New research by the Organisation for Economic Co-operation and Development (OECD) recommends company cars and diesel should be taxed more heavily to reduce carbon emissions, traffic congestion and air pollution.

Currently, most OECD member countries treat only 50% of the personal benefit to employees from company cars as taxable.In situations where employers cover fuel expenses, this favourable tax treatment creates an incentive for employees to use company cars for personal use, and to drive longer distances than they might do otherwise.

This inevitably causes negative fiscal, environmental and social impacts: including more air pollution, traffic accidents, congestion and noise, as well as increased greenhouse gas (GHG) emissions contributing to climate change.

A study of 27 OECD countries plus South Africa, argues that under-taxing company cars amounts to an average annual subsidy per car of around £1,260.The subsidy ranges from just £45 in Canada to £2,178 in Belgium.

The OECD research suggests that in the UK company car drivers receive an average annual subsidy of around £880.

The total cost across the 28 countries examined is estimated for 2012 at £21 billion of foregone tax revenues, according to the reports.

The environmental and social costs are higher still. Increased contributions to climate change, local air pollution, health ailments, congestion and road accidents from the under-taxation of company cars in OECD countries is estimated to cost £91 billion.

Adding to environmental concerns, 33 of 34 OECD countries tax diesel at a lower rate than petrol, even though diesel vehicles produce more carbon emissions per litre and more harmful air pollutants than petrol vehicles. Diesel contains approximately 18% more carbon per litre than petrol, yet remains the most used vehicle fuel in 23 of 34 OECD countries, due in part to this tax differential.

The OECD is calling on governments to stop subsidising company cars and to phase out the diesel tax differential. This would benefit public finances as well as air quality.

Simon Upton, OECD Environment Director, said: “The cost of driving a car today does not properly reflect the impact on the environment and to society. Taxing diesel fuel and company cars correctly would help to fix this,” “Governments should stop offering financial incentives to drive cars and to run them on fuels with a heavy environmental footprint.”

An OECD policy brief, Under-taxing the benefits of company cars, shows that perverse tax incentives in many countries are encouraging company car owners to drive up to three times as much as people with private cars. On average, OECD governments only tax about half the benefits accrued by employees from company car use under personal income tax regimes.

A separate OECD study, The Diesel Differential, argues that applying lower tax rates to diesel goes against efforts to reduce emissions and air pollution.

Transport accounts for a quarter of carbon emissions in most OECD countries and is a major source of air pollution. In the European Union, company cars make up 12% of cars on the road and around half of new registrations, while 55% of new registrations are diesel cars.

Download the full OECD Report.

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