A Government think-tank, backed by the Liberal Democrats, is urging road tax changes to charge £50 for each gram of carbon dioxide over 94g/km.
It is proposed that this new system would work as a one-off charge and replace the current Vehicle Excise Duty (VED) model.
Vehicles emitting 94g/km CO2 or less would qualify for a Government subsidy discounting the new car price by £750. The price of a 1.25-litre petrol Ford Fiesta would increase from £9,084 to £10,734 under the scheme, while the 1.6-litre diesel Fiesta would see its price fall from £11,845 down to £11,495.
However, large SUVs, saloons and sports cars will be subsidising the scheme with some models in the most extreme cases attracting an additional £23,000 CO2 charge on top of the list price.
The idea has been put together by Government adviser Tim Leunig for CentreForum (read the full report here).
Leunig believes the UK could cut total carbon emissions by 2.6% if the scheme was implemented.
Ed Davey, Secretary of State for Energy and Climate Change, said: "I welcome this report. It is exactly the sort of innovative thinking we have come to expect from CentreForum."
VED currently generates £6 billion each year for the Treasury. The Government is looking for ways to claw back money from road tax as it is estimating it will lose £100 million a year due to customers choosing smaller, more fuel efficient models in tax bands which attract smaller or no VED charge.
In response, Paul Everitt, SMMT chief executive, said: "In the UK, vehicle manufacturers have cut new car CO2 emissions by over 23% since 2000, investing heavily in the development of low and ultra-low carbon vehicles across their product ranges.
"The existing VED system achieves a good balance of revenue generation while incentivising motorists to consider lower carbon vehicles.
"Higher charges for new car buyers will impact the economy and threaten the regular renewal of the vehicle fleet. This would have a detrimental effect on the UK motor industry and undermine the rapid progress it is making in reducing emissions and improving fuel efficiency."
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