Question proposed, That the clause stand part of the Bill.

I do not know whether it is appropriate to say so in these circumstances, but it is a pleasure to serve under your chairmanship, Mr. Atkinson.

Vehicle excise duty was one of the stories of last year's Finance Bill and the 2008 Budget. I will be relatively brief—and I can assure the Exchequer Secretary that this issue will not keep her here until the early hours of the morning—but it may be useful to return to the proposals in that Budget. In particular, I wish to take the opportunity to pay tribute to the tenacious work of my hon. Friend Justine Greening in examining and unravelling the Government's case.

The Committee will recall that in the 2008 Budget the Chancellor of the Exchequer set out his proposals to reform vehicle excise duty, which included introducing a greater range of gradations in bands on the basis of CO2 emissions. He told the House that that was a sensible green measure, saying that

"the road tax system should do more to support the use of more carbon-efficiency...There will be an incentive to encourage drivers to choose the least polluting car."—[ Hansard, 12 March 2008; Vol. 473, c. 297.]

My hon. Friend started to examine the details of that policy and several points emerged.

First, the Chancellor claimed that the proposal was a green measure, but it clearly sought to raise revenue. Of course, the proposals on vehicle excise duty in this Finance Bill have been largely shaped by the arguments and the analysis of last summer. Thanks to my hon. Friend's work, it emerged that the original proposals would reduce motor vehicle emissions by 160,000 tonnes a year by 2020. To put that in context, that is a fraction of 1 per cent. of total transport CO2 emissions, which in 2006 amounted to 120 million tonnes. We can see immediately that the proposals' green credentials were somewhat weakened, and I would be grateful if the Exchequer Secretary gave her assessment of the green benefits of the original proposals and of the proposals in clause 14.

Another green argument needs to be addressed. It was persuasively argued that a number of older cars would essentially become unsaleable and have to be scrapped as a consequence of the new VED scheme, which would have an environmental impact. I do not wish to deviate from the subject of VED, but that point throws up the issue of the environmental impact of the car scrappage schemes. It would be helpful if the Minister said a word or two on the environmental pluses and minuses of scrapping older cars. Clearly, newer cars are more efficient and, by and large, have lower CO2 emissions, but quite a lot of carbon is involved in car manufacture. I ask that purely to inquire about the Government's analysis.

May I inquire, purely to seek information, whether the hon. Gentleman can confirm that his party stands by its commitments on green issues, particularly on green taxation?

Yes, we do. I shall come back to that point—that was a perfectly fair question. I suspect that quite a bit of this afternoon will be devoted to green taxation of one sort or another. After this debate, we will debate fuel duties and I want to say quite a bit more on the subject at that point.

My second point is to ask whether the VED proposals in the last year's Budget and those in this Finance Bill are retrospective. I have already praised my hon. Friend the Member for Putney, but a word should also be said about Mr. Campbell, who tabled an early-day motion and secured considerable support from both sides of the House—

What about Rob Marris?

Indeed, it would be a great omission not to mention him.

Is the measure retrospective? If someone has bought a car that was made or registered after 2001, and subsequently found that they will pay more VED in future years, they are committed to that car. They are stuck with it and are faced with a tax bill that they did not anticipate. People argued whether the provision was retrospective—I think that it is —and I would be grateful if the Minister confirmed her view. On 14 May 2008, in column 1495 of Hansard, she referred to page 121, paragraph A.97 of the Red Book, which, she said, contained details of the retrospective element. It seems to me that there is a retrospective element, and that point applies to this clause, albeit that the effects are less dramatic than perhaps was originally envisaged last year. Will the Minister confirm her interpretation of that point?

That raises the issue of unfairness and of who will be hit by the provisions. The hon. Members for Blyth Valley and for Wolverhampton, South-West asked who would be affected by the change in VED. Let me put that in the context of the clause, although that question could still be asked of the original proposals. It would appear that some 1.2 million drivers will experience rises of more than £200, and that many others will be affected. They would say that it is very difficult to change their behaviour when they have already acquired the cars, which comes back to the green taxation point I was making a moment or so ago.

Will the hon. Gentleman give way?

I will. I should make it clear that the figures I have been quoting are those given in the debate last year. If the Exchequer Secretary can update me, I would be very grateful.

Will the hon. Gentleman at least acknowledge that we are talking about increases in VED this year of no more than £5 per car and increases of no more than £30 next year?

I do. In the pre-Budget report, the Government changed their position, and many of my remarks praise those who were able to persuade the Government to do so. I am asking the Minister to explain what persuaded them to change their position. Was it the argument that it was not a green tax? Was it the argument that it was retrospective? Was it the argument that those who were going to be affected were not just rich executives driving around in gas guzzlers but those across the income distribution scale? What persuaded the Government to move from the position we were in this time last year to the position we are in now, where, as the Minister says, the increase will be no more than £5 this coming year and no more than £30 next year? I am trying to understand the Government's position.

There is continuity in what we had last year and what we have this year. In both the Budget and the pre-Budget report, which essentially set out what we have now, the Government stated that the majority of drivers will be better off or no worse off under the proposals. That is right, in my understanding. However, it is right in relation to the original proposals only if one includes those drivers who are not paying graduated VED at all. Let me quote the figures from last year—I am sure that the Minister will update the Committee on the figures for this year. The vast majority of the 15.5 million motorists who paid graduated VED would pay more. I would be grateful if the Minister said that that figure no longer applies.

I want to make it clear that we are not just talking about the larger models. The duty would also apply to people who drive Ford Mondeos. I should declare an interest as a driver of a Ford Mondeo estate—

A larger car.

Larger is all relative. We are not talking about sport utility vehicles or Humvees. Renault Méganes and even some Nissan Micras were affected. Where do we stand now? By 2010-11, how many people will be paying more? Who is affected? What is the breakdown?

This year, VED is not the big controversial policy it was. That is largely due to the efforts of hon. Members of all parties, and we are grateful that the Government listened to the case made by my hon. Friend the Member for Putney and others. They said that the policy announced in last year's Budget was misguided and retrospective, that it was ineffective as a green policy and that it would affect people of all incomes.

Progress has been made, but I look forward to the Minister explaining precisely which arguments the Government found so persuasive that they were prepared to back down.

As you know, Mr. Atkinson, I and my hon. Friend David Taylor have tabled amendment No. 16. For reasons that we well understand—although people outside may not—it is not in order for that amendment to be called today, so I am grateful to be able to participate in this debate. In my short contribution, I shall talk about VED but also, if I may, about other forms of taxation on motorists.

I accept that taxation is going to go up in the next five-year period, so I shall not undertake any special pleading to try to convince the Minister that the concerns of my constituents should somehow render them exempt from the Government's need to balance the national accounts over the medium term. The hon. Lady is the Member for Wallasey, which means that she is my neighbour in the Wirral—

And friend, I hope.

And friend, very much so. I was going to call her my very honourable Friend, as both of our expenses have been published, but I did not know whether the term would be in order. The Minister is, of course, my very, very hon. Friend the Member for Wallasey, and I hope that she will say whether, before the next Budget, the Treasury will assess the distributional impact on households with different incomes and in different parts of the country of duties imposed on motorists as a result of the need to increase revenue across the board.

Such an assessment would add to the rationality of the debate, but since I have not got 38 or so Back-Bench Labour MPs to sign the amendment it poses no threat to the Government. However, it would help our constituents to understand that the Government are thinking carefully about any future tax increases that they may have to make. It would also help to convince them that taxation on motorists will be underpinned by a distributional analysis to ensure that the poorest motorists are better protected than the richer ones.

I am grateful to have an opportunity to contribute to the debate on an element of the Bill that I readily concede—and as Mr. Gauke noted—is less contentious than it was last year. What made it so contentious last year was the element of retrospection, and I remember an interesting debate about whether all new taxes had a degree of retrospection. However, many hon. Members felt keenly that the proposals on VED last year had a greater degree of retrospection than most tax proposals.

Will the hon. Gentleman give way?

I will in a moment. To some extent, the fact that the higher rates will not be implemented until next year means that the sting has been taken out of the proposal—although perhaps not to the entire satisfaction of the right hon. Gentleman.

I thank the hon. Gentleman for giving way. As the Budget comes after the beginning of the financial year, is not all taxation retrospective?

I do not want to get too far off the beaten track, Mr. Atkinson, but for a person who earns £200,000 a year, the Government's proposal to introduce a 50p rate of tax on incomes over £150,000 a year could be called retrospective, on the basis that that person could not have anticipated the change when he accepted a job offer in the first place. It was argued that the proposals on VED were no more retrospective than the example that I have just given because, if that example was seen as retrospective, whole areas of the Finance Bill would be deemed to be unacceptable.

I was not entirely sympathetic to that argument. I understood it, but I felt that any attempt to effect behavioural change by using VED differentials meant that the tax change also had to impact on people buying cars for the first time. They had to be in a position to make important decisions about such a purchase and so they had to know the VED rates that they would face.

It is important that we examine these matters in detail, but the danger is that we lose sight of the big principle, about which all parties are essentially in accord. We may differ on the degree, but we accept that there must be some differential between the lowest polluting cars and the highest, and that that differential should be graded. My party argued for that differential before the Government introduced it in 2001. We had made the case forcefully for many years before then, and I remember that we were sometimes criticised for doing so. However, the notion of having a differential seems now to have become the accepted wisdom.

Why is a differential deemed to be a good idea? Transport clearly contributes to CO2 emissions and pollution. It is only one contributor among many, but it is significant, so encouraging people to use more fuel-efficient models of car is deemed to be in our collective environmental interest.

It is also worth noting in passing that the principle is being applied more widely. London's congestion charge may be rather inaccurately titled now, but it contains an element of the principle. Interestingly, residents' parking in the Taunton Deane borough council area in my constituency will be free for people whose cars are in the lowest category of emissions, and half price for those whose cars are in the second lowest category. Instead of disincentivising people with high-emitting cars, the scheme incentivises people with very low-emitting cars, and that is a sensible and practical change.

My point may be slightly off the beaten track, but incorporating a component in VED that attempts to affect people's environmental behaviour is widely accepted to have merit. If it is not retrospective, one would hope that the impact would be of even greater benefit to the environment, and that the population at large would deem the tax to be fairer.

In the past, my party has spoken about the impact of VED rises on very rural areas, something that always comes up in these debates. People in such areas need to use cars—

That is the next debate.

The hon. Gentleman says that that is the subject of the next debate, which is about fuel. He is right, and people who have to drive longer distances because they live in remote rural areas are going to use more fuel. However, some people in urban areas may not need to drive at all, whereas people in remote rural areas may have no choice—for example, they may have no other way of getting to work. My party has said that we should at least explore options for giving assistance with VED to people whose principal address is in a very remote rural area.

People who live in remote rural areas often find it essential to have a larger, more fuel-inefficient vehicle, thanks to the nature of the climate, the need to drive on winter roads, and so on. Also, their vehicles often have to have a dual purpose: they have to be family vehicles and they also have to be able to cope with work, be it on farms or in the forestry or tourism industries. People in remote areas do not have the same choices as people in urban areas.

My hon. Friend makes a perfectly valid point. People in extremely remote areas, and not just those who live outside the big cities, have two practical considerations. The first is that their need to drive is much greater, because there is little or no public transport where they live. The second consideration is the one that my hon. Friend described, which is that they may need to drive a vehicle with higher emissions because of off-road requirements and so on. That issue is worth exploring, but the clause does not do so and I shall therefore not dwell on it any further.

The provisions of the clause and those on fuel duties—the subject of our next debate—are precisely the reason why I made the plea to the Government to take a more comprehensive view of the impact of vehicle taxation, both geographically and on various income groups.

The right hon. Gentleman makes an interesting suggestion, but I do not agree with his central premise for two reasons. First, there would be a significant revenue shortfall—I assume that that is why he was not able to get his amendment selected for our consideration. That is a serious point when we have an annual budget deficit of £175 billion. Presumably, the Government's measures are intended simultaneously to effect behavioural change and to raise revenue, which is not impossible. The Government raise revenue and try to effect behavioural change through tobacco duty, for example. There is a trade-off of sorts, but it is possible to pursue both objectives simultaneously.

The hon. Gentleman is of course right to say that it is possible to raise revenue and effect behavioural change at the same time. Although I would not put them in precisely the same category, VED and tobacco duties are examples of that phenomenon. However, I assume he agrees with me that if one is really successful in changing behaviour, the revenue-raising aspect of the tax tends to diminish.

Indeed it does. The Government face the peril of being more successful than they intended to be.

That leads me neatly to my second concern about the proposals made by Mr. Field, which is that the straightforward commercial or financial incentives to pick lower-emission cars would be reduced. My party wants those incentives to be in place.

The right hon. Gentleman makes an interest point about the impact of some behavioural taxes on different social groups. Tobacco taxation, for example, has a disproportionately large impact on people in the lower income deciles, because they have a greater propensity to smoke. That is one of the reasons why, in percentage terms, the total tax burden on people on lower incomes is in many cases greater than the burden on people on higher incomes.

There is a serious social question to be asked about some of the behavioural taxes, but it applies less to VED because many people in the lowest two or three income deciles cannot afford to drive—although I take the point made by my hon. Friend Sir Robert Smith that that is more true in urban areas than in rural areas: some people in rural areas on very low incomes have to drive. However, large numbers of people, particularly in cities, on low incomes do not have cars, and those on relatively low incomes who do have cars tend to pick models with smaller engines, although not exclusively, of course. My point is that the social impact of VED differentials is less pronounced than that of other forms of behavioural taxation.

I do not want us to get muddled up with smoking taxation. I am raising the issue of low-paid workers—people who want to work and who do work—who face the cost of getting to work in their cars. The question they posed, which I put to Treasury Ministers, is whether there might not be fairer ways of raising the necessary revenue—I am not asking for revenue cuts—by shifting from taxation of petrol towards the taxation of vehicles.

Perhaps the Minister will deal with that in her response. I recognise, as I am sure all hon. Members do, that there are practical considerations for people on low incomes who wish to work and for whom motoring represents quite a large proportion of their overall expenditure. That is particularly true in rural areas, where the need to drive and to drive longer distances is greater. However, I do not accept that that alone makes the case against VED differentials. In fact, one could argue that it would be more appropriate to have more pronounced differentials, so that people with low-emission cars are incentivised to an even greater degree compared with people who have high-emission vehicles.

That is why I mentioned in passing—Mr. Atkinson, I hope you agree that, if I touch on it only briefly, it is relevant—why I am keen to see measures introduced that do not have significant revenue-raising implications, such as giving people tax exemption on residents' parking if they have low-emission cars. That positively incentivises environmentally responsible behaviour. Not only can such measures have a positive impact on low-income groups, but they send out a powerful signal about our collective environmental responsibilities.

My party has argued for an initial VED levy to be charged on new cars and graded so that the charge is highest on high-emission cars. We talked about a so-called showroom tax and, in effect, the Government are introducing a variant on that theme by setting a higher initial rate. One can brand measures in different ways, but the objective remains the same, which is to encourage people to think about buying a lower-emission new car by giving them a financial incentive to do so.

I am not sure that the Government's policy is entirely consistent across the piece. The so-called scrappage scheme is to be introduced, which seems to be designed to encourage people to buy new vehicles, whereas some might interpret the VED measures as a fairly strong inducement to stick with their existing vehicles, as doing so means that they will not incur the additional higher VED rate in year one. I am interested to know whether the Minister believes that the measure will stimulate the sales of new cars, as some MPs, especially those representing west midlands constituencies and parts of the country with a motor manufacturing tradition, want. Are the Government trying to stimulate sales through the Department for Business, Enterprise and Regulatory Reform, but trying to restrict them through the Department of Energy and Climate Change and the Treasury? If so, people are being sent conflicting signals.

We are pleased that the measure is not retrospective. It seems to be far less controversial than last year's VED measure, and it sends out a powerful environmental signal. Although we do not accept it in its totality and think it could be modified and improved, the broad principle behind the Government's thinking seems to us to be aimed in the right direction.

For the purpose of this debate, I declare an interest in that I drive a car with CO2 emissions of 119 g/km and my wife drives one with emissions of 108 g/km.

I am delighted that the Government reconsidered the retrospective measures proposed in Budget 2008, following the work done by me—I think that I was the first person to raise the subject in the Chamber—my hon. Friend Mr. Campbell and Justine Greening, who was present for the early part of this debate. It raises a question about the concept of being open to discussion and public debate and the tendency in the UK body politic to decry changes of position by Government or Opposition parties as U-turns, when such changes are often the result of productive discussions, informed by fresh information. That is what my Government did in relation to the VED proposals made last year, which were withdrawn and have been reintroduced, in a very much reworked form, in clause 14. They are now much better.

I did want to say a little about the general structure of VED, because I think it is entirely right that it should be graded according to the CO2 emissions of the vehicle. I know that my right hon. Friend Mr. Field has some reservations about that, particularly because of the impact the duty could have on lower socio-economic groups driving older cars, which tend to be bigger-engined. I would caution that if we moved away from the proposal in clause 14 to grade VED according to emissions to one based on engine size, that could present difficulties for diesel engines, for example. The car I drive has a diesel engine of approximately 1400 cc and it produces a much lower rate of CO2 emissions per kilometre than a 1300 cc model of the same car with a petrol engine, so one has to be a little careful. I know that there are concerns about diesel engines and particulates, but I am told that such concerns are sometimes overstated.

May I say, somewhat parenthetically, that I welcome the slight change to the company car tax regime on CO2 emissions per kilometre, which I believe is a progressive measure, referred to in paragraph A.119 on page 167 of the Red Book? There is also a reference in paragraph A.120 on the same page to the lifting of the £80,000 cap on the list price, which I must confess I did not previously know existed and seems rather bizarre.

Why does clause 14 still provide for the "reduced rate", as it is called? My understanding, as it stated in paragraph 28 of the explanatory notes to the clause, is that the reduced rate

"applies to cars using alternative fuels or featuring a hybrid fuel-electric powertrain. Alternative fuels include Liquefied Petroleum Gas, Compressed Natural Gas and high blend (85 per cent. content) bioethanol."

On grounds of tax simplification and the rate differentials in tables 1 and 2 of clause 14—they are not, in any case, very great—I would urge the Government to reconsider whether the reduced rate should exist at all. That consideration is particularly relevant when some environmental concerns have been raised about whether we should encourage the use of LPG fuel in vehicles.

According to table C6 on page 131 of the Red Book, for 2009-10, VED is projected to raise £5.6 billion. Given the changes that will take place from 2010-11, as set out in tables 1 and 2 of clause 14, I hope that the Minister will be able to tell us this afternoon what the projected VED revenues will be for 2010-11 and even for 2011-12, bearing in mind that VED principally covers light passenger vehicles, but also commercial vehicles, light vans and so forth.

I start from the point—as, I suspect, do most hon. Members apart from the flat earthers on climate change—that it is a good thing to use taxation measures to discourage polluters. Cars that emit higher levels of CO2 per mile driven pollute more and mess up the planet more, so I salute what the Government have done in recent years by introducing the 15 bands of VED in an attempt to change consumer behaviour through a tax mechanism. I similarly salute what the last Conservative Government did, following the efforts of the Campaign for Lead-free Air of which I was a member, to encourage motorists through a tax mechanism to switch from leaded to unleaded petrol. That produced changes very quickly—both in consumer behaviour and the type of vehicles produced by motor manufacturers within the UK, including the west midlands, and abroad.

In recent months, because of the oil price spike last year and what the Conservative party refers to as the age of austerity, I understand that sales of small cars are increasing proportionately to those of large cars. I would categorise a Ford Mondeo estate as a large car in respect of its dimensions and, in many versions, its engine size. I view the change as a step forward, but I stress the word "proportionately", because although small cars may have recorded more sales in recent months, overall sales have fallen markedly. That, of course, adversely affects the motor industry around the country.

Table 1 in clause 14 shows that a new vehicle will be exempt from VED in the first year when it produces fewer than 130 g of CO2 per kilometre driven. That is a good step forward and, in future years, I urge the Government to keep the matter under review with the aim of lowering the exemption threshold from, say, 130 g to 120 g. The European Union has been striving against backward-looking motor manufacturers—those manufacturers are now, sadly, reaping the whirlwind, as are their workers—to get the average for each manufacturer's fleet production down to 130 g. Table 1 currently provides for a first-year exemption only for those vehicles described as below the EU average.

I share the hon. Gentleman's instincts. However, I am always a little cautious about exempting only such small cars because that makes the person in the street think it is just a ruse to provide the appearance of environmentalism, given it is so hard to find models that actually qualify for the exemption. Surely there may be some benefit in exempting some reasonably popular models of cars; they may not be right at the end of the emissions scale, but they are nevertheless near it. That might offer people what they regard as a genuine inducement rather than a bit of political manoeuvring.

I take the hon. Gentleman's point. I am not an expert, but I understand that there are some relatively large cars coming in at an emissions rate of 130 g or below. In order to drive the motor industry by means of a taxation mechanism and to drive consumer behaviour—to use an appropriate verb—we need to keep the grading under review and push it further in the future. It is no coincidence that the European Union manufacturer with the lowest fleet average—from memory, I believe it is about 136 g per kilometre driven for all the new cars sold last year—is the one that is quite likely to take over Chrysler and Opel-Vauxhall: namely, Fiat. Relative to many other motor manufacturers, Fiat is thriving at the moment. Of course, all these things are relative, but I suspect that has happened because Fiat had the foresight to concentrate on smaller and lower-polluting vehicles. The two do not always go together. It is possible to buy some pretty polluting cars that have small external dimensions, just as it is possible to buy some relatively low-polluting cars that have quite large external dimensions.

Turning to table 2, in clause 14, I note an element of retrospection in paragraph (a) relating to higher-polluting cars. For those cars with emissions between, say, 225 g and 250 g, for which the standard rate of vehicle excise duty would be £425 per year, for those registered before 23 March 2006 that rate will be £235. Such cars would now be three years old, but given the number of years for which society has imposed tax penalties for more polluting vehicles, I welcome and am content with that relatively minor level of retrospection. Similarly, for those cars registered before the 23 March 2006 cut-off date that produce more than 255 g in emissions, the standard rate of VED will be £245 per year rather than £435.

Given the hon. Gentleman's undoubted expertise in this area of industry, does he anticipate that motor manufacturers, which, in many cases, are desperate for sales, might absorb the costs of first year VED, and include it in the list price for consumers? If so, will that stimulate demand and weaken the environmental message that the Government seek to send?

As is the hon. Gentlemen's wont, he jumps ahead of me. I was referring to table 2, which relates to vehicles after the first-year loading. I am about to refer to table 1 and vehicles in the first year. I think the small element of retrospection is acceptable. Those vehicles with emissions of 255 g registered after 23 March 2006 will not get the discount from £435 to £245 that those registered before that date will get.

Turning to table 1, to which the hon. Gentleman referred in his speech and intervention, there is a risk in relation to shifting cars in the showroom. As far as I know, almost everyone who buys a new car does so with the vehicle excise duty paid—it is shown on the invoice. Just as we see advertisements for "No VAT", which are not technically accurate as a discount is being given equivalent to the VAT chargeable on a list price, we may see such sales techniques creep into advertisements with regard to VED—for example, "No VED loading on a brand new car."

VED loading simply on a first-year basis is not the way to go. As the hon. Gentleman put it, it would be a variation on a showroom tax. Company cars constitute quite a high proportion of the UK car market. Three years ago, the Liberal Democrats commendably picked up my proposal of about four years ago for swingeing vehicle excise duty on new cars bought after an announced change in the taxation regime had taken effect. That would be not merely a first-year loading. For example, under table 1, a car that emits 255 g or more of CO2 emissions would pay £950 at the standard rate in its first year, dropping to £435. For that kind of vehicle, swingeing vehicle excise duty is needed every year, not only to dissuade people from buying it, but to make them bear in mind the resale of the car. Such swingeing vehicle excise duty, as I proposed one year, although I put the grams per km threshold higher, would affect resale massively, and cause company as well as private buyers to think about whether they would buy such a polluting vehicle. They might be able to afford to run such a car year to year, but they would not be able to afford the hit on the resale price.

Previously, I have had complaints from the public, who misunderstand the proposal. It is not an attack on 4x4 drivers. The last time I looked, nine out of the 10 most polluting cars on sale in the UK were not 4x4s. The one 4x4 in that top 10 was a Land Rover, which is produced in the United Kingdom. The others in the top 10 were sports cars and top-of-the-range cars such as Bentleys, which have huge engines and are huge vehicles. I urge the Government to consider again an ongoing—not retrospective—swingeing rate of vehicle excise duty for the most polluting vehicles. That would discourage people from buying such vehicles, not only because of their running costs but because of the adverse affect on their resale price. I hope the Minister will assure me that the Government will consider that in future years.

I hope that I can deal with some of the points raised by Opposition Members and by my hon. Friends on clause 14. As has been pointed out, the clause makes changes to vehicle excise duty rates for cars and vans, and those changes take effect from 1 April 2010. The clause introduces first year rates of VED for brand-new cars, as was, I think, mentioned by all who spoke. First year rates will be chargeable on the first vehicle licence taken out on a new car from 1 April 2010. They are intended to influence, up front, the purchasing choices of drivers who are buying brand new cars by acting as a strong signal at the point of purchase that people can save money by choosing lower-emission cars.

The introduction of first year rates means that cars emitting up to 130 g of carbon dioxide per kilometre will pay no duty on their first vehicle licence. Cars emitting between 131 and 165 g per kilometre will pay the same amount for their first year rate as they will for all subsequent licences. For cars emitting more than 165 g per kilometre, first year rates will be higher than the standard rates applicable on all subsequent licences. Only those new cars with the very highest emissions will pay the top rate of £950.

My hon. Friend Rob Marris, the hon. Members for Taunton (Mr. Browne) and for South-West Hertfordshire (Mr. Gauke), and to a lesser extent my right hon. Friend Mr. Field—the latter talked about the distributional effect of the measure, and I will deal with that point separately, if he will allow me to—all pointed out that tax measures try to change behaviour, certainly when they are based on trying to incentivise activities that have a smaller carbon footprint. That is a clear way of trying to change behaviour. As my hon. Friend the Member for Wolverhampton, South-West and the hon. Member for Taunton pointed out, the measures are also revenue raisers.

Revenue raising is an important aspect of the part of the Budget documents that we are discussing. The remainder of our debates today are about duties that raise a certain amount of revenue. We must not forget, or lose sight of, the fact that it is perfectly reasonable for Governments to raise revenue with which to finance the things that they do with public money. I often have that discussion with the many people who come to tell me that we should reduce all the taxes that are levied, but who never tell me where we can find the extra revenue that they wish to see spent on whatever is in their interest; in the context of vehicle excise duty, that is often on roads or other infrastructure. I can see the hon. Member for South-West Hertfordshire wriggling in his place; I am happy to let him intervene.

I am far from wriggling. I wish to thank the Minister; she is being very clear, and the Committee appreciates that. The clause is about changes to vehicle excise duty, and that is about raising revenue. Governments have to raise revenue, but does she accept that when the policy—or rather, last year's policy—was announced, it was very much presented as an environmental policy? However, the Government's figures suggest that the environmental impact will be very limited.

I hoped that I was saying that there are some taxes through which one hopes to change behaviour, but which also have a revenue-raising element to them. Vehicle excise duty is one of those. Obviously, we wish to change behaviour, and I will talk about that later. We wish to incentivise people to buy cars with a smaller carbon footprint and lower CO2 emissions than those that were on the road in the past.

That is a clear aim, but another aim is to raise revenue. We can do both. As was said earlier, there can be a balance. If a Government are very successful at changing behaviour, they may have to find other ways to raise revenue, because the more successful they are at changing behaviour by giving signals through taxes, the less their tax take will be. As they need to finance public services and everything that our constituents want the public services to provide, such as health and education, other ways must be found to finance them. That balance exists, and is accepted in all parts of the House.

Tax measures are only one means of changing behaviour. Another is regulation, which applies particularly in this instance, as was pointed out by my hon. Friend the Member for Wolverhampton, South-West, with his knowledge of these matters. He mentioned the European Union regulation governing car emissions. We have successfully negotiated increasingly tight limits on emissions to be set for manufacturers. In answer to his question whether 130 g was the correct point at which to allow an effective exemption from first year rates, our judgment is that it is correct at present, but as we always do after every Budget, we will keep an eye on the development of engine technology. We want the incentive to remain taut. As engines become much more efficient, we will review that rate.

The other main way of driving behavioural change and driving down CO2 emissions is through new technologies. The Government have made some significant announcements about how we wish to support the car industry through its short-term difficulties, and incentivise it to be at the forefront of the dash to innovation in energy efficiency and carbon efficiency in engine design and the design of transport generally. Despite the significant progress that has been made in engine efficiency—new cars are 30 per cent. more efficient than 10-year-old cars because of innovation and change—we must recognise that road transport still accounts for 20 per cent. of all UK emissions.

Given that the House passed the Climate Change Act 2008—this year's Budget contains the first three carbon budgets—we have a legal duty to achieve the huge reduction in carbon emissions that Parliament set us in that legislation. One of the ways in which we must approach that is by dealing with the 20 per cent. of emissions that come from road transport. That means that we must incentivise technological change and innovation, as well as behavioural change.

The changes in the Budget, which my hon. Friend the Member for Wolverhampton, South-West spoke about, form a coherent package to achieve that aim. It includes, as he pointed out, the changes to the tax on company cars, with lower tax for lower-carbon cars, lower rates in capital allowances for the business car regime for lower-carbon cars, and the differential rates of VED that we are discussing. Outwith the Budget process, but of equal importance, there is the £250 million of support to provide incentives for ultra-low-carbon cars, too.

The hon. Member for South-West Hertfordshire talked about scrappage—a term that also passed the lips of the hon. Member for Taunton. The point of the scrappage scheme is not to reap environmental benefits, except in a secondary way, and we have not argued for it as an environmental measure. It is designed to try to put some confidence back into the new car market in a timely and temporary way. That is why it is time-limited—it ends in March next year—and its cost is capped at £300 million. The scheme is explicitly designed to kick-start, from a confidence point of view, the new car market.

The environmental gains, if there are such, will be secondary and consist of the fact that new cars are more energy-efficient than older cars. Therefore, by definition, if an older car is scrapped and replaced with a new, more efficient car, there will be some minor gains. However, I shall not stand at this Dispatch Box and argue that the scrappage scheme is primarily an environmental measure, because it is not designed in that way.

Again, I am grateful to the Exchequer Secretary; she has been very clear with the Committee, which will appreciate the point that she makes. Taking her pointers to the environmental benefit of the scrappage scheme, I should be grateful to know whether there has been any assessment of its environmental downside, in that more cars will be bought. I appreciate that the Government have not presented the measure as principally environmental, but will she examine the environmental minuses as well as the pluses?

We may be able to discuss scrappage in more detail at another stage of the Bill. To answer the hon. Gentleman's question, however, the point of the scrappage scheme is that to qualify, a car must be scrapped, so we are talking about replacing existing cars with newer, more energy-efficient cars. Clearly, on the issue of whole-life costs, there would have to be an assessment of whether we save on the environmental costs of making new cars, and some work is being done in that area. However, I would not want the hon. Gentleman to run away with the idea that the primary aim of the scheme is anything other than to try to give a temporary, and I think much-needed, boost to a great British manufacturing sector that is in great need of support. That is the point of scrappage.

I shall now deal with the points that my right hon. Friend the Member for Birkenhead made. His argument was hung on an amendment that has not been selected, so we shall not talk about that, except to say that it would definitely be retrospective to try to go back to engine size rather than CO2 emissions as a basis for VED. We were the first country to base vehicle excise duties on CO2 emissions, and six more European countries now do so. We have achieved major reductions in emissions from our car fleet as a result—partially, at least—of that change. It sends good signals to consumers, but we need to improve on and even increase those signals if we are to hit our very demanding targets for averting dangerous climate change. Clearly, that is something in which we all have a direct interest.

My right hon. Friend was right, however, to focus on the distributional aspects of progress in new, greener technology, because, as the Committee on Climate Change, which the House tasked with taking a closer look at these matters, said in no uncertain terms in its report to Parliament, there are often distributional effects when we switch to lower-carbon activities. As a country and as a society, we will not be able to persuade our electorate that we need to make progress and avert climate change if we cannot also demonstrate that we have a fairness agenda. In other words, if there is no fairness for those who are poor and least able to buy new, or shift from existing goods to newer, more energy-efficient ones, we will not get public support for the changes that we need.

My right hon. Friend is therefore right to worry about some of those issues. We have some data that hint at connections, but not in the sort of detail that he would like. Some data suggest that low-income households are more likely to own cars with smaller engines. However, the hon. Member for Taunton was right in his analysis that the poorest do not own cars, so the distributional shape of the tax is not the same as that of, for example, tobacco duties.

We also have data to suggest that the majority of the cars that emit the most carbon are owned by higher-income households. Again, the data are not geographically well represented or spread in the way that my right hon. Friend wanted. I am happy to talk to him to ascertain whether we can analyse the distributional impact of the shift from high to low CO2 emitting cars on the engine pool, and particularly on his constituents and many of mine, who are not always known for going to the latest car showroom and getting the latest model.

My right hon. Friend may also like to correspond with the Committee on Climate Change, which is developing some expertise in the matter, to ascertain whether it can study the issue.

I shall take up the Exchequer Secretary's offer and her suggestion about others with whom I might make contact. I think that our poorer constituents accept that the Government need to raise revenue, and that they raise it from drivers in different ways. However, their plea is that we take account of the total impact of all the levies that we impose on drivers when we consider the distributional effect. We hope that we will not have a Government who are not green-minded, as my hon. Friend describes this Government to be.

We try to bear the big picture in mind throughout the budgeting process. We do not consider vehicle excise duties in isolation, but alongside other duties. We then examine their distributional impact, so I hope that we can make my right hon. Friend pleased with our fair approach.

The system of CO2 based vehicle excise duty applies to cars registered from 2001 onwards. Cars registered before then continue to pay the duty according to their engine size because we do not have comprehensive data on their CO2 emissions. Clearly, over time, the number of cars in that pool diminishes. Although engine size can act as a proxy for emissions, my hon. Friend the Member for Wolverhampton, South-West gave a few examples of perverse results. It does not, therefore, provide as accurate a measurement of emissions as that used in CO2 based VED: grams per kilometre.

I hope that hon. Members will join me in supporting the clause.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.