Oil at $140 a barrel and diesel at £6 a gallon have rewritten the green fleet question. It is no longer ‘what will it cost us to run an environmentally-friendly fleet’ but ‘what will it cost us if we don’t’?

Oil and CO2 are two sides of the same coin. At today’s fuel prices, converting the former into the latter costs business fleets around £500 per tonne of carbon emitted.

That cost is rising steadily and will continue to do so as global oil production falters and the UK’s fossil energy deficit widens over the next five years.

The 47% rise in pump prices since January 2007 has increased the cost of driving 12,000 business miles by £500.

Moreover, burgeoning environmental taxes on business vehicles now considerably magnify the impact of expensive fuel over the full lifetime of each vehicle on the fleet.

For example, let’s say that Business A decides that its employees should drive cars that emit no more than 120g/km of CO2, while its rival, Business B, sticks to typical cars emitting around 165g/km. Is Business A merely being environmentally friendly or does its choice of fleet policy give it a clear financial advantage?

Business A’s decision certainly cuts down on CO2 emissions, but more importantly from a business perspective, it also halves the company’s bill for employer’s NI on company car benefit tax and slashes fuel use by around 35%. Moreover, from next year, when writing down allowances will be linked to CO2, Business A will also enjoy a marked cashflow advantage over its rival, because its cars qualify for more advantageous treatment.

The example1 below shows the whole life cost for two cars with identical lease rentals, one very ‘green’, the other with average CO2 emissions. The green car costs nearly £2,900 less to run over three years/60,000 miles.

No fancy financial footwork is needed to achieve the saving. The difference is almost entirely due to environmental factors: fuel costs and carbon taxes.

As fuel prices climb towards £1.50 per litre and beyond, companies that select vehicles according to list prices or lease rentals run increasing fiscal risks compared with those that rely on sound environmental and financial criteria in the form of CO2-driven whole life costs.

Greenness and cost effectiveness go hand in hand all the way up the fleet ladder: it’s not just a question of forcing drivers to accept smaller or less attractive cars.

A business might, for example, offer its drivers a premium-badged 2-litre upper medium diesel saloon with CO2 emissions of 123g/km, whose projected three-year whole life cost is nearly £4,000 lower than a volume-badged petrol saloon emitting 210g/km, even though the latter’s on-the-road price is around £5,000 cheaper and it also costs less to lease.

Your business needs to connect the cost imperatives with the green agenda to find the right answers.

Calculating whole life cost

Whole life cost calculations ensure (unlike using list price or lease rentals) that fleet policies accurately reflect the full impact of each vehicle on both the bottom line and the environment.

What’s in the calculation:

Vehicle list price (or P11D price): determines the Class 1A national insurance paid on company car benefit.

Actual purchase price: Used to calculate actual cost per mile; allows for discounts.

Capital allowances: Will be CO2-based from 2009.

Leasing disallowance: Currently the expensive car leasing disallowance. Also CO2-based (affecting cars over 160g/km) from April 2009.

VAT: Recovery is usually restricted on contract hire. The general VAT recovery position of the organisation is relevant.

Corporation tax: The company’s position is important in determining WLC.

Depreciation: Essential. Affected by initial discount and other factors.

CO2 emissions: Determines level of car and fuel BIK (and therefore employer’s NI), vehicle excise duty, capital allowance and leasing disallowance treatment.

Fuel consumption: The largest ownership cost after depreciation.

Employer’s NI: Equivalent to 12.8% of the driver’s BIK if the vehicle is a company car.

Insurance: Altogether, insurance, fuel and NI can account for as much as 40% of running costs over three years.

Service, maintenance and repair: SMR costs vary dramatically and often rise at higher mileages or contract length.

Specification: Many optional extras do not recoup cost at resale. Some choices add significantly to the cost of parts.

Mark Sinclair is a director at Alphabet

1 For the assumptions used in the calculation, please see Alphabet’s Whole Life Cost Guide, available to order free of charge by calling
0870 50 50 100