Most OECD member countries treat only 50% of the personal benefit to employees from company cars as taxable.

In situations where employers cover fuel expenses, this favourable tax treatment creates an incentive for employees to use company cars for personal use, and to drive longer distances than they might do otherwise.  

Four main conclusions can be drawn about company car taxation and the environment:

• Current company car tax rules increase distance driven. Favourable tax treatments increase both the number of cars driven as well as the distance driven per car per year.
  
  
• Increased driving resulting from company car tax rules harms the environment, due to its disproportionate impact on total distance driven.
  
  
• Non-taxation of distance driven (as opposed to the capital component) is the most harmful feature of most company car tax systems, both environmentally and socially.

Ending the under-taxation of company cars, particularly that of the "distance" component, would therefore considerably improve environmental outcomes across the OECD.

The paper "Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and Environmental Costs" (OECD, 2014) examines policy in 27 OECD member countries and one partner country. It compares tax settings for company cars and commuting expenses with a stylised “benchmark” tax treatment that estimates the full value of the benefit received by employees with company vehicles. Among other findings, it shows that employees in most countries paid no additional tax for additional distance driven.

Building on this analysis, "Environmental and Related Social Costs of the Tax Treatment of Company Cars and Commuting Expenses" (OECD, 2014), explores the following questions:

• How does the tax treatment of company cars and commuting expenses impact the environment?
• Which particular features of the current tax rules have the largest environmental impact?
• How could tax rules be changed to modify these impacts?