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Itís not the size of your engine, itís what you do with it

By Gaurav Sodhi - posted Wednesday, 20 June 2007


The Beattie State Government is trying to rid the public of a nasty little habit we have acquired. It seems folk these days continue to buy huge gas guzzling four-wheel drives and V8s, complete with bloated engines and inefficient fuel consumption.

So to curb this dastardly excess the Queensland Government is to introduce a sliding scale of taxes, indexed to the number of cylinders in your next vehicle. The more you have, the more you pay.

A more panicked, preposterous, populist and paternalistic response can hardly be imagined. Above all else, however, the plan is flawed in its economic logic and in its philosophy.

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Increasing registration costs is akin to raising the fixed price of driving. The idea is supposed to be that anyone looking at a big burly V8 would be put off by the higher registration costs and choose the more sensible V6 or the even more frugal four cylinder model instead. So what’s wrong with that?

Governments’ distorting the purchasing decisions of individuals is rarely a good idea. It is not their job to wag their finger at the choices we make.

But pollution has a cost, even if it is one that, until recently, has barely been acknowledged by policymakers. Because the cost of pollution is shared by everyone in the community, there is nothing wrong with charging the driver of a vehicle a higher proportion of this cost.

This “externality”, however, comes not from buying a V8, but from the emissions it produces. Having a V8 or four-wheel drive in your driveway does not pollute the globe - driving it does. So the correct place to price pollution is at the petrol pump, not the car dealership.

If the government was really interested in reducing pollution and helping the environment, it would be advocating higher petrol taxes, not higher registrations. But it seems the government has calculated that people will be averse to the t-word (“tax”), so it is best to go with increasing registrations. No one will complain that way.

This reeks of government exploiting public concern for the environment in an ill thought out policy to raise revenue. Moreover, the measure is completely unnecessary.

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Australian car buying habits are already changing because of the jump in petrol prices. This has meant the marginal cost of transport has risen. Consumer responses may be rigid to fixed costs (since it’s an annual payment and every one has to pay it anyway), but they are certainly responsive to changes in marginal costs, i.e. petrol prices.

Earlier in the year the Toyota Corolla displaced the Holden Commodore as the most popular car in Australia. Remove the fleet sales of six cylinder cars and it becomes clear that private buyers are overwhelmingly choosing more efficient models, most often four cylinder ones, all by themselves without the government guilt trip guiding their actions.

The car industry is a technologically driven one. There is plenty of variation in emissions within cylinder groups and even more between groups. Some high tech six cylinder cars use less fuel than four cylinder vehicles. Diesel engines use less fuel again. Chrysler and Mercedes both have technology that switches off cylinders when cruising around town, only firing them up when called upon - resulting in far less petrol being burnt. Lexus has a hybrid V8. It is ridiculous that manufactures are penalised and discriminated against by public policy for innovations that increase efficiency.

Moreover, new cars are typically more efficient than old ones, not to mention safer. So taxing new purchases encourages people to hold onto their older cars. Consequently this type of policy is unlikely to work because people now have an incentive to keep their older, dirtier cars.

If the government is really interested in helping the environment and not winning kudos points from the electorate, there is only one thing that will work: it will have to increase petrol taxes so that the marginal cost of driving, those costs that are felt each time we get into the car, are higher.

That way the costs of pollution, which is what we are interested in, rise. And it would hasten a shift to newer more efficient models, as well as diesel and hybrids - a shift that is already beginning to take place.

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About the Author

Gaurav Sodhi is a researcher at The Centre for Independent Studies. His paper Five out of Ten: A Performance Report on RAMSI was issued last month.

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