An £800 tax would fund old diesel scrappage, encourage move to low-emission vehicles and reduce air pollution, according to Policy Exchange thinktank

An £800 pollution tax should be put on sales of new diesel cars, with the proceeds used for a scrappage scheme for older diesels, according to the thinktank Policy Exchange.

The move, proposed ahead of George Osborne’s budget on 16 March, would encourage motorists to move towards lower emission vehicles and significantly reduce air pollution, according to the thinktank, which is close to Osborne. The idea is also backed by the mayor of London, Boris Johnson, and an influential committee of MPs.

Air pollution is illegally high in many UK cities and causes tens of thousands of premature deaths a year. Regulations have failed to control nitrogen dioxide levels, which mostly comes from diesel vehicles and was highlighted by the VW emissions cheating scandal.

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“London and many of the UK’s other major cities are facing an air pollution crisis, with residents exposed to illegal and unhealthy levels of NO2 pollution,” said Richard Howard, head of environment and energy at Policy Exchange. “If we are to clean up air pollution, then government needs to recognise that diesel is the primary cause of the problem, and to promote a shift to alternatives.”

Howard said: “I know the government is thinking hard about this.” He said increased vehicle excise duty [VED, or ‘road tax’] on new cars was preferable to increasing the tax on diesel fuel or banning diesels from city centres: “It needs to be done in a way which does not unduly penalise existing diesel drivers, who bought their vehicle in good faith, and gives motorists sufficient time to respond.”

In 2015, Osborne announced changes to VED which removed exemptions for low-emission cars. From 2017, all cars except electric vehicles will pay £140 a year. But new cars will be charged a one-off tax in their first year. Those producing the most carbon dioxide, which drives climate change, will be charged £2,000 while average emitters will pay £160.

Policy Exchange argues that an additional £800 should be charged for diesel cars. “The current plans for 2017 fails to reflect that diesel is more polluting in other ways [than CO2],” said Howard. The £800 is the estimated cost of the damage caused by the extra pollution, calculated using government valuation methods.

Howard estimates the extra tax would raise £500m a year. He said this should be used to fund a diesel scrappage scheme. This would give a £2,000 grant to drivers taking an older diesel vehicle off the road and buying a lower emission vehicle.

The government would pay £1,000, with the manufacturer matching this by reducing the list price by £1,000. The government ran a £300m car scrappage scheme in 2009 in this way, in order to boost the recession-hit motor industry. Johnson is among MPs and others who have called for a diesel scrappage scheme.

Simon Birkett, director of the Clean Air in London campaign, backed the Policy Exchange ideas but said a city-centre ban on diesels was also needed. “We must ban diesel vehicles from the most-polluted places by 2020. There is no alternative if we’re to protect a generation of schoolkids. Diesel drivers must press those responsible for compensation. You wouldn’t let someone keep poisoning the water would you?”

Policy Exchange noted that tax incentives increased diesel cars from 14% of Britain’s car fleet in 2001 to 36% now, but that diesel cars no longer produce significantly less CO2 than petrol cars. The thinktank said diesel cars and vans cause 70% of NOx emissions in London, with vehicles producing four times more than the official limits on average.