Norway, electric cars and taxes

At the end of June 2021, we have seen another round of exceptional numbers for EV (electric car) adoption in Norway: In the first half of this year, about 57 per cent of all new private cars were full-electric, with another 26 per cent plug-in hybrids, 83 per cent plug-ins in all. June alone showed even higher numbers, 65 percent full electric, while petrol and diesel cars are basically no longer sold, 3.8 and 4.4 per cent of the total respectively (and 7 per cent non-plug in hybrids). 

Sale of "fossil" vs. plug-in cars in Norway

There was however another interesting figure published. If we split personal cars into those bought by individuals and those by companies, the former was 77 per cent full electric, the latter a “mere” 37 per cent. The reason for this difference? Taxation policies. And now it gets interesting, because Norway is heading for parliamentary elections this September, and the various parties have all suggested changes in the taxation that has so favoured EV adoption.

It is often said that the cause of Norway’s exceptionally high EV adoption is that we are filthy rich from selling dirty oil, and can salvage our conscience by heavy subsidizing of EVs. That is partly true - the double standards thing is true - but we aren’t directly subsidizing purchases, as some countries do, we are doing it indirectly by waiving taxation on EV purchases. For historical reasons (see earlier blogs), Norway has had extremely heavy import duties as well as full 25 per cent VAT on cars. Thus, a petrol car that might cost €15,000 in another European country could easily cost €25,000 here. We moaned, but have come to accept this as an inescapable fact, as taxes tend to be. Now, when an electric version of that car came along, it might cost €25,000 off the factory line. So, the government dispensed it from all import duties and VAT, and voilà: it had the same sales price as the petrol version. And, as EVs do not need petrol (currently some €1.60 per litre - even though we pump it up ourselves) and electricity could be down to €0.10 or less per kwh, the math is simple to make.

That is the method, and that is why companies don’t see the same advantage as others, because they do not pay VAT on any car. Or to be precise, they pay it, then deduct it, and pass the cost on to the customer. But in any case, an EV is taxwise for them much closer to a petrol car (they still avoid the import duties, though). Still, EVs do make more sense for 37 per cent of the corporate buyers, which we can then assume would be the case generally if the VAT was imposed for all EVs. Still rather more than in Europe (8 per cent full electric now, but rising rapidly), but far from the “Norwegian utopia”.

EVs and party politics

Sooner or later this will happen, there is no rationale for any permanent exemption from VAT for this product, electric cars, it was always meant to be temporary but has been extended period by period. At this juncture, however, most political parties have stated that it is time to readjust this policy. National elections will be held in September, and while the election campaign is just heating up, opinion polls have shown consistently for more than a year that the current centre-right government will be replaced by some form of centre-left government, probably some form of coalition between two or three parties. All of the relevant parties have declared an opposition to maintaining a tax exemption for the most expensive, luxury cars: taxpayers cannot go on subsidizing the millionaires who pay $150,000 for a Porsche lighting up his cigar with a $100 bill he has screwed out of the common man. The conservatives basically agree, although their argument is the one billion € (give or take) a year that the exemptions cost the state in non-collected revenue. Granted, we do have the oil to fill the gap, but economists warn against this kind of reliance on oil revenue. 

Car of the filthy rich

So, the policy the parties of the prospective future government have agreed on, is to impose full VAT on the part of the sales price that is above €60,000. That is, a car costing €80,000 before tax will pay VAT on the last €20,000, or a price hike of €5,000. Those sound like ridiculous high sums for a European and certainly a US consumer, but it must be remembered, as we said above, that EVs are not cheaper in Norway, they actually cost more than in other countries - it is just that petrol cars alway cost as much or more. And maybe we are filthy rich. If we look at purchase figures for western Europe, we find that, Tesla exempted, European EV buyers tend to go for small fairly reasonably priced cars: Renault Zoe, Peugeot 208/Opel Corsa, Smart, Fiat 500 and the Mini. In Norway, these are pushed down a table by Audi, Mercedes, Volvo, BMW, with only the medium-priced Koreans breaking into the more expensive models (the new VWs, also to be considered medium-priced, I guess, are also beginning to take up room). Many of these, if you add various options and stuff, will break the €60,000 barrier; a typical E-tron is probably most often sold at around €80,000. 

How much will this affect sales? Of course, in popular parlance this new tax is nicknamed “the Tesla tax”, but in fact most Teslas fall below the limit and will not be affected: the lowest priced Tesla Model 3 starts at €35,000 now, most are probably sold specced at somewhere around €45-55,000, well below the limit. Most Audis, BMWs and Jaguars will be hit, but - as indicated - only by a few thousand euros, which, it is argued, people in that price range will not even notice. 

Luxury cars and practical cars

Audi e-tron

Not all agree, the Green party evidently mans the barricades, but many also argue that the reason so many Norwegians buy E-trons and similar, is not (just) because of the brand name and luxury. Traditionally, it is only these cars with a higher price that offer four-wheel drive, which is very popular in snow-rich Norway; 50 per cent of all cars sold in Norway are 4WD. Also, particularly in the countryside (where EV adoption is seriously lacking) a tow hitch is often considered essential, and while even the smallest diesel or petrol car will have this option, no EVs below €40 to 50,000 did. You had to go to the Audi, Tesla or Volvo level for that. Now, some of the VW ID / Skoda group do have both or either of these requirements for less than €60,000 (they stop at around €55,000 for the highest specs), so that may influence this argument, but still, many fear that customers who are thinking in such practical, not luxury terms, will make their calculations and then go for the diesel alternative instead - or, rather perhaps, not move from diesel, as they might otherwise have considered. 

So, it is a bit of a gamble. Some studies suggest that a VAT re-imposition on the most expensive cars like the one suggested will lower EV adoption by some 3-4 per cent a year. Others think it is a political price to pay in order to preserve most of the VAT exemption, as the “we will not pay our hard-earned tax money on those good-for-nothing latte-drinking posh Tesla kids” is definitely a sentiment that is voiced openly both on the left and right of the political spectrum. Putting a limit, so that only “normally-priced” cars get the exemption staves off that criticism. 

Also, nobody has said when the change would be made. It could be as early as next year, or it could be postponed even until the symbolic year 2025 - when all parties except the far right agree that all new cars should, voluntarily and without any ban - be zero-emission only. 2025 is within the coming parliamentary period, so the parties may want to hold off and see how close we get to reaching that goal (which is of course statistically unattainable without a ban; politically if we get towards 85 per cent full electric / 95 per cent plug-in, the government can claim victory, and on current development, that is attainable, but far from assured). 

However, more agressive voices want a reduction now, and a full re-imposition of VAT from 2025. That would, the study suggests, cut EV sales in half, and increase CO2 emissions noticeably. Such a change is thus unlikely without a comparative increase in taxation of petrol/diesel cars, which is politically virtually impossible. Pro-EV bodies agree that the VAT exemption must come to an end at some time, but argue it should keep time with the reduced factory price of EVs, so that the basic principle of petrol/EV sticker price equality, which we have now, will be maintained until that parity is achieved out of the factory (probably in the latter half of this decade). 

Perhaps it is a question of symbolism. Economically, the new taxation is probably not going to make that much difference. But if the impression is made that the EV benefits are going away, that may slow the buyer’s inclination to go for the EV as the default choice, which is pretty much the case now in the cities. This view of the EV as "the normal car" could be broken off and combustion engines again become envisageable alternatives. On the other hand, the “secondary” benefits, like reduced or no toll on toll roads, free parking, and access to bus lanes, have been progressively reduced or removed, without any apparent slowing down of EV adoption in the cities, rather the contrary, so it is possible that each buyer still will make his own calculation of cost and benefits, and make his choice from that. If so, it may be as important to remove the other hindrances to EV adoption, such as expanding charging options, including curbside overnight charging, hotel destination charging and expanding fast charging into the countryside, all important elements to make electric the natural choice for those who buy and drive cars.