What’s the best policy to cut car emissions?

Australia’s vehicle regulation regime is so far out of step with other countries that vehicle manufacturers freely admit this country is a dumping ground for higher-emitting old models.

According to Volkswagen, Australia is an ‘automotive third world’ and a ‘dumping ground for older and less-efficient vehicles’. In Australia, cars, utes, and SUVs contribute about 11% of our annual CO2 emissions. Which is why addressing car emissions is a key part of getting Australia to net-zero by 2050.

Encouraging drivers to transition to electric vehicles is an obvious part of the solution, but a patchwork of policies currently regulates car emissions. Listen to Marion Terrill, Transport and Cities Program Director, Natasha Bradshaw, Associate, and host Kat Clay discuss why an emissions ceiling is the best option to reduce vehicle emissions.

Transcript

Kat Clay: Australia’s vehicle regulation regime is so far out of step with other countries that vehicle manufacturers freely admit that this country is a dumping ground for higher emitting old models. According to Volkswagen, Australia is an automotive third world, and a dumping ground for older and less efficient vehicles.

In Australia, cars, utes and SUVs contribute about 11 percent of our annual CO2 emissions, which is why addressing car emissions is a key part of getting Australia to net zero by 2050. Encouraging drivers to transition to electric vehicles is an obvious part of the solution, but a patchwork of policies currently regulates car emissions.

I’m Kat Clay, and here to discuss which of these policies is best, and whether there is one policy that rises above the rest, are Marion Terrill, Transport and Cities Program Director, and NaTash Bradshaw, Associate. Marion, Australia currently has several expensive policies to reduce light vehicle emissions.

What do we have now and why aren’t they fit for purpose?

Marion Terrill: Reducing carbon emissions from cars and SUVs is essential because they contribute about 11 percent of our total emissions. And governments Commonwealth and state have been busy putting in place policies associated with this. So we’ve got things like state based subsidies to buy electric vehicles.

There’s registration discounts for electric and hybrid vehicles. There’s fuel excise discounts on lower emitting fuels, and there’s a fringe benefits tax exemption for electric vehicles. So this is all very well intentioned, but these policies are actually a bit of a grab bag in many ways. They are expensive.

For example, the Productivity Commission estimates that the fringe benefits tax exemption for electric vehicles costs over 900 per tonne of carbon emissions abated, which is absolutely exorbitant. So, so they are expensive ways of spending taxpayer money to get a certain level of abatement. And often what’s happening is that they’re helping people who would have bought the vehicle anyway.

So they’re not really giving you additional abatement. I think a lot of them are really focused on this idea of trying to spark or catalyze demand for electric vehicles and hybrid vehicles. But really what’s happened in the last few years is that there, there’s just no problem with demand. really supplies the primary issue.

People are struggling to get their hands on these vehicles. So in many ways, we just feel that they’re a very expensive way of achieving abatement and probably not targeting the right problem. Having said that, I do think the light vehicle sector is a good place to achieve emissions reductions because the technology for decarbonisation already exists and it is actually quite cost efficient.

So it has matured a lot over the And so a fuel efficiency standard or an emissions ceiling. is a policy that, that really more goes to that aspect of light vehicles.

Kat Clay: So Tash, a few weeks ago, we discussed the fuel efficiency standard in the National Electric Vehicle Strategy on this podcast. But today I wanted to go further into the importance of an emissions ceiling.

As you have done some updated modeling since then, why do you think an emissions ceiling is the best policy to replace the existing patchwork of policies?

Natasha Bradshaw: Well Kat, it might be hard to believe after hearing about this patchwork of costly policies that Marion’s just described, but a well designed emissions ceiling would reduce carbon emissions and reduce exhaust pipe pollutants that damage our health.

At the same time, it would save drivers money, come at a negligible cost to taxpayers, and increase the range of low and zero emissions vehicles available to consumers without banning any type of vehicle. Let me explain how it works. An emission ceiling places a limit on the average emissions of new vehicles that each manufacturer can sell in a given year.

The limit or target would ratchet down each year and ideally would reach zero in 2035. A nice feature of this is that it’s technology neutral. The government isn’t backing or banning any specific technology. Instead, manufacturers can meet their targets using whatever technology is most cost efficient and meets the demands of their customers.

For example, some might sell a higher share of hybrids or electric vehicles, and others might just make their petrol or diesel vehicles more efficient. The policies we currently have, as Marion mentioned, are designed to encourage demand for EVs. But the reality in Australia at the moment is that lots of people want to buy EVs, they just can’t get their hands on them.

And Kat, as you alluded to in your introduction, part of the reason for our supply shortage is that 80 percent of global vehicle sales come under an emissions ceiling. And so manufacturers prioritize providing EVs to those countries, and we’re ending up with the leftovers, which are the highly polluting cars.

When we introduce an emission ceiling, a greater quantity and wider range of low and zero emissions vehicles would become available for Australians to purchase. And unlike subsidies or tax incentives, an emission ceiling is a demonstrated way of reducing emissions with no cost to taxpayers except for the administration of the scheme.

And while EVs are more expensive to buy at the moment, they are much cheaper to run, and so consumers will end up saving money under the ceiling.

Kat Clay: Thanks Tash, that’s a great explainer of what an emission ceiling is and why it’s useful for us even as consumers. Marion, it’s important to note that the National Electric Vehicle Strategy only committed to broad policies and is currently in a six month consultation process to develop the specifics.

Why is it so important to get the emission ceiling right?

Marion Terrill: We’re pretty late to this party, but time is ticking on it and 80 percent of light vehicles around the world are sold under a policy like an emission ceiling or a fuel efficiency standard. Here in Australia, we now have a commitment that we’re going to get one, but we’re in our second round of consultation essentially on a fuel efficiency standard and its design.

And what’s important here to realise is that the world is not waiting for us. What has happened is the Australian government has legislated an emission reduction target of 43 percent below the 2005 level and a carbon budget. for the decade of 2020 to 2030. It’s also put in place things like the safeguard mechanism and 82 percent renewable electricity generation target by 2030.

The bottom line is that we’re, we’re struggling to, to meet the targets that we’re setting for ourselves. And of course the big target of 2050 is sort of coming at us quite fast. Now cars last at least 15 years on the road and hitting a target of zero emissions, like essentially all the car, new cars sold in 2035, need to be zero emissions.

And that’s because They’ll last 15 or more years and so they’ll still be on the road in 2050 and that’s when we really do need to be hitting net zero. So the longer we leave it to get to this point of zero by 2035, the harder it’s going to be to get there because we’re going to have to move more aggressively.

We’re already in that position. We have got a bit of a precedent where we’ve seen New Zealand, for example, be pretty late to this. and have quite aggressive targets, which so far it is on track to meet. It is important to get the emissions ceiling right, but by right it’s got to be so that we really, so that we’re getting the lowest cost abatement for Australians and for as long, and For as long as that’s in the light vehicle sector, that’s a great place for the, for this effort to be focused.

Kat Clay: Yes, it’s something we’ve discussed at length with the energy team as well, is that the closer it gets to those targets, you know, 2030 and 2050, the longer you leave it, the more expensive it gets. And so if there are cost effective ways of reducing emissions on the table, then it’s certainly something the government should be doing.

So the transport team has done significant work on this topic in the 2021 report. called the Grattan Car Plant, but Tash, you’ve recently done some updated modeling on the impact of an emission ceiling. So what did you find?

Natasha Bradshaw: What we’ve done is estimate how much consumers would save under an emission ceiling and what the reduction in emissions would be, but the path to zero can take different trajectories.

And our latest modeling considers two options. Our preferred trajectory has targets that fall quite steeply initially, so that we catch up to New Zealand’s targets in 2027, and then they continue to fall to zero by 2035. A fallback option would be Still to get to zero in 2035, but with more lenient targets in the first few years, and then a steeper decline closer to 2030.

Under the emissions ceiling, cars would be a bit more expensive to buy, but a lot less expensive to run. That’s particularly true for zero and low emissions vehicles, but it’s also true for more efficient petrol cars because You spend less on fuel. Our updated modeling shows that under our preferred approach, a person buying a new car would save 1, 600 in the first five years after buying the car and more than 3, 500 over the life of the car.

Our fallback approach would also save consumers money, but a little bit less. We also modeled the emissions reductions from the policy. With no policy action, new cars would emit a total of more than 775 million tons of carbon emissions between now and 2050. Under our proposed ceiling, this number could be more than halved.

Our recommended ceiling would reduce emissions by about 460 million tons by 2050. And our less ambitious

Kat Clay: So just to interrupt there, I mean, can you give us an idea and put that number in perspective? I mean, cause in my head, I don’t know how much that is.

Natasha Bradshaw: So if you think about it as a yearly target in 2030, the emission ceiling will save 9 million tons of emissions, and that’s about two and a half percent of what our expected emissions would be in that year.

And that will sort of increase a bit in future years. It’s not a crazy amount, but it’s a significant reduction and it comes at a negligible cost to taxpayers and provides a saving for motorists.

So

Kat Clay: Tash, it’s really interesting to hear that it would not only be saving money for consumers. So if I was to buy an EV, it would save me money over the life of the vehicle.

But also, I mean, there’s the moral and ethical and environmental considerations of reducing emissions. So Marion, I want to get into the nitty gritty of how your Post emission ceiling would actually work. Because you’ve recently put in a submission on this particular topic can you, you and Tash take us through what you would want to see?

Marion Terrill: So a really important feature of an emission ceiling or fuel efficiency standard is that there’s a single target applied to all light vehicles where we can learn the lessons from other countries here by being a bit late to the party. And that is some countries do have two different targets. one for passenger vehicles and a more lenient target for light commercial vehicles.

But the problem with that approach is that it doesn’t account for people switching out of passenger vehicles and into large SUVs which are classified as light commercial vehicles. For example, this happened in the U. S. So the targets that they’ve got within each segment have been met, but because people have been moving into SUVs and light trucks, they’re still getting increases in average vehicle emissions from new car sales because of the compositional change.

So it is really important. We think that there is just a single target and that all passenger cars, SUVs, and light commercial vehicles are subject to the same target.

Natasha Bradshaw: The next thing to consider is how do you set that single target? The government has committed to reaching net zero by 2050 and that sets a date where those sectors that can reduce emissions at the lowest cost need to reach zero emissions or better in order to leave room for those really hard to abate sectors to continue emitting.

Currently light vehicles are a low cost way to reduce emissions. This is true even in comparison to other parts of the transport sector. So previous Grattan work has shown that a reasonable target for trucks would be that 100 percent of new rigid trucks and 70 percent of articulated trucks could be zero emissions in 2040.

And that means there’ll be continuing to omit past 2050. Now technology could change, but given current circumstances, we should be working towards a target of zero by 2035 with a steep decline in the first few years, effectively to make up for the time lost by delaying implementation. The government should then evaluate the targets it sets annually and modify them if needed.

Marion Terrill: A more technical feature is how the emissions are actually tested. Again, there’s international experience that really highlights the need to carefully monitor the emissions under any emission ceiling. And the way this is done is that vehicles are tested, but there’s, there’s quite a significant gap between the test results and the real world emissions.

At present, vehicles sold in Australia are tested using a testing regime called the New European Drive Cycle, which simulates a range of driving conditions, but it’s not a perfect scheme and it’s become more imperfect over time. In other words, the gap between test results and real world emissions has grown.

So there is another way of testing, which is called the World Wide Harmonized Light Vehicle Testing Procedure. What’s important to know about this is that it reflects real world driving conditions more accurately because it involves more aggressive driving at higher speeds and in more tightly controlled conditions.

And the gap between the testing and the real world emissions is not as great. We think it is important that the testing allows decision makers to, to understand what the emissions really are. Therefore, we think that they should go with this newer, more accurate worldwide harmonised light vehicle testing procedure.

Natasha Bradshaw: As much as it’s important to be clear about the targets and to closely monitor them, most international schemes do provide manufacturers with some flexibility in how they meet their targets. And if these are designed well, it can help to reduce the compliance burden faced by manufacturers without undermining the emissions reductions from the scheme or increasing costs to consumers.

A good path would be to allow some trading, so manufacturers who don’t meet their targets in a given year could purchase credits from those manufacturers who overachieve. Or, manufacturers who overachieve in some years could accrue credits that they could use to meet their targets in later years.

Marion Terrill: That’s right. So what’s important here is our goal is emissions reduction at low cost. Another way of ensuring emissions reduction at low cost is to not allow technology multipliers. A technology multiplier, it’s essentially a kind of bonus attached to certain technologies. Such as an electric vehicle over summer, over a hybrid, and it might be a weighting that it counts as 1.

5 or 2, or a hybrid might count as that relative to a petrol car. But in the end, what we’re really about here is emissions reduction at low cost. What they do is they reduce the overall emissions reductions achieved through an emissions ceiling. So they’re, they’re inconsistent with a technology neutral approach.

And besides really electric vehicles are no longer an immature technology. They’re very well established. So it’s just not necessary.

Natasha Bradshaw: And one last thing that we need to be tough about is penalties for manufacturers who don’t meet their targets. Penalties need to be tough enough to encourage a trading of credits under the flexibility rules that we spoke about before.

This is similar to the way that a default penalty applies to large industrial facilities whose emissions are above their set baseline under the safeguard mechanism, and it ensures that these targets are truly binding.

Kat Clay: Yes, we don’t want people just palming off their emissions to somebody else under a credit system.

Marion, we have talked a little bit about, you know, the savings that would be in place for people who transition to electric vehicles, but given the high cost of electric vehicles themselves, would an emissions ceiling increase the cost of cars at a time when the cost of living is already high?

Marion Terrill: The really important thing about an emissions ceiling or a fuel efficiency standard.

Is that it’s not just about electric vehicles. What it’s about is reducing the average emissions across the fleet of new cars sold. So it is true that electric vehicles remain substantially more expensive than the equivalent petrol or diesel vehicle. But the gap between a hybrid, for example, and a conventional petrol vehicle is much smaller.

In any case, the technology is improving over time so that all vehicles, whether hybrid, electric, or conventional petrol and diesel vehicles. All of them are becoming more fuel efficient and less emissions intensive. It’s important not to focus excessively on electric vehicles. One of the, the wonderful things about a fuel efficiency standard or emissions ceiling is that for drivers who care about the cost of driving and general driving, so non, not specialist interest, but general getting around at the in a cost efficient way. This is a very good policy for those people, because they will save money and it’s particularly pertinent, as you say now, Kat, when the cost of living is under significant pressure. for people. We’re a little bit disappointed that the government doesn’t appear to be considering relaxing rules associated with imports.

Competition in the, in the market for electric vehicles and also hybrids and so forth is really important for a low cost transition and we would have liked to have seen the government relax the current restrictions on the imports of new and second hand cars sold outside manufacturers formal distribution channels.

Now these are known as parallel imports, and we would, we think that a vibrant parallel import market for electric vehicles would help reduce the cost of meeting targets under an emissions ceiling. So that’s a potential option for future consideration that would go to this question of the costs of driving at a time when When everything is expensive.

Kat Clay: Thank you so much, Marion and Tash for talking about an emission ceiling and why it’s so important over the coming months that the government gets it right. If you’d like to talk to us about the emission ceiling or anything else in our Transport in Cities program, please do find us on Twitter at Bratton Inst and all other social media.

Channels at Grattan Institute. We are a not for profit and it is coming towards the end of the year. Please support Grattan’s independent policy research by going to grattan. edu. au forward slash donate. We really appreciate your support. As always, please do take care and thanks so much for listening.