Green drivers to pay more

Anti-gas-guzzling taxation policies have been too effective. Successive Chancellors have been increasingly harsh on traditional drivers, ostensibly to encourage us into greener cars.

However, now we're all switching to low CO2 models, the Treasury has twigged that it's losing a small fortune, and we're not going to like its solution.

According to the Daily Telegraph the government has been conducting talks with motoring groups about overhauling the road tax system, and has been considering whether it can use this as a way to clobber all drivers, so that greener drivers can produce more revenue for them. The end result may well be higher road tax for us all.

Chloe Smith, a Treasury minister, said in the House of the Commons that the government was "considering whether Vehicle Excise Duty should be reformed to support the sustainability of public finances and to reflect the improvements in vehicle fuel efficiency". This essentially means upping the rate of tax on green cars.

Current system

At the moment you fit into a particular band depending on the CO2 emissions of your car. There are 13 different bands, ranging from those where no road tax is payable, to ones with an astonishing £475 a year charge.

If it is electric or hybrid you don't pay anything at all. If it is a small, modern car with a small engine, like the VW Passat, you pay £135. If it's a bit bigger and more powerful, like a VW Golf or the Ford Focus you pay £275 in the first year and £195 in each subsequent year. And if it's a gas guzzler, it'll cost you £1,030 for the first year and £475 a year after that.

Vehicle excise duty (the official name for road tax) made the Treasury 5.78 billion in the 2010-2011. That's roughly equal to the 5.74 billion the year earlier, but the concern is apparently that the figures are set to fall as manufacturers keep bringing down the CO2 emissions of their cars and people switch to smaller more cost-effective models.

Falling revenue

According to the Society of Motor Manufacturers and Traders, the average CO2 emissions of new cars is dropping dramatically. In 2011 it stood at 138.1g/km, down 4.2% on 2010. It means that the average new car is 18% more efficient than the average UK car on the roads. As the new cars gradually make up a larger and larger proportion of cars on the roads, the trend towards greener cars will accelerate.

A recent survey by Sainsbury's Finance found that over 3 million people are looking to change their car to reduce the costs - either cutting down their engine size (2 million) or switching from a petrol car to a diesel one to reduce fuel and road tax costs (1.3 million).

According to recent estimates it could mean road tax income is £100 million lower than expected.

The alternatives?

And while there is unease over suggestions of higher taxes, Edmund King, AA president, said there may not be much alternative. He explained: "As cars get greener and more fuel efficient then Government revenue from Vehicle Excise Duty and fuel duty will fall. If the Government wants to maintain tax revenue from drivers they either introduce road pricing, which would be political suicide, or they increase taxes. The government said in the last Budget that they would review VED and they have been consulting on this.

"The AA has stressed that consumers and industry need longer term signals in taxation strategy rather than short-term tax hikes. We have also made it clear that any retrospective tax hikes on VED would backfire on the Government. For many millions motoring is a necessity and not a luxury - yet it is already taxed as a luxury. Tax policy should encourage cleaner, greener motoring rather than meaner, leaner taxation".