Japan has decided to abolish an environmental tax imposed on car purchases as part of a broader overhaul of auto-related taxation, a move welcomed by the automotive industry, but environmental groups warn it would weaken incentives for cleaner vehicles.
The environmental performance levy, introduced in 2019 after a previous automobile acquisition tax was scrapped, imposes up to 3 per cent of the car’s acquisition price depending on its fuel efficiency. It has long been criticised by industry groups as amounting to double taxation. Automakers have argued that the charge weighed on domestic demand and distorted the tax system.
The Liberal Democratic Party-led tax panel approved the outline of tax reforms for fiscal 2026, which included the decision to scrap the levy, after earlier discussions within the ruling camp had focused on a temporary suspension rather than outright abolition.
Abolishing the levy will cut local tax revenue by about ¥200 billion (US$1.4 billion) a year, according to government estimates. The tax outline said the central government would “take responsibility” for covering the shortfall until stable funding sources are secured, without providing further detail.
Changes to ownership-stage taxes, including the automobile tax, light vehicle tax and automobile weight tax, were deferred. The government said it would aim to reach a conclusion in fiscal 2027 on a simpler and more neutral system based on vehicle weight and environmental performance.
Electric vehicles (EV) and plug-in hybrid cars are a particular focus. Passenger EVs newly registered from fiscal 2028 would be subject to a weight-based tax, reflecting their impact on road infrastructure and their limited use of liquid fuels, the outline said.
The manufacturers’ association cautioned that any new framework should not hinder the adoption of electrified vehicles, and reiterated its call for the abolition of provisional surcharge rates that still apply to the automobile weight tax.
Existing incentives that reduce annual vehicle taxes for cars with superior emissions and fuel efficiency will be extended for two years. The government will also review eco-car tax breaks and consider tightening efficiency standards for EVs and plug-in hybrids in line with fuel economy targets for fiscal 2030.
Japan’s vehicle tax framework includes several incentives designed to encourage buyers to choose cleaner, more efficient cars. Under the long-running “eco car” tax reduction scheme, EV, plug-in hybrids, fuel-cell cars and other low-emission models receive substantial reductions or waivers on the automobile weight tax when they are newly registered.
The government also operates the “Greenification Special Provision”, which cuts annual automobile tax rates – in some cases by as much as 75 per cent in the first year – for vehicles that meet strict emissions and fuel-efficiency criteria.
The environmental performance levy was another part of this system.
Opponents argue that easing or scrapping purchase-stage taxes would shrink the price gap between low-emission vehicles and conventional petrol cars, diluting a key fiscal incentive used to encourage cleaner choices. Environmental groups, including Kiko Network, have previously cautioned that reducing this differential would weaken one of the limited policy tools available to influence consumer behaviour in support of Japan’s 2050 net zero goal.
The government has pledged to reach net zero emissions by 2050 and accelerate decarbonisation through the mid-2030s, and international assessments have repeatedly urged Japan to strengthen, not dilute, policy signals in the transport sector.
Masanori Katayama, chairman of Japan Automobile Manufacturers Association, called the permanent abolition of the levy a “bold decision,” saying it addressed long-standing concerns over double taxation and eased the burden on car users.
“The move would help revitalise the domestic auto market and strengthen Japan’s production base at a time when the sector is under pressure from US tariffs,” he said in a statement released on 19 December.
“The association would continue to engage with policymakers to ensure future reforms strike a balance acceptable to consumers while supporting carbon-neutral goals and industrial competitiveness.”
