WLTP The Impact on Tax and Car Design
Worldwide Harmonized Light Vehicle Testing Procedure (WLTP) The impact on tax and car design The Worldwide Harmonized Light Vehicle Testing Procedure (WLTP) is set to alter the landscape of the automotive sector and its introduction looms large on the horizon, with OEMs and leasing managers braced for upheaval. Why WLTP? The reason for the introduction is well-understood but the implications are less clear. The existing NEDC cycle no longer accurately reflects the true fuel consumption picture across the industry. WLTP was developed within the United Nations Economics Commission for Europe (UNECE) with the support of the EU Commission, to address this disconnect namely to ensure that testing accurately reflects real world driving conditions. UNECE s ambition is for WLTP to be used as a global test cycle across different world regions and for CO 2 emissions - as well as fuel consumption values to be comparable worldwide (subject to local laws and regulation). Its initial aim is to ensure there is no discrepancy between the laboratory and on-the road performance of vehicles, but it has a wider overarching aim of helping reduce emissions worldwide. Amidst a backdrop of concern about pollution levels, this is a significant statement of intent. This whitepaper will explore two key issues, firstly the extent to which WLTP s complex relationship with taxation at a national level will have the knock-on effect of stimulating the appeal of lower emission vehicles. Secondly, it will look at the issue of optional extras, and the extent to which OEMs are able to monitor emissions vehicle by vehicle and for all optional extras which have a discernible impact on CO 2 emissions. This paper will argue that this shift may result in a change in how OEMs monitor CO 2 levels element by element, in preparation for changes in tax rates that may happen anytime from September 2018. Our assumption is that January 2019 will be when these changes begin happening, once the industry has established a usable correlation between WLTP and NEDC. Altering attitudes to option configurations will be critical to remaining competitive for OEMs. The legislation change could mean that consumers may choose simpler lower option vehicles - especially in those markets where CO 2 is a driver for local taxes. WLTP 2
Finally, the paper will address WLTP s impact on real life fuel consumption data. It will become increasingly important to evaluate Whole Life Costs as fuel consumption can change significantly with each vehicle configuration and as such, consumers will increasingly evaluate this additional element at the point of purchase. As a result, CO 2 emission rates may also become a bigger differentiator in sales and marketing in future, in a bid to appeal to the changing demands of consumers. Tax: how tax may change and how this will impact the automotive landscape Little is known about how WLTP will work in practice with regards to taxes. One thing that is certain however is that vehicles will register higher CO 2 values under the WLTP test cycle, in comparison to the NEDC test cycle. As of September 2017, one car model might have a value of 100g CO 2 /km using the old NEDC test, but this number will be higher under WLTP as the testing criteria is more stringent and representative of real-world conditions with fewer stops and higher speed driving conditions. With no change to the current emissions-based tax system this would mean that the tax rate for the vehicle increases, if applied to the WLTP CO 2 value rather than to the NEDC value. For at least two years, immediately after the regulation comes into practice, WLTP will run in parallel to NEDC.The NEDC fuel consumption and CO 2 values for new type homologation vehicles will be evaluated using the Co 2 mpas tool, to create a correlation between the two test procedures. In simple terms, once a new type homologation vehicle is tested under the WLTP criteria, Co 2 mpas will calculate the CO 2 emission level, numerically changing the test conditions, removing the optional contribution and providing the CO 2 NEDC correlated value. This will come into practice from September 2017 for new type homologation vehicles, and will continue from September 2018 for all other vehicles. During this period, tax systems should still be based on NEDC levels. The combination of the two sets of CO 2 values for a large number of vehicles will build a statistic sample that is usable across the industry to correctly correlate NEDC testing results to WLTP. New type homologation vehicles WLTP tested Co 2 mpas CO 2 NEDC correlated value Once a correlation is established between WLTP and NEDC for the entire industry based on a statistic sample, the current tax system, specific to each EU member state could be modified and based on WLTP. The reason for the delay is that the EU has advised national governments across Europe to alter tax rates to ensure any additional costs are not passed on to consumers. This means that by January 2019, in countries where taxes vary by CO 2 levels, tax rates should change to avoid passing costs on to the consumer. Whilst this appears a small regulatory change, it has the potential to change not only how OEMs design vehicles, but also how and why consumers choose them. This will be a step change in how CO 2 influences the future of the automotive industry. 3
Implications of new taxation and WLTP on leasing companies The increased complexity of the taxation system means that leasing companies will need to understand that without a change in local tax, and an understanding of the real correlation between NEDC and WLTP, it s unlikely that there will be changes in the company policy of organisations choosing vehicles. Companies operating in CO 2 sensitive markets such as Austria and the Netherlands for example, may find that decisions are based on CO 2 levels due to the changing tax rates in future. But, this cannot happen yet, as no decision has been taken on a national level on what the new tax rates will look like. WLTP will impact many elements of the decision-making process for someone choosing a fleet vehicle taxes will be applied based on the CO 2 emission level and Whole Life Cost will be impacted by the real-life fuel consumption values. However, we believe that no change in tax nor in company fleet policy should change before 2019, so leasing providers should be vigilant but not worried. To take the UK as an example, as of December 2016, HM Revenue & Customs stated that there would be no changes to bandings for company car tax of Vehicle Excise Duty when the initial WLTP phase starts in September 2017. Between then and 2020, new vehicles will need to have a correlated NEDC and WLTP value attributed to their Certificate of Conformity to enable comparisons. The current benefit-in-kind tax system expires in 2020 and it s expected that the system will be modified for leasing companies at this point. Up until this point the focus for leasing companies should be ensuring they are prepared to handle the altered level of data. 4
Optional Extras WLTP is highly influenced by individual vehicle specifications. Some customers who opt for higher equipped vehicles could therefore incur higher taxes (in the countries where taxes will be variable with CO 2 levels). This means some elements of additional cost will inevitably be passed on to the consumer because purchase decisions will impact on the classification of the individual vehicle. As of September 2017, one new type of homologation vehicle will have WLTP fuel consumption and CO 2 output levels, as well as NEDC values attributed to it. This will be complicated by the impact of CO 2 levels on the different options available; until now, options have not impacted the defined CO 2 levels (with the exception of wheel size, number of seats and transmission where optional), but WLTP will consider all available options from air conditioning, leather interior to the presence of a sunroof therefore the variation in CO 2 levels and tax rates is vast. In the future, all car configurators will specify and price vehicles via their real CO 2 footprint. As such adding optional extras will typically increase prices and also taxation levels if the vehicle moves from one CO 2 tax band to another. This will have two main implications. The first is on how OEMs design the various optional extras available. We believe that the option offer strategy will be reconsidered in the interest of simplifying it in light of the WLTP calculation, to evaluate how options will affect the resulting the CO 2 levels and therefore the tax thresholds. This means that WLTP will add a further layer of complexity for OEMs when localising vehicles, making additive elements simpler and bundling low impact additions together in markets where CO 2 taxes are applied will become crucial. Innovation will be key to remaining competitive and OEMs are aware that WLTP is a symptom of a wider desire across regulators to reduce emissions, so targets will only become more stringent. The design of carbon-efficient components will become more critical, as will the need to bring these concepts to market quickly and efficiently. It therefore stands to reason to expect that OEMs will alter how manufacturers design options to ensure that the presence of a sunroof, for example, doesn t vastly alter the CO 2 emission rate of a vehicle. Regulators accept that this places a burden on OEMs, therefore simulation testing is permitted. For each vehicle configuration, a base line will be calculated and then predicted rates will be given for each option allowing OEMs to balance the impact of different features on the model s competitiveness. The other side of this coin is the extent to which option design will become a key driver in consumer decision making. Simpler vehicles with fewer options may become more popular as consumers seek more affordable models. The industry may see a decline in extras such as a memory function for seats, leather interior or wooden accessories which raise weight and emissions without any corresponding improvement in performance. Indeed, few options improve CO 2 performance as most add weight or increase energy use. In addition, since features that reduce CO 2 emissions are made standard quickly, it s possible that the automotive industry will move towards more simplified models as standard. This change will be driven by consumers becoming more aware of emission levels due to the spotlight WLTP is throwing on the issue. Options that can positively impact CO 2 levels, such as new dual clutch automatic transmissions or intelligent electrical systems are likely to appeal more to consumers and become more widespread. As discussed, higher CO 2 readings under WLTP may result in higher tax levels and because of the need to calculate the effect of all accessories on emissions, communicating pricing to customers both leasing companies and individuals - will become more complex. Pricing will need to consider additional options, as well as WLTP and NEDC figures. For leasing companies this presents a further challenge as leasing company members will need to expand their systems to interpret the additional data coming out of both JATO and OEMs. 5
Whole Life Cost Comparisons of Whole Life Cost figures currently consider a wide variety of factors including purchase price, residual value, fuel costs, service, maintenance, repair costs and tax. With vehicle options set to influence tax rates and fuel consumption, consumers could start taking more notice of the implications of various factors on the final Whole Life Cost. WLTP is likely to have an impact on the role of Whole Life Cost calculations. It will become increasingly important for consumers to evaluate Whole Life Cost, as the real fuel consumption rates will change significantly with vehicle configuration and as such, consumers are likely to focus more on this when purchasing a vehicle. As discussed before consumers are likely to pay careful attention to the impact of option combinations, therefore the ability of car manufacturers to position vehicles as efficient will become a more important element of the marketing and pricing process. As a result, CO 2 may also become a bigger differentiator in sales and marketing in the future. The implications of this are vast amidst a backdrop of regulatory pressure on vehicle manufacturers to play a role in reducing emissions. This could mean that CO 2 and environmental considerations become even more influential in the positioning of vehicles to prospective customers. This may mean that simple vehicles with limited numbers of optional extras are positioned as eco models to appeal to consumers looking to avoid unnecessary costs. Conclusion: two years to prepare WLTP s objective is to provide a real-world style reading of CO 2 levels for vehicles, its aim is to evaluate every combination of vehicle that is selected by customers, to help customers and OEMs understand what the real-life CO 2 consumption of a vehicle is.the overall goal of the EU commission is to provide a more transparent system for both OEMs and consumers. The regulation will have short-term consequences. Changes to taxation at a national level, real life CO 2 readings for vehicles and an increased volume of data configuration required for the industry, will immediately change the sector. CO 2 Levels In the longer term, it may impact the way cars are designed. Locking in CO 2 efficiency at the start of the manufacturing process will become critical to remaining competitive. CO 2 emissions may also become a key factor in the purchase decision-making process, and will therefore shape the sales and marketing process for manufacturers. WLTP and its impact on tax, may be the first step in making CO 2 a fundamental element in the decision-making process which may eventually lead to reduced emissions. What s clear in the immediate future however, is the need for OEMs to get prepared to face a future where WLTP is modelled throughout the car design process, from inception to production, sales and marketing. Changes to tax rates are step one so it s crucial that OEMs are ready. 6
JATO Dynamics Limited Hunton House Highbridge Estate Oxford Road, Uxbridge UB8 1LX, UK T +44 (0) 20 8423 7100 F +44 (0) 20 8423 2233 wltp@jato.com www.jato.com/jato-wltp