In last week's Budget, Minister Brian Cowan made some significant changes to the way that new cars are to be taxed for the future. The big changes relate to Vehicle Registration Tax (VRT) which the Minister has changed to ensure that from July 1, 2008, the VRT rates are to based on the level of exhaust emissions rather than the engine size.

Michael Moroney provides an analysis the implications of the Budget changes for all motorists.

Diesel car drivers can expect reductions in new car prices from the 1st of July next, following the announcement of changes in the Vehicle Registration Tax (VRT) in last week's Budget.

These changes are the most significant since the VRT system was introduced in 1993. The Government has linked the VRT rates to CO2 emission levels, which should mean that new car buyers would seek to buy cleaner cars and get a price reduction to boot.

The figures issued by the Department of Finance in the Budget statement show that most diesel engine cars will incur a reduction in VRT levels, so expect that diesel car prices will fall in July. It is obvious from the Minister's statement that he expects that prices for CO2 cleaner cars will fall from July 1st and he expects car companies to pass on the VRT reduction to customers in an effort to encourage the use of cleaner cars.

It is expected that the demand for diesel models will increase from just over 20% of sales to closer to 50% of all new car sales following the VRT change. This is in line with what has happened in other European markets where car tax is linked to CO2 emissions.

The VRT is an important source of revenue for the Government. It yielded €1.3bn in 2006 and is estimated to yield €1.4bn in 2007. It provides around 3% of the total tax receipts and most of the VRT is derived from passenger cars.

The Government has made the changes with a degree of caution in order to ensure a neutral impact on its income. But it does seem fair.

The new VRT system will mean a lower rate of VRT for cars that have lower carbon dioxide (CO2) exhaust levels, bringing about a situation where cars that pollute more will incur a higher level of taxation. This means a move away from the system where VRT was based solely on the size of the vehicle engine and took no account of the improvements in engine technology that have taken place in the last 10 years.

The Minister for Finance has introduced a seven band CO2 emissions system, from Band A to Band G. The system will be underpinned by a new CO2 Emissions Labelling System for cars, on the lines of the energy efficiency labels for white goods.

All cars sold after 1st July next will have to have an emission band clearly marked. This system will be introduced by the Department of the Environment, Heritage and Local Government; The new seven VRT rates range from 14% to 36%, depending on the car's CO2 emission level. These new VRT rates will continue to be applied to the Open Market Selling Price of the car, according to the Budget statement.

Minister Cowan said, "The measure is not about penalising people for their reasonable lifestyle choices – it is about providing them with opportunities and incentives. By explicitly linking VRT rates to carbon emissions on the basis of a new and highly transparent labelling system, we are providing individuals and families with the opportunity to make choices to help the environment and with financial incentives to do so."

Those buying higher emitting cars will pay more from July. The new VRT rules do offer drivers the option of making sensible and informed decisions in an effort to get lower car prices by opting for car choices that give a lower VRT rate.

The Government will continue to give existing incentives for certain hybrid electric and flexible fuel cars. After 1 July 2008 there will be a further top-up relief up to €2,500 on the VRT payable on such cars. Fully electric cars and electric mopeds will be exempt from VRT 1 January 2008.