand levels. Huge investment in R&D and new production facilities have lowered the overall CO2 ratings hugely: across Western Europe the market average has fallen from 172 g/km (2000) to 146 g/km (2010). In the UK over the same period, the figures are 185 g/km to 144 g/km. 


These improvements come from a range of different factors:

• Tighter engine management 

   through advanced ECUs

• Improving fuel qualities

• Different gearing

• Lower weight (despite additional 

   safety and comfort items)

• Stop/ start technologies

Pending legislation aims to get the corporate average down under 140g/km within the next year or two – and most manufacturers seem quietly confident they can achieve this (although they don’t always advertise that view to the regulators.)

As well as these changes, the shape of the market has altered significantly. Sales of larger cars are down and of smaller cars considerably up (although all within a smaller overall annual market). 

So the cars (and to some extent vans) are considerably more refined than before, yet deliver much better fuel consumption – or do they?

Across the same period, the tested (for the Euro-standard Type Approval system) national average fuel consumption for petrol cars in UK has improved from 34.6mpg to 44mpg, a 27% improvement. For diesels, the figures are 44.9mpg to 52.1mpg, a 16% improvement. Overall these represent an improvement of around 17%.

However, across the same period, total road fuel use (petrol and diesel – cars and light goods only) has only declined by 1.6 m tonnes per annum, from 36.5 million tonnes in 2000 to 34.9 in 2011. During that period road traffic has increased by around 10%, according to DfT figures. So the figures don’t quite add up.

 

Implications: head in the sand?

Even though we may pat ourselves on the back for the on-paper reduction of CO2 levels, what appears to be happening is the failure of the delivered consumption promise, because actual fuel consumptions, and therefore actual CO2 reductions, are not improving as much as they could. 

It is widely accepted that the actual performance on the road is around 15% worse than the ‘combined’ figures from the official tests, and that of course varies widely according to traffic, weather and geography, but that under-achievement seems to be getting worse.

It is also widely recognised that too few fleets actually monitor the detailed fuel consumption achieved by their car/driver combinations. Even with the significant increase in use of fuel cards with all the monitoring and control potential, only a minority of fleet managers actually measure and monitor the detailed figures – and even today, some fleets barely try to control the overall costs.

There is a growing concern that manufacturers, government and fleet operators are actually just relying on ‘new technologies’ to improve their positions. 

Here in the UK, and much of Europe, the industry is going mad throwing money at all kinds of R&D (both in-vehicle and back-office technologies), the very best of which will still take at least one whole cycle to become remotely effective – yet there is very little on optimising what is already in operation. 

By ignoring the vital aspects of policy, corporate expectations, occasional disciplinary action, and proper, effective measurement and monitoring of fuel volume and costs today, we fail to prepare the ground to exploit future technologies properly. A driver who refuses to be told to drive leaner, in a business that doesn’t think it can manage and improve delivered fuel performance, seems quite unlikely to get anything like the best out of any new-technology vehicle next time round. 

Perhaps even worse, he or she might try to drive it to get the same on-the-road performance – taking these technologies out of their optimum performance window and totally negating the potential benefits.

And then, when someone does a quick measurement of mpg, it’s not much better, so “all that technology and expense was a waste of time,” undermining the core objectives of the strategy. 

This requirement to improve how, and how well we manage fuel has a direct and linear implication for CO2 emissions to the environment. Despite the technology-based improvements, we’re actually not making as much progress as the headline figures might show. Is it time for a re-think?

 

BIK tax: it’s the future

Industry experts predict what will happen in the next 10 years

The Government may retain an emissions-based company car tax structure, but introduce a system that takes into account other exhaust gas pollutants and not just CO2.

Having taken into account carbon monoxides (CO), oxides of nitrogen (NOx), particles and hydrocarbons as well as CO2, a numerical figure could be produced linked to a car’s overall emissions and then directly related to a percentage of a car’s list price as now.

If telematics systems are to become standard in all cars at a future date, we could move to a mileage-based tax system.

 

Steve Whitmarsh, managing director Run Your Fleet

'We anticipate that manufacturers will keep ahead of the BiK trend by producing more efficient, lower emitting and high powered cars, encouraged by the taxation, emission targets and financial penalties already placed on them by European law.

Alternative fuel technologies such as hybrids will increase in popularity, with hydrogen fuel cell technology a possibility; although as with electric cars a lot will depend on the cost and infrastructure.'

 

Ian Hughes, Commercial Director, Zenith

'Once the tipping point is reached whereby the UK motor industry is supported by drivers in green vehicles, taxation will rise back up to maximise revenue and ease congestion, potentially by forms of “vehicle usage” tax.

Taxation on low emission vehicles is understandably low at present. But ultimately the taxation stick will reappear over the next decade once the current agenda is met. 

Company car taxation is a fine balancing act. With the corporate sector contributing so importantly to new vehicle registrations, no Chancellor will wish to damage that side of the economy.'

 

Stuart Menzies, Commercial Director, Interactive Fleet Management

'Unfortunately, the changes after 2015 onwards are a real step change – especially the decision to get rid of special rates for drivers of ultra-low carbon company cars. 

The first 10 years of the CO2 system proved beyond doubt that worthwhile company car tax incentives change behaviours, cut costs and pollution and support business. Turning the screw on fleet drivers for another £350 million a year on top of the £1 billion-plus they already pay risks pushing them back into older, more polluting, less safe private cars.'

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