Automotive manufacturers must deliver greener vehicles if they are to cope with future demands from the highly lucrative fleet market.  Changes to the taxation of company cars across Europe mean businesses with high CO2 emission vehicles in their fleet will face higher costs, increasing demand for low emission vehicles.

The UK is leading the way in targeting the carbon footprint of company car fleets.  From April 2008, tax relief on company cars is expected to move to an emission basis, with 120g/km and 165g/km becoming key benchmarks.  At present, the average carbon output for a company car in the UK, is around 170-180g/km.  With a typical company car contract lasting three years, employees making decisions now about which car to drive could burden themselves and their employer with increased tax from next year if they choose a high emission vehicle.

Mike Woodward, automotive consulting partner at Deloitte said:

“In 2002, taxation of employees company car benefit changed to an emissions basis and the percentage of diesel cars sold increased from around 20% to over 60%.  We expect the proposed changes to tax relief on company cars to have a similar impact with demand for sub-165g/km vehicles increasing significantly.  Manufacturers need to respond to the impending tax changes so their cars meet the new requirements of fleet managers.”

“In the long term, manufacturers will respond by producing cleaner engines using alternative fuels.  However, in the short term, we expect a change in the composition of major fleets to include more low emission vehicles.  This may have a significant impact on the mix of vehicles manufacturers sell.”

In addition, the Government has raised Vehicle Excise Duty for cars with high CO2 emissions.  As a result, businesses with high emission vehicles in their fleet face losing a significant amount from their re-sale value.  The Government is also likely to introduce measures discouraging Employee Car Ownership Schemes bringing more people back into company car schemes.

If these changes are implemented, we expect the fleet market to start changing along the following lines:

• Companies will bring tax into their calculations of whole life costs of cars demonstrating the increasingly expensive nature of high emission vehicles
• User chooser fleets will become more restricted as very high emission cars come off the fleet
• Companies will move away from Employee Car Ownership Schemes

Christopher Macgowan, Chief Executive of the Society of Motor Manufacturers & Traders, said:

“Car manufacturers have been producing cleaner and cleaner cars for some years now and the industry continues to respond to these challenges positively – you only have to look at the new technologies coming to the market to witness the progress being made.”

“In the short term manufacturers have to meet the market demands for greener vehicles and also play their part in well to wheel CO2 reductions.  Fleet managers in the motor industry will probably be amongst the first to face the pressure of moving staff to low CO2 cars in order to meet their own corporate carbon footprint goals.”

Woodward added:  “The challenge will be how to get employees into lower emission vehicles without them being demotivated and leaving.  Fleet and HR managers will need to consider a number of methods to encourage staff into greener cars.”

There are a number of innovative options open to companies including:

• Informed choice – giving employees a list of vehicles ranked by CO2 emissions rather than cost – and highlighting associated benefits with choosing this car;
• Passing on the incentive – the scheme can be structured to show the whole life costs to the employer and employee.  This could incentivise the driver to choose a car with a lower whole life cost, with the saving passed on to the employee;
• Occasional use vehicles – Many people need a large car a few times a year (holidays for example). By establishing a relationship with a rental company, cars can be offered at very attractive rates for these events, allowing the user to choose a smaller, cheaper, and more environmentally friendly car for every day.
• Buy one, get one free?  - Employees could be allowed a carbon entitlement which they could use to acquire two cars – one for themselves, and one for a family member’s use – replacing one high emitter with two lower ones.
• Carbon trading – A carbon target is agreed and any employee choosing a car below this target is rewarded with a carbon credit, anyone choosing above the target receives a carbon debt.  Credits can be exchanged for rewards and debits can be cleared by funding a carbon reduction scheme, or by taking other personal measures to reduce carbon output.

Woodward added: “Going ‘green’ has become the second highest priority for fleet managers, behind cost.  With increasing pressure on organisations to improve their green credentials, company car managers are looking for ways to reduce the carbon output of their fleet, but at the same time, they also need to keep their staff happy.  These options provide a number of ways to encourage staff into greener vehicles whilst minimising the pain to an organisation.”

Ends

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