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Assessing the effectiveness of South Africa’s emissions based purchase tax for private passenger vehicles: a consumer choice modelling approach.

21 Dec 2016-Journal of Energy in Southern Africa (University of Cape Town)-Vol. 27, Iss: 4, pp 25-37
TL;DR: In this paper, the authors used a discrete consumer choice model to assess the effectiveness of the tax policy in changing consumer behaviour and reducing fleet emissions, and they found that the emissions reduction achieved by the tax were negligible compared to the increases in fleet emissions associated with the growing vehicle market.
Abstract: South Africa is an important economy in terms of global greenhouse gas emissions and it has made progressive policy steps to address its national emissions. One significant national fiscal policy is the emissions based purchase tax for private passenger vehicles, implemented in September 2010. There has, however, been little attempt to assess the effect that this key mitigation policy has had on the emissions of new passenger vehicle fleets. This study uses a discrete consumer choice model to assess the effectiveness of this tax policy in changing consumer behaviour and reducing fleet emissions. It finds that the emissions reduction achieved by the tax were negligible compared to the increases in fleet emissions associated with the growing vehicle market. It is demonstrated that the structure of the tax policy does not suit the dynamics of the South African vehicle market and the policy would require restructuring if it is to more effectively reduce fleet emissions. In addition, for the tax policy to effect significant fleet emissions reductions in the future it will require the emergence of low- and zero-carbon vehicle technologies in the lowest price brackets of the market, possibly via subsidy policies.

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Abstract
South Africa is an important economy in terms of
global greenhouse gas emissions and it has made
progressive policy steps to address its national emis-
sions. One significant national fiscal policy is the
emissions based purchase tax for private passenger
vehicles, implemented in September 2010. There
has, however, been little attempt to assess the effect
that this key mitigation policy has had on the emis-
sions of new passenger vehicle fleets. This study
uses a discrete consumer choice model to assess the
effectiveness of this tax policy in changing consumer
behaviour and reducing fleet emissions. It finds that
the emissions reduction achieved by the tax were
negligible compared to the increases in fleet emis-
sions associated with the growing vehicle market. It
is demonstrated that the structure of the tax policy
does not suit the dynamics of the South African
vehicle market and the policy would require restruc-
turing if it is to more effectively reduce fleet emis-
sions. In addition, for the tax policy to effect signifi-
cant fleet emissions reductions in the future it will
require the emergence of low- and zero-carbon
vehicle technologies in the lowest price brackets of
the market, possibly via subsidy policies.
Keywords: emissions tax, passenger vehicles, dis-
crete choice modelling
25 Journal of Energy in Southern Africa Vol 27 No 4 November 2016
Assessing the effectiveness of South Africa’s
emissions-based purchase tax for private passenger
vehicles: A consumer choice modelling approach
S.J. Vosper*
a
, J.-F. Mercure
b
a Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge, CB3 9EP,
United Kingdom
b Department of Environmental Science, Radboud University, P.O. Box 9010, NL-6500 GL Nijmegen,
The Netherlands
* Corresponding author: Tel: +27 (0)74 102 0960
Email: sam@promethium.co.za
Journal of Energy in Southern Africa 27(4): 25–37
DOI: http://dx.doi.org/10.17159/2413-3051/2016/v27i4a1436

1. Introduction
In terms of carbon emissions from fuel combustion,
South Africa is the world’s 15
th
largest CO
2
emitter,
contributing 1.2% of global emissions (International
Energy Agency (IEA), 2014a). As a signatory to the
Kyoto Protocol, South Africa ambitiously pledged
to reduce its emissions by 34% and 42% by 2020
and 2025, respectively, at the 2009 COP negotia-
tions (Environmental Defense Fund, 2014). Mer-
cure et al. (2014) suggested that decarbonising the
electricity sector alone will typically not be enough
to meet a nation’s emissions reduction targets and
stabilise global temperature rises below 2
°
C.
South Africa’s road transport sector accounted
for approximately 11% of national emissions in
2012 and thus presents a key area for emissions
reductions (IEAa, 2014). South Africa’s public
transport infrastructure is largely under-developed,
with limited rail networks and a low percentage of
airline traffic (IEAb, 2014). In addition, the coun-
try’s major cities have continued to expand since
the abolishment of apartheid’s segregated residen-
tial policies (Todes, 2012). Large economic centres,
such as Johannesburg, are now characterised by
sprawling low-density commuter communities
(Todes, 2012). As a result, there has been a growing
dependence on private road transport for both pas-
sengers and freight (IEAb, 2014). One approach to
reducing emissions from private passenger vehicles
is to improve the uptake of low-emissions vehicle
technology (Rajan, 2006). The major challenge to
increasing its penetration is making the technology
cost-competitive (Grubb, 2014). Addressing the
cost disparity is an attractive policy for a nation like
South Africa, which has a growing vehicle popula-
tion and limited infrastructural flexibility to move
away from private transport. A variety of push and
pull policies, such as taxes and subsidies, can be
pursued to bring low-emission technologies out of
niche markets (Geels, 2002; Grubb, 2014). South
Africa has been progressive in this regard, with the
implementation of a carbon emission-based pur-
chase tax on new passenger vehicles as early as
2010, with amendments in 2014. There has been,
however, little attempt to assess the effectiveness or
model the prospective outcomes of these tax
schemes (Nel & Nienaber, 2012; Pillay & Buys,
2013).
This investigation aims to shed new light on the
South African vehicle emissions policy by retrospec-
tively assessing its impact on new vehicle fleet emis-
sions through the uptake of lower-carbon technolo-
gies. A probabilistic discrete choice model of con-
sumer response is used to predict how consumers
would have behaved within a given time period
had no tax been present. The policy impact is eval-
uated by comparing the emissions outcomes of the
modelled and observed consumer behaviours. The
discrete choice model used in the analysis is based
on the model developed by Mercure and Lam
(2015). It is built on the assumptions of consumer
choice drawn from economic theory, marketing lit-
erature and consumption anthropology. These
model outputs are then contextualised within an
analysis of the South African vehicle market.
2. Literature review
2.1 South African policy context
As South Africa is one of the only vehicle manufac-
turers in Africa, the importation of used vehicles is
generally prohibited (United Nations Environment
Programme (UNEP), 2010), so growth in the vehi-
cle population is primarily through the purchase of
new vehicles. South Africa has followed Europe in
terms of vehicle emissions standards, with newly
manufactured passenger vehicles complying with
Euro 2 standards since January 2008 (National
Association of Automobile Manufactures of South
Africa (NAAMSA), 2010a; South African Petroleum
Industry Association (SAPIA), 2008). A labelling
scheme was simultaneously mandated to align with
the emissions standards. South Africa’s car dealers
were required to display stickers on new vehicles
that detail their fuel efficiency and CO
2
emissions,
based on a standard drive cycle analysis from 2008
(NAAMSA, 2010b; UNEP, 2010). The labels are
intended to enable consumers to evaluate their pur-
chase options based on their prospective emissions.
The ad valorem taxation system for the pur-
chase of new passenger vehicles based on their CO
2
emissions was implemented on 01 September
2010. The policy sets a tax exempt threshold level
of 120 g CO
2
/km, while the structure of tax was lin-
ear, with each gram of CO
2
above 120g/km being
taxed at R75 per gram (NAAMSA, 2010a). This
scheme was revised in August 2014 to R90 per
gram and again in April 2016 to R100 per gram
(South African Revenue Service (SARS), 2014;
SARS, 2016). Tax is paid by the consumer at the
point of purchase and is then transferred to SARS
by the supplier/manufacturer (independently of
value added tax). This emissions tax is the only
environmental-based or carbon-based tax applied
at any point in the purchase, registration or use of
private passenger vehicles.
2.2 Fuel price considerations
South Africa has not experienced any recent shocks
to the fuel price, while abrupt changes in fuel prices
and policies can encourage gradual shifts in the
uptake of particular technologies (Department of
Energy, 2015; Grubb, 2014; McKinsey &
Company, 2007). Furthermore, it was shown that
vehicle buyers typically exhibit a strong tendency to
undervalue fuel economy when purchasing new
vehicles (Greene, 2011). Consumers typically
require a 2-4 year payback for an additional invest-
ment in fuel efficiency and do not rely on lifetime
26 Journal of Energy in Southern Africa • Vol 27 No 4 • November 2016

discounting when evaluating vehicle options
(Greene, 2011). For this reason, consumer choice
modelling can be done successfully without consid-
ering fuel prices. Mercure and Lam (2015) also
demonstrated that, even if consumers consider the
lifetime fuel costs of vehicles at the time of purchase
(under various discount rates), this cost is signifi-
cantly lower than the initial investment of a vehicle
purchase. Consequently, the fleet emissions reduc-
tions achieved per 1% tax on fuel are always small-
er than equivalent tax rates on the vehicle purchase
price. This suggests that an emissions tax at the
point of purchase is more effective when aiming to
reduce emissions through the uptake of low-emis-
sions technologies.
2.3 Consumer behaviour
The purchase of a new vehicle is one of the largest
single expenses that consumers are likely to make
during their lives, so it is a decision that requires
careful consideration of various economic and func-
tional factors (McShane et al., 2012). Marketing
research, however, has shown that the demand for
products goes far beyond their price and function.
Douglas and Isherwood (1979) offered an especial-
ly useful insight into the anthropology of consump-
tion in their seminal work The World of Goods. An
explanation of how goods carry social meaning and
perform a role in making visible and stabilising the
categories of culture was given. For instance, the
consumption of particular goods can serve as mark-
ers of social identity within a group or association to
a group. Research in the fields of economics, psy-
chology, marketing, anthropology and sociology
has recognised how social influence shapes deci-
sion making, concluding that people exhibit a
strong tendency to conform to the observed
behaviour of others: ‘visual influence’ (Burnkrant &
Cousineau, 1975; McShane et al., 2012). It was
illustrated by McShane et al. (2012) that this phe-
nomenon holds for large purchases like vehicles.
It can be inferred that goods such as passenger
vehicles, which are highly visible in their consump-
tion, play an important role in displaying social
identity and enforcing group characteristics. The
behaviour of other members of a group act as a
form of social proof or norm that people must fol-
low to remain in the group (McShane et al., 2012).
This may manifest in people purchasing vehicles
from a specific price subset of the vehicle market
that is suitable to their social group and income
level. Mercure and Lam (2015) represented this
idea graphically by overlaying the lognormal
income distribution of the UK population with the
similarly shaped price distribution of vehicle sales
for 2012 (Figure 1).
2.4 Discrete choice modelling and
technology diffusion
A number of modelling procedures emerged in
recognition that the consumer population is not
homogeneous but rather broken up into many het-
erogeneous socio-economic and cultural groups,
e.g., Daniel McFadden’s discrete choice models to
predict the choices made by individuals. These
models assume a decision maker as an individual
who chooses on the basis of some decision rule,
among a finite and knowable set of alternatives that
are each characterised by various attributes (Ben
Akiva & Lerman, 1985). A discrete choice analysis
that predicts a choice behaviour for the immediate
or short term can serve as a very useful tool in ret-
rospective and prospective analyses. It is under-
stood that short-term behavioural change can man-
ifest in longer term change as it imbeds in society.
Geels (2002) described this socio-technological
regime as dynamic, with the cultural, political, sci-
entific and market forces interacting and changing
over time. Altering this socio-technological regime
through the introduction of various behavioural,
market or institutional policies can help direct which
technologies diffuse into markets (Grubb, 2014). In
terms of private passenger transport, hybrid or elec-
tric vehicles could be considered as low-emission
niche technologies at a very early stage of diffusion.
3. Data summary
Sales data for new private passenger vehicles was
obtained from Lightstone Auto, an independent ser-
vice provider to NAAMSA. The data set recorded
the monthly sales figures in South African rand for
each vehicle model on the market from September
2009 (included) until August 2014 (included). The
dataset also matched each vehicle sale with its sug-
gested retail price in each month. These prices were
adjusted by factors of inflation provided by the
World Databank (World Bank, 2015). The data set
also listed the technological characteristics of each
27 Journal of Energy in Southern Africa Vol 27 No 4 November 2016
Figure 1: Comparison of the UK income
distribution for 2012 and the price distribution
of passenger vehicles sold in 2012
(Mercure & Lam, 2015).

vehicle model that included engine size, fuel type,
fuel consumption (l/100 km) and emissions (g CO
2
/km). This study assumes that the dataset is repre-
sentative on average due to its size despite some
controversy around the quoted emissions levels for
some passenger vehicles.
Summing the monthly sales figures yielded five
sets of annual sales data, which each run from 01
September to 31 August in the following year.
These periods will be referred to as Years 1 to 5
henceforth and were chosen for their suitable align-
ment with the introduction of the initial and updat-
ed tax policies, implemented respectively in
September 2010 and August 2014. Year 1 directly
precedes the introduction of the first tax policy,
which remains in effect for the following four years.
Year 5 then directly precedes the implementation of
the updated tax policy. An initial summary of the
sales figures and market shares of the four broad
categories of vehicle technology is presented in
Table 1, which shows that the shares of diesel vehi-
cles increased from 14.9% to 17.9% in the five
years. Growth in hybrid shares was, however, neg-
ligible. The first 47 electric vehicles entered the mar-
ket in Year 5. The growth rate slowed down and
sales decreased in Year 5, while the total sales of all
engine technologies increased by 43.14% from
Year 1 to Year 5. This was likely due to the econom-
ic downturn in 2014, characterised by stagnant eco-
nomic growth, price inflation and high interest rates
(NAAMSA, 2014).
The price distribution of the South African vehi-
cle market, illustrated in Figure 2, offers another
useful perspective. This distribution of the vehicle
market generally exhibits a positive skew over the
period of five years, which may also be perceived to
as the positive section of a lognormal distribution.
Also note that only the wealthiest portion of the
South African population (right-hand tail of the
income distribution) is able to afford new passenger
vehicles (NAAMSA, 2014). Considering this, it is
conceivable that the price distribution of vehicle
sales would map neatly onto the right hand tail of
the South African income distribution and thus pre-
sent an analogous demonstration of consumer
choice to Figure 1. It is also useful to note where
hybrid vehicles are placed in the price distribution
despite having very small shares as an engine tech-
nology. They appear only in the upper price ranges
grouped at approximately R400 000 and R800 000
and, therefore, they do not cater to consumers in
the lower price ranges (where most vehicles are pur-
chased). The distribution, in this regard, differs from
the UK’s where hybrids are available across most
price brackets (Mercure & Lam, 2015).
Figure 2: Price distribution of the passenger
vehicle sales for Year 1 with hybrid sales
highlighted in blue.
It is also useful to illustrate the relationships
between price, engine size and emissions for the
South African vehicle market. It is assumed that
vehicles with a larger engine size are typically more
luxurious and expensive (Mercure & Lam, 2015).
This property holds true for the South African data
set as shown by the strong positive relationship
between engine size and the logarithm of price in
the first panel of Figure 3. The second panel then
confirms the mechanical relationship where larger
engines, which produce more power, require
greater volumes of fuel and thus produce higher
levels of emissions per kilometre travelled. These
two relationships can be exploited to produce a
positive relationship between emissions and the log-
arithm of price in the third panel of Figure 3. This
relationship can be understood in terms of the other
two relationships as consumers are not paying for
emissions directly but rather through paying for
engine size. The market structure presented for Year
1 is representative of all five years of analysis.
28 Journal of Energy in Southern Africa • Vol 27 No 4 • November 2016
Table 1: Summary of sales and market shares of four engine technologies for each sample year.
Energy type % Market share
Year 1 Year 2 Year 3 Year 4 Year 5
Petrol 84.91 85.50 85.14 83.06 81.87
Diesel 14.97 14.34 14.68 16.82 17.98
Hybrid 012 0.16 0.18 0.12 0.14
Electric 0.00 0.00 0.00 0.00 0.00
Total sales 304 407 374 388 431 294 454 020 433 275
Growth (%) 23.92 15.12 4.96 -4.41

29 Journal of Energy in Southern Africa Vol 27 No 4 November 2016
Figure 3: Population weighted univariate regression plot of the Year 1 vehicle sales depicting (a)
engine size vs price, (b) emissions vs engine size, and (c) emissions vs price.
Figure 4: A schematic representation of emissions based fiscal policy effectiveness for
(a) strong and (b) weak correlations before (left-hand side) and after (right-hand side)
emissions tax (Mercure & Lam, 2015).

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Cites background from "Assessing the effectiveness of Sout..."

  • ...For instance, the contribution of South Africa to global emissions is about 1.2% and the country as a signatory to the Kyoto Protocol on Climate change, has promised to reduce emissions by 34% by 2020 and 42% by 2025 (Vosper and Mercure, 2016)....

    [...]

  • ...2% and the country as a signatory to the Kyoto Protocol on Climate change, has promised to reduce emissions by 34% by 2020 and 42% by 2025 (Vosper and Mercure, 2016)....

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  • ...23 industry; which vehicles would be affected and which would not (Vosper and Mercure, 2016)....

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  • ...Carbon tax is applied at the point of sale for new motor vehicles and charged/ calculated in relation to the carbon emissions that are anticipated to be discarded by the car during its useful life (Vosper and Mercure, 2016)....

    [...]

  • ...As the introduction was first to set off in the motor vehicle 23 industry; which vehicles would be affected and which would not (Vosper and Mercure, 2016)....

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  • ...The carbon tax cost is added to the cost of the vehicle being purchased and thus increasing the cost of vehicles (Vosper and Mercure, 2016)....

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  • ...As this cost is determined at the point of sale, the cost is therefore transferred over to the customer/ purchaser who is purchasing the vehicle (Vosper and Mercure, 2016)....

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