The purpose of the Bill is twofold: first, to provide a permanent legislative basis for the motor tax increases which were approved by Dáil Éireann by way of Financial Resolution on budget day, 5 December 2007, and second, to give statutory effect to the new carbon dioxide-based motor tax system which I announced in my carbon budget of 6 December 2007. The Bill contains seven sections and one Schedule, with the details of both the increased motor tax charges and the CO2-based system set out in the Schedule.
I will deal first with the increases in motor tax. The Bill is the necessary follow-up to the Financial Resolution passed by Dáil Éireann on 5 December 2007. The resolution has limited statutory effect and must be replaced by a Bill that provides a permanent legal basis for the motor tax increases, which came into effect on 1 February 2008. The increases are 9.5% for cars with a capacity of less than 2.5 litres and 11% for cars above that threshold. There was no increase for electric vehicles, but the motor tax on goods vehicles and all other vehicles also increased by 9.5%. A similar increase also applied to duties for trade plate licences, the registration plates used by motor traders on vehicles which are temporarily in their possession.
In considering the 9.5% increase for the bulk of the existing fleet, it is important to reflect on the fact that since the last increase in motor tax rates in 2004, inflation has increased by more than 15%. To give some perspective for the recent increases, the annual rate increase for the car of lowest engine size — up to 1000 cc — is €14, or 27 cent a week. For cars in the 1001 cc to 1400 cc range, the annual increase is between €22 and €28, or 42 cent and 54 cent a week. For cars in the 1401 cc to 1700 cc range, the annual increase is between €30 and €39, representing a weekly increase of between 58 cent and 75 cent. In summary, 95% of the car fleet — that is, cars with an engine size of less than 2 litres — will see extra costs of between 27 cent and 98 cent per week. In the case of goods vehicles, 87% of such vehicles will see an annual increase of €24, or 46 cent per week.
The clear purpose of the changes in motor tax rates is to increase funding for local government. Senators will be aware that the proceeds of motor tax are not paid into the Exchequer but are paid directly into the local government fund. This fund, which was introduced in 1999, is ring-fenced exclusively for local government purposes. It cannot be used for any other purpose. Motor tax receipts are supplemented on an annual basis by an Exchequer contribution paid into the fund. For 2008, motor tax receipts are projected to reach €1,080 million, with the Exchequer providing €545 million, giving total funding of some €1.6 billion. This represents approximately 30% of local authority current funding requirements. The fund is used primarily to finance regional and local roads and the general purpose needs of local authorities. The success of the local government fund can be measured by the ability of local government to respond to the ever-increasing demands for improved services in recent years. These demands have arisen due to an expanding population, unprecedented economic growth and higher customer expectations. The ability of the fund to deliver significant resources to local authorities has succeeded in limiting the direct financial contribution required of local businesses and communities through rates and charges.
The fund plays a key role in financing the improvement and maintenance of regional and local roads throughout the country. Regional and local roads serve an important economic role in the Irish context and they have a valuable contribution to make in delivering the vision of the national spatial strategy for sustainable, balanced development of our country. A total of 94% of the country's roads are regional or local, and these carry about 60% of all road traffic and 40% of goods traffic. These roads are often the sole means of access for local economic activity. The National Development Plan 2007-2013 provides that some €4.3 billion will be invested by the local government fund and the Exchequer in the regional and local road network over the period of the plan. While responsibility for regional and local roads was transferred to the Department of Transport with effect from 1 January 2008, the fund will continue to provide significant resources towards the development and maintenance of the network. This year alone, €565 million has been provided from the fund for these roads. Together with the Exchequer provision, the total funding for regional and local roads in 2008 is €618 million.
For 2008, I have allocated record levels of some €999 million in general purpose grants to local authorities from the fund. These grants are my Department's contribution to local authorities to reduce the gap between the cost of providing an acceptable level of day-to-day services and the income they obtain from other sources. The amount provided this year represents an increase of some €52 million over the record levels provided in 2007 and is a clear signal of the Government's commitment to the local government sector and a recognition of the importance it attaches to local democracy. I wish to ensure that local government continues to deliver for communities and businesses across its wide range of services. The additional income that will accrue to the local government fund due to the changes in motor tax rates will assist in delivering on that objective.
The second element of the Bill is to provide for the new motor tax system based on CO2 emission levels, which I announced in my carbon budget of 6 December 2007. This involves a fundamental change in the manner in which motor tax will be charged. The Bill gives effect to the commitment in the programme for Government to introduce measures to rebalance motor tax in favour of cars with lower CO2 emissions. It complements the new CO2-based VRT system that was given statutory effect under the Finance Bill, which was enacted last week. The move to a CO2-based motor tax system is clear evidence of the Government's commitment to tackling climate change. Climate change is a profound challenge, and if we are to avoid the worst impact it is imperative that we reduce human-induced emissions of greenhouse gases and that we do so quickly. The Government has set itself the challenging target of reducing national greenhouse gas emissions by 3% on average over its lifetime. This target is ambitious, but it is in line with the scale of emission reductions recommended by the Intergovernmental Panel on Climate Change.
As we work towards meeting our existing targets and seek to rise to the challenge presented by our proposed EU targets for 2020, our efforts to secure global agreement on deep cuts in emissions must be backed by a commensurate level of ambition at home. The programme for Government and the carbon budget I delivered last December make it clear that we are up for the challenge. Following a review in 2007 of its strategy to reduce CO2 emissions from new cars, the European Commission concluded that limited progress had been made towards the central goal of limiting average vehicle emissions of new cars sold in the EU to 120 g/km by 2012. The Commission subsequently announced the framework of a new strategy that sets out an integrated approach towards achieving this overall objective.
Road transport generates about one fifth of the EU's CO2 emissions, with passenger cars responsible for around 12%. Although recent years have seen improvements in vehicle technology, especially in fuel efficiency, which translates into lower CO2 emissions, this has not been enough to stem the growth in emissions due mainly to increased car ownership and increased car size. While the EU reduced overall emissions of greenhouse gases by 5% between 1990 and 2004, CO2 emissions from road transport rose by 26%. This was despite a reduction of more than 12% in average new car CO2 emissions between 1995 and 2004. A recent report by the European Environment Agency highlighted the challenge posed by these trends and concluded that much more needs to be done within EU member states if transport is to contribute to the demanding emission reductions required by the EU for 2020.
In Ireland, emissions from road transport increased by more than 180% between 1990 and 2006. This reflects growth from relatively low car ownership levels in 1990, a trend that seems set to continue. The Government is acutely conscious that more measures are required to stem this trend and these proposals on motor tax are just the beginning. A range of further measures have been proposed by the Minister for Transport in his recently published consultation document on sustainable travel and transport.
It is in this context that I am moving to a motor tax regime where the charge will be based on CO2 emissions. As I said, this will complement the new CO2-based VRT system which is provided for in the recent Finance Act. Both new tax systems have been informed by an extensive public consultation process. The initial consultation document on motor tax proposed a system based on a combination of CO2 emissions and engine size. However, I am of the view that, if we are serious about addressing emissions from cars, we need to move to a system based solely on CO2 emission levels. I am pleased to say that this view was shared by a large number of respondents to the public consultation exercise.
Senators will be aware that the new CO2-based motor tax system occupied much of the debate in the other House. In particular, issues were raised about the starting date for the new system and the impact of the new regime on the domestic second-hand car market. In response, I brought forward amendments on Committee Stage that sought to ensure greater equity in the operation of the new regime. As a consequence of these amendments, the following is the position in terms of the application of the new system.
The new CO2-based motor tax system will take effect from 1 July 2008. In the first instance, it will apply to new cars that are registered on or after 1 July 2008. It will not apply to second-hand imports that were registered abroad prior to 2008. In addition, anyone who registers a low CO2 emitting new car in the first six months of 2008 will be switched to the lower CO2-based motor tax rate on first renewal of motor tax after 1 July 2008. Finally, cars that are first registered abroad from 2008 and subsequently imported to this country will come within the CO2-based motor tax system. This will ensure equity between cars that are registered here as new from 2008 and future imports of equivalent second-hand cars. I should make it clear that cars registered before 2008 will continue to be taxed in future years under the existing motor tax system related to engine size.
There will be seven CO2 bands, commonly referred to as the seven white labels, A to G. The same bands will apply in respect of VRT, so there will be commonality of approach between the motor tax and VRT systems.
The motor tax rates are set out in paragraph 6(d) of the Schedule to the Bill and are graduated as one moves up through the CO2 bands. For the lowest band, A, which corresponds to CO2 emissions not exceeding 120g per kilometre, the motor tax rate will be €100. The top band, G, will attract a rate of €2,000. This reflects CO2 emissions of more than 225g per kilometre. The top rate of €2,000 will also apply to a car when its CO2 emissions level cannot be confirmed by the Revenue Commissioners by reference to the relevant EC type approval certificate or EC certificate of conformity and the Revenue Commissioners are not otherwise satisfied by reference to any other document produced in support of the declaration for registration pursuant to section 131 of the Finance Act 1992. This parallels the approach which will apply in the case of determination of the VRT rate for a car. The clear objective of the new motor tax system is to influence the purchasing decisions of consumers. Purchasers of cars with low CO2 emissions will be rewarded while a premium will be charged on vehicles with high CO2 emissions.
Every year, more than 150,000 Irish people decide to buy a brand new car. It is a decision that is not made lightly. Considerations like affordability, functionality, economy, safety, performance and even colour have traditionally come into play for people when deciding on the car that best suits their needs. From now on, when people decide on what car to buy, they will add a new factor. They will think carbon, so to speak. With the new taxation system for cars, this decision to think carbon can save them thousands of euro.
A key part of both the motor tax and VRT initiatives will be a new mandatory labelling system for cars based on CO2 emission levels. Requirements relating to the display of information on a car's fuel economy and CO2 emissions were introduced in 2001 on foot of an EU directive. All new passenger cars offered for sale or lease in Ireland must, therefore, already be accompanied by a fuel economy label that displays information on the vehicle's fuel consumption and its carbon dioxide emissions. Experience has shown that the existing labelling requirements are not sufficiently consumer-friendly and that an improved design would be beneficial to car buyers. The new label will include consumer-friendly information on a vehicle's CO2 emissions and fuel efficiency. The label will be similar to the energy rating label that already exists for many consumer electrical goods and is already familiar to consumers. I am preparing separate legislation to give effect to these proposals. The new labelling regime will be accompanied by an active public information campaign which will promote the purchase of fuel-efficient cars.
Senators will be aware of the importance of motor tax to the funding of local authorities. As I said at the outset, motor tax receipts are paid directly into the local government fund which is ring-fenced exclusively for local government purposes. There has not been an increase in motor tax rates since 2004 and the rate of inflation in the intervening period was more than 15%. The 9.5% increase for the majority of vehicles is well below this figure.
The fundamental changes that are contained in this Bill, in terms of moving to a CO2-based motor tax regime, are designed to achieve financial neutrality in the context of income to the fund. We are clearly breaking new ground with the overriding objective of progressively reducing CO2 emissions from cars. As we move forward, there will be a need to keep the new arrangements under review to ensure the environmental objective is delivered while at the same time protecting this important source of funding for local authorities. I thank Senators for their attention and look forward to a constructive and informed discussion on the Bill.