Green car incentives may be a victim of their own success

Government efforts to encourage motorists to buy greener cars are proving so successful they are raising concerns that tax breaks for cleaner vehicles may have to be re-jigged.

The average CO2 emissions of new cars fell by 5.4 per cent to 149.5 grams per kilometre (g/km) last year, the latest research from the Society of Motor Manufacturers and Traders (SMMT) will reveal today. And the number of vehicles sold that come under the 120 g/km threshold has nearly doubled in the past year – jumping to 20.4 per cent of all new cars sold, from just 11 per cent in 2008.

The increase reflects both improvements in engines and also government incentives, including emissions-linked car taxes and the scrappage incentive scheme. The average car bought under the scheme produces 27 per cent less CO2 than the scrapped vehicle.

But because low-carbon cars generate substantially less vehicle excise duty than dirtier alternatives, such success is depressing the Government's tax take, leaving the motor industry fearing future tax hikes. "People want greener cars, and the market is responding by producing them, but that means Government won't raise the revenues it had expected," Paul Everitt, the chief executive of the SMMT, said. "So either the Government will have to accept a lower income or it will end up shifting the CO2 thresholds."

Car tax is already set to rise in April, with the introduction of a special "first-year rate", which doubles the level for the first 12 months. The size of subsequent rises is not an issue because they are likely to be relatively low. But re-jigging where the thresholds fall will cause problems. "It is time for the Treasury to sit down with the industry to establish a longer-term outlook for CO2 taxes and incentives," Mr Everitt said.

"We only know about the next one year's tax regime, but we need some certainty otherwise car makers will spend two years developing a vehicle – and customers will buy it – only for the car to end up on the wrong side of a line."

The shift to greener engines is visible across the whole range of car sizes. The so-called "mini segment" – which includes the Peugeot 107, for example – made the best year-on-year improvement, cutting CO2 by 6.7 per cent last year and 28.6 per cent since 1997. Buying habits are also reflecting the trend, with the 131-140g/km now the most popular, compared with the 151-165g/km band last year.

Across the entire UK fleet of 30 million cars, the average CO2 emissions level is now 175.1g/km. But despite making Europe's third best net improvement since 2000, the UK's average new car CO2 level is still only 10th greenest out of a European top 15.