Energy, emission and cost savings possible with the addition of fuel consumption into DOF vehicle excise tax

June 30, 2018

A new Clean Air Asia study on the Philippine Department of Finance’s vehicle and fuel excise tax reform covering the fuel economy of newly registered light duty vehicles has found that the price-based progressive excise tax will improve overall fuel economy and increase tax revenues.

However, the “Promoting Fiscal Policies to Improve Fuel Economy in the Philippines: Evaluation of Excise Tax Reform for New Vehicles and Transport Fuels” study concluded that while fuel economy improvements translated to significant reductions in the fuel use and emissions of light-duty vehicles (LDVs), as it was not based directly on fuel economy (engine size and performance), it did not provide a convincing incentive for consumers to purchase an LDV that consumed less fuel.

The use of fiscal policies can be an effective means to promote sustainability in the transport sector, with such policies having the potential to reduce the consumption of fossil fuels in the transport sector, alleviate rapid motorization, contribute to the improved efficiency of transport systems, and contribute to the internalization of the associated environmental and health costs, such as those from air pollution. Air pollution is a key environmental concern for the Philippines and places a major burden on the health of the citizens.

The Department of Finance is pursuing several fiscal policy reforms. The current administration signed into law in December 2017 Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Act, which is the first of five planned tax reform packages in the Comprehensive Tax Reform Program. The first package amends select provisions of the National Internal Revenue Code of 1997 and contains fuel and vehicle excise tax reform.

Such fuel and vehicle excise tax reforms can potentially contribute to the mitigation of the negative impacts of transportation, such as on energy use, and on the environment by influencing consumer choice and consumption behaviour.

The study analyzed the impact of the vehicle and fuel excise tax reform of the amended version of one of the bills originally proposed by DOF, House Bill No. 4774, on the fuel economy of newly registered LDVs until the year 2020 using the Fuel Economy Policies Implementation Tool developed by the International Energy Agency. It then estimated the impacts of the improved fuel economy on energy use, emissions, and fuel costs from road transport using the Asian Development Bank’s Transport DataBank Model. It suggested an alternative vehicle taxation scheme aimed at providing more incentives for consumers to purchase more fuel-efficient vehicles while ensuring a similar level of tax revenues.

Instead of a purely price-based vehicle taxation, the study recommends the introduction of a fuel consumption-based component into the vehicle excise taxation in which the fixed tax component is substituted with a fuel consumption-based component that is based on a linear function. This linear relationship ensures that the incentive to shift to more efficient vehicles is similar for all vehicle segments.

“The resulting vehicle excise tax can potentially trigger annual fuel economy improvement rates in the range of 3 percent and lead to corresponding energy, emission and cost savings,” said Clean Air Asia Transport Program Coordinator Kathleen Dematera.

The study is part of the effort led by the Global Fuel Economy Initiative, supported by the European Union, the FIA Foundation, UN Environment, the Global Environment Facility, and other organizations.

The “Promoting Fiscal Policies to Improve Fuel Economy in the Philippines: Evaluation of Excise Tax Reform” study can be downloaded at https://cleanairasia.org/wp-content/uploads/2019/07/Promoting-Fiscal-Policies.pdf