Who Pays For Air Pollution: Automakers Or Taxpayers?

As the climate crisis becomes an increasingly pressing issue, governments are seeking ways to reduce carbon emissions and mitigate air pollution. One approach is to implement carbon-based taxation policies that target high-emission vehicles and industries. These taxes aim to incentivize the adoption of more efficient and environmentally friendly technologies, such as electric vehicles, while discouraging the use and production of polluting cars. While some countries, like France and the United Kingdom, have made significant progress in this area, with over a third of their new car markets consisting of electric or hybrid vehicles, other countries, like the United States, are facing challenges in reducing emissions from the transportation sector. The discussion revolves around the political viability of carbon taxes and the potential impact on both the environment and the economy.

Governments use taxes to incentivise the purchase of less-polluting vehicles

Several countries have shifted their focus from taxing passenger cars for revenue generation to introducing taxes that target CO2 emissions. These taxes are designed as an instrument to mitigate the negative effects of CO2 emissions on public health and the environment.

One strategy to reduce vehicle emissions is to impose carbon-emissions-based registration fees that increase the price of the most-polluting vehicles, making them less desirable to buyers. France, for example, has implemented an upfront fee on cars with high carbon emissions, resulting in about 30% of new car buyers in the country paying such fees as of 2021. This fee is in addition to a weight charge on heavy vehicles and a rebate of up to €5,000 for those who opt for non-polluting electric vehicles. Similarly, the US has a tax credit of $7,500 for electric vehicles, though it no longer applies to popular manufacturers like Tesla or General Motors.

In Portugal, a tax based on CO2 emissions is levied when registering new vehicles. This tax heavily penalizes the most polluting vehicles, while diesel vehicles are taxed at a lower rate. Portugal also has an annual circulation tax based on engine capacity, power, and the number of cylinders, with an additional component related to CO2 emissions. The government also offers incentives for the purchase of electric vehicles through subsidies, tax exemptions, and benefits such as special parking areas in cities.

Some US states, like California, are promoting faster change by offering incentives for electric vehicles. Policymakers in California aim to achieve a 35% new-vehicle electrification share by 2026, and in the first quarter of 2022, about 26% of new cars sold in the state were electric or hybrid. At the federal level, the US House passed an increased electric vehicle tax credit in 2021, but it was not approved by the Senate. This credit would have provided benefits for low- and moderate-income families, who are often the most frequent drivers.

While electric vehicles are generally considered less polluting, it is important to note that even they produce dangerous particulate pollution from tire and brake wear and rely on batteries with minerals obtained through ecologically-damaging mining processes. Therefore, in addition to incentivizing the purchase of less-polluting vehicles, governments should also encourage alternative modes of transportation, such as walking, biking, and public transportation.

Some countries have introduced a CO2 emissions tax when registering new vehicles

Portugal, for example, has legislated the introduction of a tax based on CO2 emissions when registering new vehicles. This tax heavily penalizes the most polluting vehicles, while diesel vehicles are taxed at a lower rate. In addition to this, Portugal also has an annual circulation tax based on engine capacity, power, and the number of cylinders, which also includes a CO2 emissions component. The Portuguese government also offers incentives for the purchase of electric vehicles, such as subsidies and special parking areas in cities.

France has implemented a similar carbon fee, which can cost buyers of highly polluting vehicles, such as the Ford F-150, up to €35,000 in extra fees. This fee is layered on top of a weight charge for heavy vehicles and includes a rebate of up to €5,000 for those who purchase non-polluting electric vehicles.

The United Kingdom has also had a similar fee in place since 2001, with buyers of the most polluting cars paying higher rates. In 2025, the UK introduced changes to the road tax system, with electric cars being charged for Vehicle Excise Duty (VED) for the first time.

These CO2 emissions taxes are intended to reduce greenhouse gas emissions and their impacts on ecosystems and human health. They can also promote more efficient and environmentally friendly mobility by encouraging the use of collective transport and incentivizing the purchase of less-polluting vehicles.

A uniform tax on emissions is currently impractical but often discussed

A uniform tax on emissions is an appealing idea, but it is not without its challenges and complexities. While it is often discussed as a potential solution to reduce vehicle emissions, it is currently impractical due to several reasons.

Firstly, a uniform tax may not adequately address the variations in vehicle emissions. Different vehicles have varying levels of emissions, and a uniform tax would fail to account for these differences. This could result in some cleaner vehicles being over-taxed, while the dirtiest vehicles, which should be the target of such a tax, may not be taxed enough. This inefficiency could lead to a significant portion of the issues associated with vehicle emissions remaining unresolved.

Secondly, the implementation of a uniform tax on emissions is challenging due to the dynamic nature of emissions. The amount of emissions released is influenced by future economic activity and changes in fuel prices, technologies, and consumer behaviour. These variables make it difficult to accurately project future emissions and the effectiveness of a uniform tax in reducing them.

Thirdly, while carbon taxes have been implemented in various countries, no country has successfully introduced a uniform carbon tax across all sectors. This suggests that the complexity of implementing such a tax is significant, and it may require a combination of policies and incentives to effectively reduce emissions.

Despite the impracticality of a uniform tax on emissions, there are alternative strategies that can be explored. One approach is to implement taxes based on vehicle type and age, with higher taxes for older and more polluting vehicles. Additionally, governments can offer incentives for the purchase of electric vehicles, such as subsidies, tax exemptions, and special benefits like reserved parking areas or rebates. Another strategy is to focus on retiring the dirtiest vehicles through cash-for-clunkers programs or allowing gasoline taxes to be county-specific.

While a uniform tax on emissions may not be the optimal solution, a combination of targeted taxes, incentives, and policies can help reduce vehicle emissions and encourage a shift towards more environmentally friendly transportation options.

India's car tax policy has a lower rate for smaller cars than larger cars

Many countries have shifted their focus from taxing passenger cars solely for revenue purposes to introducing taxes that target CO2 emissions. These taxes are designed to mitigate the negative effects of air pollution on public health and the environment. While some countries like Portugal and those in the Mediterranean have implemented taxes on vehicle registration and annual circulation, others like France and the UK have imposed fees on the purchase of polluting vehicles. These fees are often accompanied by incentives for the adoption of electric vehicles, such as subsidies, tax exemptions, and special parking areas.

In the case of India, the government has implemented a car tax policy that considers various factors, including vehicle length, engine capacity, fuel type, body type, and ground clearance. This policy, introduced in 2006, specifically imposes a lower tax rate on smaller cars (less than 4 meters in length) compared to larger vehicles. The impact of this policy has been analysed through projects like EPIC-India, which explore the effects on air pollution, market competition, and social welfare.

The EPIC-India project raises several questions about the impact of India's size-based car tax policy. Firstly, it suggests that the policy may have influenced consumers to purchase smaller cars, potentially leading to a reduction in air pollution. Secondly, it addresses the possibility of income redistribution, as lower-income households are more likely to own smaller cars. Lastly, the project considers the policy's impact on market competition and the decision-making of car manufacturers.

India's car tax policy has undergone frequent changes, particularly regarding taxes for different size segments. The current policy, with its focus on size-based taxation, has resulted in a “bunching” of cars at the 4-meter cutoff, indicating a potential downsizing effect for larger vehicles. This policy has contributed to India having some of the highest taxes on cars globally, with a flat Goods and Services Tax (GST) rate of 28% for all cars, except electric vehicles, which attract a GST of 5%.

In conclusion, India's car tax policy, with its lower rate for smaller cars, aligns with global efforts to reduce air pollution and promote the adoption of more environmentally friendly vehicles. The policy has potentially influenced consumer choices, contributing to a reduction in pollution, while also impacting social welfare and market competition.

The US has been slow to adapt to the climate crisis with carbon-based vehicle taxation

The US has been slow to adapt to the climate crisis, with carbon-based vehicle taxation not yet being widely implemented. While some US states, like California, are promoting faster change, the country as a whole lags behind other nations in terms of reducing emissions from the transportation sector.

One key issue is the differentiation between "passenger cars" and "light trucks" in US Corporate Average Fuel Economy standards. This distinction has created a perverse incentive for automakers to market and sell heavier pickup trucks and SUVs, which now make up 75% of the US new car market. These larger vehicles are not only major safety risks for pedestrians but also contribute significantly to carbon emissions.

While the US has introduced a tax credit of $7,500 for buyers of electric vehicles, it no longer applies to popular manufacturers like Tesla or General Motors. In contrast, countries like France and the United Kingdom have implemented carbon-based vehicle taxation policies that have led to more than one-third of their new car markets being electric or hybrid vehicles.

To accelerate the transition to environmentally friendly vehicles, the US can consider several measures. These include carbon-emissions-based registration fees, weight-based charges, and carbon emissions taxes to discourage the purchase of heavily polluting vehicles. Additionally, creating urban zones and roadway lanes reserved for zero-emissions vehicles can encourage the adoption of electric cars.

Carbon taxes are designed to reduce greenhouse gas emissions by increasing the prices of fossil fuels and the goods and services that produce high emissions. This approach not only decreases demand for these products but also incentivizes the development of less carbon-intensive alternatives. By taxing the carbon content at any point in the product cycle, from upstream suppliers to downstream energy-using industries, a carbon tax can effectively send a signal to emitters to reduce their carbon footprint.

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