Higher taxes on fossil fuel cars needed to drive change to electric vehicles

In 1971 cars imported into Ireland came in two varieties: Fully Built Up and Completely Knocked Down. This classification was driven by the tariff regime in place from the second World War to European Union entry in 1973, in principle designed to promote Irish jobs. Over that period most cars sold in Ireland had to be imported basically as flatpacks. They were first partly built abroad, generally in the UK. Then, to enter Ireland, they had to be disassembled, and before being sold to Irish customers the kits had to be put together again.

With mass production across Europe being the norm, this idiosyncratic approach to protecting the Irish market added hugely to the cost of cars. In the 1960s cars were unreliable by today's standards, but when they had been taken apart and reassembled to enter Ireland, inevitably more faults crept in. This form of import restriction also limited the choice of models available, reducing competition.

The result was a bad deal for consumers, with high prices, limited choice and an unreliable product. The rationale for this regime was that it provided employment here in the car-assembly industry. There were also extra jobs in other countries, principally the UK, in disassembling cars into kit form for shipment to Ireland. But overall it was a pretty inefficient system.

EU entry in 1973 meant that this regime had to be phased out, leading to job losses in car assembly. While in the short run, this was challenging, in time the mechanical skills of those employed in the sector were much better used – and probably better paid – elsewhere in the economy.

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Car purchasers got a better deal in terms of choice and reliability. Irish buyers looked beyond Vauxhalls and Austins to buy continental models such as Renault and Volkswagen. However, while some had hoped that EU entry would lead to cheap cars in Ireland, they were destined to be disappointed. New cars, which were a luxury item in the 1970s, were subject to a high rate of tax.

Road infrastructure

A traditional justification for high taxes on cars has been that it helps pay for essential road infrastructure. Another factor keeping new car tax rates high has been that, following EU entry, we had no domestic car industry. Elsewhere in Europe the pattern is that purchase taxes on cars are high in countries such as Denmark, Norway and Finland, which don't make cars, whereas they are low in Germany, France, the UK and Sweden, traditionally big car producers.

Studies of the European car market show that, not surprisingly, consumers pay high prices for cars in countries with high purchase taxes on vehicles. However, before-tax prices in these countries are generally below those of jurisdictions which levy low taxes on cars.

For example, one EU study showed that in Denmark the tax on a new Volkswagen Golf constituted 60 per cent of the sale price, while in Germany it was about 16 per cent. However, the pre-tax car price in Denmark was only 80 per cent of that in Germany. While the higher retail price was painful for Danish consumers, it was a good deal for Denmark as a whole, which was getting its cars at a cheaper price than Germany (with the Danish exchequer benefitting). The same study showed the Irish pretax price was 90 per cent of the German one. Effectively what is happening is that some of the tax on cars in Ireland is carried by car producers and distributors, rather than all being passed on to consumers.

Greenhouse gas emissions

Another rationale today for levying tax on new cars is to discourage greenhouse gas emissions. The country in Europe with the most expensive cars is Norway, primarily due to the very high tax rate on fossil fuel vehicles. Norway is also the country with the highest penetration of electric cars.

To meet our climate change targets, we need to rapidly shift our car fleet from fossil fuel to electric vehicles, by encouraging those buying new cars to make the switch, either through the carrot or the stick. As a Government Economic Service paper has shown, it could cost government €10 billion by 2030 if we try achieving this via subsidies. The Norwegian strategy of using higher taxes on fossil fuel cars is probably the only feasible approach to drive the change.

In Ireland most people on limited budgets buy second-hand cars, accounting for almost half the cars registered in Ireland for the first time last year. As there is a very limited supply of second-hand electric cars with right-hand drive, this factor may slow the process of electrifying our car fleet.