Does taxing private transport help reduce carbon emissions?
12 March 2022
By Abby Sze and Charlene Tai
What is the Ultra-Low Emissions Zone (ULEZ)?
One of the biggest challenges in tackling the climate crisis is the problem of carbon emissions. As global demand for transport accelerates in our ever-globalising world, the emission of greenhouse gases produced from fossil fuel combustion engines in vehicles hinders the ability of society to effectively reach global pledges of net zero.
The transport sector constitutes a significant amount of global energy usage and contributes to vast levels of air pollution, particularly in urban areas. London’s Ultra Low Emissions Zone (ULEZ) seeks to target this issue by levying a tax on older vehicles driving within the city zone. A daily charge of £12.50 for driving in the ULEZ aims to discourage driving in the city, a policy striving to improve the city’s air quality and reduce emissions.
The Mayor of London, Sadiq Khan, announced new plans to expand the ULEZ, covering all 32 London boroughs. This would help the city stay on track to meet its climate target of reaching net zero by 2030.
Figure 1. The expansion of London’s Ultra Low Emissions Zone, to include Greater London.
Source: Financial Times, 2022
Despite the proposed benefits of this policy expansion, the implementation of this policy could pose some challenges. Firstly, the ULEZ charges a tax on older cars driving in the city, hence the manufacturing of more energy-efficient vehicles would have to increase in order to meet the demand for the newer, policy compliant cars. The disposal of old cars and manufacturing of new ones are energy-intensive processes, involving global production and supply chains that produce significant amounts of carbon emissions. As a result, the trade-off between new cars being manufactured to support this policy, and the long term reduction in air pollution must be considered.
We also think that the new policy might be discriminatory to those with lower income. Although the rationale behind expanding the ULEZ zone is to incentivise people to shift to less-pollution vehicles such as electric cars or other forms of transport, it might act as regressive taxation to lower-income households. Implementing a tax on older cars creates a greater financial burden on lower-income vehicle owners. Since not everyone can afford more energy-efficient vehicles, we believe that the expansion of the ULEZ zone might perpetuate socioeconomic inequalities. Potential policy alternatives may include promoting cycling or public transport as the preferred mode of transport.
How does London’s ULEZ policy relate to the Greater Bay Area (GBA)?
Adopting a policy like London’s ULEZ may help certain areas of the GBA reduce their emissions as this market based intervention will discentivise private vehicle use. Looking at the bigger picture, this can contribute to China’s efforts to stay on track to meet their climate pledge of net zero before 2060. However, a vast majority of China’s greenhouse gas emissions are emitted by the manufacturing industry. Such a policy also assumes that there are other transport alternatives, such as a robust public transport system, that can handle a shift in transport demand. Hence, implementing such a policy in China may not be effective in reducing total emissions.
The expansion of London’s ULEZ, and potentially ULEZ-like policies in other cities, can also impact the GBA indirectly. As the policy discourages the driving of older motor vehicles in the city, the demand for more eco-friendly cars may increase. For a manufacturing-driven economy, cities like Shenzhen may benefit from this increased demand. While this will boost the local economy, the heightened production may also increase pollution in the area of production. Thus, the ULEZ may end up just shifting the problem of pollution around the world rather than actually reducing total emissions.
Looking ahead
In conclusion, while the expansion of the ULEZ might incentivise people to switch to more energy-efficient cars, it could act as a regressive tax to lower-income families. On the other hand, there are also environmental switching costs when replacing old cars. The carbon footprint involved in this process might outweigh its benefits. We believe that the government can incentivise citizens to travel with greener alternatives, such as cycling and car-sharing, by granting more subsidies on these two areas.
In this article, we have also discussed whether this policy would be successful if it was executed in the GBA. Similar to the dilemma London faces, the benefits of reducing vehicular emissions from a ULEZ-like policy will have to be weighed against the increase in pollutants emitted via the production of newer cars. We believe that in the long term, reducing the usage of old, pollutive cars will have a positive impact on the environment, though there will be short term switching costs that will have to be considered in the overall analysis of a ULEZ-like policy.
(Opinion article based on a Financial Times write up)