Financial Incentives: Road Transport Vehicles

In February 2013 the European Commission published its “Guidelines on Financial Incentives for Clean and Energy Efficient Vehicles” (the “Guidelines”). The vehicles in question are road vehicles; cars, vans, buses, trucks (to include two and three wheelers and quadricycles). Incentives can take many forms. Some may be purely financial, including grants, loans, tax deductions etc, with others being legal in the sense of regulation, standard setting or even prohibition.

The European Commission believes that there are market distortions created by some of the existing incentives. The Guidelines have been produced to help address this and to provide Member States with clearer rules on what incentives should and should not do. Fleet operators (private, public, retail, rental, logistics, etc), manufacturers, procurement professionals and the like may be particularly interested in the Guidelines.

Context

In the 2010 European Communication "Europe 2020: A strategy for smart, sustainable and inclusive growth" the European Commission set out its plans to enhance competitiveness and energy security of the European economy by more efficient use of resources and energy. This was followed in 2011, by the White Paper “Roadmap to a Single European Transport Area – Towards a Competitive and Resource Efficient Transport System" which ambitiously seeks to break road transport’s dependence on oil and develop a sustainable alternative fuels strategy along with appropriate infrastructure. The White Paper set a target of 60% greenhouse gas (GHG) emissions reduction from transport by 2050 by, amongst others, “increasing the efficiency of transport and of infrastructure use with information systems and market-based incentives”. The Commission pledged to “move towards full application of “user pays” and “polluter pays” principles and private sector engagement to eliminate distortions, including harmful subsidies, generate revenues and ensure financing for future transport investments”.

In the context of transport the Guidelines define financial incentives as “incentives which are designed to modify the general conditions in such a way as to increase the market demand for a certain type of vehicle, with particular environmental performance”. Provided intended incentives apply to vehicles which meet pre-set performance criteria, the European Commission believes that incentives should as far as possible seek to employ:

(1) a pull-effect to enhance consumer demand; and

(2) a push-effect to stimulate manufacturer supply.

In order to trigger the push/pull effect in the EU market, the European Commission feels it is important that Member States coordinate and harmonise the design of their financial incentives so as to create critical mass on a pan-European basis.

Mandatory principles

The Guidelines refer to a number of mandatory principles in the design of financial incentives. These are enshrined in existing EU legislation and include:

Non-discrimination: Incentives must not favour a specific manufacturer or a particular Member State.

Community type-approval legislation: Incentives must be compatible with the Community type-approval legislation, which provides for mandatory technical requirements for new vehicles.

State-aid rules: Obviously incentives must be compatible with Treaty provisions on State Aid and the notification obligations under the State aid rules will have to be met.

Public procurement: The incentives will be required to take into consideration the provisions of Directive 2009/33/EC on the promotion of clean and energy-efficient road transport vehicles (which is itself a legal incentive in that it sets rules, which favour clean and energy-efficient vehicles in procurements by the public sector). This Directive requires that lifetime energy consumption, emissions of carbon dioxide (CO2), emissions of oxides of nitrogen (NOx), non-methane hydrocarbons (NMHC) and particulate matter (PM) be monetised and taken into account as part of the procurement process.

Recommended principles

The Guidelines provide that certain recommendations should also be taken into consideration whenever new financial incentives are being considered.

Technological neutrality and Common-performance criteria: Incentives should not be limited to vehicles equipped with a specific technology. This would discriminate against other technology that would provide the same environmental performance. Indeed rather than technology-based criteria, incentives should be available on environmental performance criteria.

Proportionality: It is recommended that any incentives should be proportionate to the environment performance of the vehicle. So for instance, an incentive which allowed for substantial benefits only in the event that the vehicle achieved a CO2 performance below a particular g/km value, but no incentive for a vehicle which progressed in performance but did not achieve the CO2 g/km value performance, would contravene this proportionality principle.

Size of the incentive: The size of the incentive should not exceed the additional cost of technology. The aim of this is to reduce the risk that that the incentive will be used to subsidise manufacturers.

Link to CO2 limits in the relevant EU legislation: The Guidelines recommend incentivising vehicles which outperform the CO2 emission target values in EU legislation rather than merely matching such targets (see below).

Legal catalysts for change

Financial incentives are designed to work alongside the legal framework. In the context of transport a number of new laws have been introduced to improve emission performance and fuel efficiency of transport. A few are mentioned below. EC Regulation No 443/2009 set a fleet average emission performance requirement of 130g CO2/km for new passenger cars by 2015. A European Commission proposal to reduce CO2 emissions from light commercial vehicles is currently being discussed by the European Council and Parliament. This proposes a fleet average emission for all new light commercial vehicles of 175g CO2/km by 2016. The EU has also reduced emissions of pollutants such as particulate matter and NOx by setting stricter standards: Euro 6 limits for cars and vans and EURO VI for heavy-duty vehicles will apply from 2014. Importantly, to meet the demands for electric charging points and alternative fuelling stations, a new directive has been proposed on the deployment of alternative fuels infrastructure which will impose mandatory infrastructure targets on Member States. (A lawnow on the latter proposal is forthcoming).

Comment

Of course any economic instrument will be scrutinised carefully. In the UK, the Guidelines are timely as they coincided with the Budget 2013 announcement by the Chancellor of the Exchequer that financial incentives are to be introduced for manufacturers of ultra low emissions vehicles in UK. The exact detail of the proposed incentives is yet to be disclosed. It will be interesting to see how the UK’s proposed incentives address the principles set out in the Guidelines.

These are potentially important changes, not only in themselves but also within the context of a much wider reshaping of transport (infrastructure and use) policy and law. These changes also come at a time of rising cynicism relating to how the reported environment and efficiency performance of vehicles in sales and marketing literature compares with such performance in real time. This potential disconnect may need to be a factor for consideration in the shaping of incentives.

Further reading:

The Guidelines

The White Paper “Roadmap to a Single European Transport Area – Towards a Competitive and Resource Efficient Transport System"

EC communication on “A European Strategy on Clean and Energy Efficient Vehicles,” which called for a set of rules regarding financial incentivisation as one of forty concrete measures to be implemented by the Commission (2010)

Communication entitled “Europe 2020: A Strategy for Smart, Sustainable and Inclusive Growth”

A list of existing grants and incentives available in the UK