Vehicle registration tax as a policy instrument to help reduce CO2 emissions and fuel consumption in Turkey

The Turkish registration tax on new passenger cars (Özel Tüketim Vergisi, or ÖTV) has a strong impact on consumer purchase behavior and vehicle market structure. However, the ÖTV currently does not directly take into account the emissions level of a vehicle, and thereby provides only a limited incentive for consumers to opt for passenger cars with low- or zero-emissions. In absence of mandatory CO2 targets for vehicle manufacturers and a CO2-based vehicle taxation system, Turkey risks falling behind in reducing emissions from passenger cars and in driving technology innovation in one of the country’s key industries.

A proposal for modifying the Turkish ÖTV to take into account CO2 emissions is based on the following principles:

  • The overall tax revenue before and after modifying the ÖTV system is kept constant. To assure there is constant tax revenue over time, a regular re-adjustment of the ÖTV tax rates is necessary.
  • The basic structure of the current ÖTV system, with six tax categories for combustion engine vehicles, is kept the same. The new rate for each tax category respectively will be calculated taking into account the CO2 emission level of a vehicle.
  • The base tax rate, to be multiplied with the CO2 emission level, is the same for all vehicles within a ÖTV group. Vehicles with below-average CO2 will be subject to a lower ÖTV rate and vehicles with above-average CO2 will be subject to a higher ÖTV rate than before.
  • For diesel cars, an extra surcharge is introduced to take into account higher NOx emissions. Without a surcharge, vehicles with diesel engines would have a tax advantage because CO2 emission levels tend to be slightly lower for diesel cars.

The alternative ÖTV scenario demonstrates how it would be possible to modify the current ÖTV scheme to provide an incentive for consumers to opt for vehicles with lower emission levels. Every major manufacturer operating in the Turkish market already offers vehicle versions with lower CO2 emission levels. Transitioning to a ÖTV system with a CO2 component would provide an opportunity for manufacturers to promote these low-CO2 options, thereby driving technology innovation and emission reductions. For Turkey, as a fuel importing country with a strong automotive industry, this shift towards innovative technologies and away from high fuel-consuming imports implies not only significant emission reductions, but also a strong opportunity for economic growth.