Company cars: Time to end one of the largest fossil fuel subsidies in Europe

May 30, 2021

Belgium is a small country, known for its beer, chips and impossibly complex political structure. It is much less well known for being the fifth biggest car market in the EU, bigger than the Netherlands and Poland. Why? Belgium’s high tax system rewards workers with an almost tax free right to drive. Offering a luxury car in Belgium is the cheapest pay rise companies can offer, dumping huge numbers of heavily-polluting vehicles onto Belgian streets. But last week the country’s politicians took a major step to address its company car problem by agreeing to make all new company cars electric by 2026. The rest of Europe should take note.

The country’s company car addiction has long been a source of irritation for environmentalists. The scheme is a subsidy to private car ownership, encourages unnecessary travel and favours the well off who get to drive premium vehicles at discount prices. Worst of all, until very recently, almost all company cars were diesel-powered.

The logical solution, long favoured by greens, would be to abolish the company car scheme and lower labour taxes. But that’s easier said than done. Simply abolishing the tax benefits would mean higher taxes for a large group of middle class voters – not exactly a vote winner as the Flemish green party learned in 2019.

And so for almost a decade nothing happened. What needed to be done?

After some soul searching, Belgian green groups supported by T&E started to advocate for a more step wise reform, starting with phasing out fossil company cars but keeping the system in place for electric vehicles. That’s because company cars have one big thing going for them: they are an incredibly powerful driver for fleet renewal with cars ending up in the second hand car market after 4-5 years. Ideally suited to accelerating the uptake of electric cars and creating an affordable second hand market for them.

Corporate drivers care about total cost of ownership, not just the car’s price tag. That benefits electric vehicles but also makes the market much more responsive to small tax  changes to things like deductibility or benefit in kind. Company cars are usually premium models, making the switch to electric easier and drivers are also much more likely to have access to either home or workplace charging.

Last week Belgium’s federal government adopted an ambitious plan to get companies to switch to electric. The main tax benefits for fossil company cars will gradually disappear between 2023 and 2026. In a big win for green groups, plug-in-hybrids, often referred to as “fake hybrids” in Belgium, will also be phased out.

The reform is not just a victory for pragmatic environmentalism but it is of real strategic importance. It should be replicated across Europe. Here’s why:

First, diesel company cars are the ultimate fossil fuel subsidy. Without changes, Belgium and other nations will continue to fork out €32 billion a year to polluting engine cars.

Second, this is in fact one of the single most important climate measures countries can take. Company cars drive twice as many kilometers as private cars, roughly doubling the emissions savings potential. The Belgian decision is expected to cut the country’s car emissions by a quarter in the next nine years. If all major car markets follow Belgium’s example, the impact on emissions would be significant.

Last but not least, the company car market is the heart of the European car market. It’s the European automakers’ cash cow. Decisions such as these will force European automakers to go all in on electrification if they don’t want to lose out to the likes of Tesla and Polestar in their top market. It will also force companies that bet heavily on plug-in hybrids to reconsider their strategy.

It is important to underline that electric company cars are by no means a perfect solution. We also need to reduce the number of cars on our roads and the inefficiency and equity issues related to the system are real. So our goal remains to reduce and ultimately phase out subsidies to company cars. But the climate crisis is a race against time. EU nations should seize every possible opportunity to eliminate this big fossil fuel subsidy and drastically cut car emissions. The country I know best shows the way. And it’s been a long time since I’ve been able to write that.

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