Transport remains the only sector emitting more than in 1990, but emissions are finally beginning to fall. With three-quarters coming from road transport, urgent action is needed, including full use of government policy tools, especially taxation
Europe now faces a decisive choice: to either lead the global BEV race and confidently enter the electric age or risk falling behind in the fossil fuel era.
Car taxation is key to ensuring this leadership position. By reforming national tax codes, both companies and individuals can be encouraged to lean towards electric models.
In European policy, taxation has proven itself to be a powerful and versatile tool. There are countless examples of green taxation across multiple sectors as documented in several reports. Cars are no exception.
In the corporate car market, the effect of reforming taxation can be huge. Corporate cars account for 60% of all new cars in the EU, so taxation changes have the power to drive the whole car market in one specific direction. They also enter the used car market much quicker than private cars, typically after 3-5 years, which means that millions of almost new, affordable electric vehicles can quickly be made accessible for private buyers. In Europe, 8 in 10 households get their cars in the used car market. And finally, most of the corporate EVs are assembled in Europe, so reforming car tax to favor EV purchases is a way of defending local car manufacturing and jobs.
However, some Member States haven’t made effective use of this tool yet. The top five markets alone (Germany, France, Italy, Spain and Poland) represent 71% of corporate car sales, and 42% of all new car sales in the EU. But only France is creating effective incentives for the purchase of electric company cars.
The potential of tax incentives to drive change cannot remain untapped. Favouring electric over petrol cars clearly drives change. Belgium stands out as an example of how big changes can be achieved in a very short period of time. In 2021 Belgium introduced a tax reform to progressively phase out depreciation write-offs for petrol company cars and as a result, BEV corporate uptake grew between 2021 and 2024 by 32.2 percentage points.
With EU laws signalling the pace to decarbonisation , it might appear that the role of taxation is diminished as the emissions problem is effectively solved. And yet taxation continues to play a role for several reasons:
Car taxation can improve public finances by raising revenue.
Car taxation can be a fair way of conducting public finance by raising revenue from the right sources (i.e. following the user pays and polluter pays principles and, when most of the car fleet is already electrified, the larger cars pay principle).
There are many externalities associated with car ownership and usage beyond CO2 emission. Car taxation can be used to address these additional externalities.
Taxation serves as a complement, rather than an alternative, to regulations by creating the conditions through which the CO2 standards can be fulfilled.
National governments may wish to attract zero-emission vehicles to their country (e.g. air quality, noise pollution, lower operating costs, electricity grid balancing) while the CO2 standards are EU-wide.
National governments may wish to electrify their new sales faster than the EU-wide CO2 standards.
National governments may wish to use taxation as a tool to steer the production of domestic OEMs and therefore secure car production and jobs remain in Europe.
The CO2 standards are implemented in a stepwise manner, leaving periods of little action in the interim periods between requirements (e.g. the next standard is applied in 2025 and the next challenging standard is applied in 2030). Car taxation can streamline EV uptake over those interim periods.
There is the ability to amend taxation on a regular basis.
