WLTP The Impact on Tax and Car Design - JATO Dynamics
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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
CO2 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 CO2 emissions.
This paper will argue that this shift may result in a change in how OEMs monitor CO2 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 CO2 is a
driver for local taxes.
WLTP
2 All Rights Reserved. © JATO Dynamics 2017Finally, 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, CO2
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 CO2 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 CO2/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 CO2 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 CO2 values for new type homologation vehicles will be evaluated using the Co2mpas
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, Co2mpas will calculate the CO2 emission level, numerically changing the test
conditions, removing the optional contribution and providing the CO2 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 CO2 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.
WLTP CO2 NEDC correlated value
New type
tested
homologation vehicles Co2mpas
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 CO2 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 CO2 influences the future of the automotive industry.
3 All Rights Reserved. © JATO Dynamics 2017Implications 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 CO2 sensitive markets such as Austria and the Netherlands for example, may find that decisions are based on CO2 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 CO2 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 All Rights Reserved. © JATO Dynamics 2017
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 CO2 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 CO2 output
levels, as well as NEDC values attributed to it. This will be complicated by the impact of CO2 levels on the different
options available; until now, options have not impacted the defined CO2 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 CO2 levels and tax rates is vast. In the future,
all car configurators will specify and price vehicles via their real CO2 footprint. As such adding optional extras will
typically increase prices and also taxation levels if the vehicle moves from one CO2 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 CO2 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 CO2 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 CO2 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 CO2 performance as most add weight or increase energy use. In addition, since features that reduce CO2
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 CO2 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 CO2 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 All Rights Reserved. © JATO Dynamics 2017Whole 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, CO2 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 CO2 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 CO2 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 CO2
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 CO2 readings for
vehicles and an increased volume of data configuration required for the industry, will immediately change the sector.
CO2 Levels
In the longer term, it may impact the way cars are designed. Locking in CO2 efficiency at the start of the manufacturing
process will become critical to remaining competitive. CO2 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 CO2 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 All Rights Reserved. © JATO Dynamics 2017JATO Dynamics Limited T +44 (0) 20 8423 7100
Hunton House F +44 (0) 20 8423 2233
Highbridge Estate wltp@jato.com
Oxford Road, Uxbridge
UB8 1LX, UK www.jato.com/jato-wltp
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