A baseline analysis of the Turkish vehicle market

We know quite a bit about vehicle markets in some parts of the world: the United States, Europe, China, to note the most important examples. Some of the information comes from government, some from industry, some from researchers like ICCT (e.g., here and here). But other parts of the world remain less well understood. Turkey is one.

That’s surprising, because Turkey is the world’s largest manufacturer of buses and also among the top manufacturers of passenger cars and trucks. And it’s important, because Turkey is a growing and potentially large market, and how it develops matters a lot.

And it explains why, as one of the 2015/16 Fellows at the Mercator Istanbul Policy Center (IPC), I’ve spent the past several months looking at the structure of the Turkish vehicle fleet and its impact on fuel consumption and emissions, trying to get a better understanding of the current situation and comparing Turkey to other key automotive markets worldwide. The detailed results of my baseline analysis of the vehicle fleet in Turkey are here and here. Some summary observations below.

I focused in particular on a comparison to the German automotive market. Why? Because Turkey’s and Germany’s vehicle industries are quite similar. In both countries the automotive industry is part of the backbone of the national economy, with numerous production plants, employing thousands of workers, and accounting for about 15% of national exports. And in both countries the automotive industry faces significant challenges, such as local air pollution, global climate change, and threatened energy security, requiring it to focus on developing clean technologies and innovative pathways for future economic growth. The populations of Turkey and Germany are about the same size, but Turkey’s vehicle fleet today is only about one-third the size of Germany’s; imagine if Turkey’s motorization rate increases to Germany’s level in future years. Meanwhile, about half of all new cars in Turkey are first registered in Istanbul, highlighting the important role that the city could play in terms of deployment of clean vehicles.

What probably fascinated me the most is the fact that the average fuel consumption and CO2 levels of new passenger cars in Turkey are (at least according to the NEDC testing procedure) relatively low. In 2014 the average was 121 gCO2/km, compared to 123 gCO2/km in the EU-28. This is despite the fact that Turkey is one of the few key automotive markets that has not yet introduced mandatory CO2 or efficiency standards for new vehicles. Taking into account differences in weight and power (new cars in Turkey tend to be slightly lighter and less powerful than their counterparts in the EU-28) the efficiency of vehicles in Turkey seems to be very similar to the average efficiency of vehicles in the EU-28 (see Figure 1). This is confirmed when examining individual vehicle models; generally the level of CO2-reducing technologies applied is about the same.

Figure 1. Average CO2 emission level of new registrations passenger cars (2014), by vehicle segment, in Turkey, Germany and for the EU-28 average.

One reason for this observed similarity is that Turkey already is indirectly affected by the CO2 standard in the EU: many of the vehicles registered in Turkey are imported from the EU, and many vehicles produced in Turkey are exported to the EU, so that there appear to be spill-over effects of the EU regulation. Another reason is the fuel tax in Turkey, which is one of the highest in the world. As a result, fuel prices in Turkey are very high compared to most countries and thereby provide an incentive to purchase vehicles with low fuel consumption, and to drive less.

Not only fuel taxes but also taxes on purchasing and owning a vehicle are high in Turkey. The new-vehicle sales tax is called a “special consumption tax” and is based on the purchase price of the vehicle. For passenger cars there are three different tax rates, being between 45% and 145% of the vehicle’s base price. Whether the 45%, 90% or 145% tax rate applies, depends on the engine displacement of a vehicle, with an important tax threshold at 1.6L. The impact of this tax design is quite dramatic: For a new car worth 20,000 Euros the sales tax is 9,000 Euros if it has an engine displacement of 1.6L or below, but 18,000 Euros if it is 1.7L or above, on top of that there is always a 18% general sales tax (see Figure 2). As I showed here these kinds of steps in a taxation scheme tend to lead to a clustering of vehicle sales around the respective tax thresholds. And indeed, as a result of the taxation scheme, 95% of new cars in Turkey have an engine displacement of 1.6L or below, and more than 40% are exactly at 1.6L. For comparison, in the EU only about 70% of vehicles are below 1.7L engine displacement. So while the Turkish vehicle taxation scheme has a great impact on engine size, it is not directly linked to the CO2 emissions of new vehicles and therefore currently provides only a small incentive for purchasing low-emission vehicles.

Based on a preliminary estimate using the ICCT Global Transportation Roadmap tool, fuel consumption and CO2 emissions from the road transport sector in Turkey will nearly double by 2030 unless some kind of policy action is taken to alter present trends. Given that Turkey imports 93% of its oil, present trends have negative implications for national energy security as well.

Figure 2. Vehicle tax levels for new passenger cars in Turkey in 2014 and distribution of new vehicle sales by engine displacement.

Revising the vehicle taxation scheme in Turkey so that it is based on the CO2 emissions of a vehicle would be a powerful measure to reduce fuel consumption and CO2 emissions in the future. If combined with CO2 standards for new vehicles it could also incentivize the development and production of innovative vehicle technologies, thereby strengthening the competitiveness of the Turkish automotive industry. And those kinds of policy measures are what I will be focused on during the next phase of my Fellowship, which I’ll summarize in a second report later this year.