Norway is not a member of the European Union, but it is one of the founding nations of the European Free Trade Association (EFTA) and is part of the European Economic Area (EEA). That makes it a kissing cousin to the EU and subject to many of its economic policies. Over the past decade, Norway has surged ahead of other countries when it comes to electric car adoption largely because those vehicles are exempt from paying the value added tax that applies to conventional vehicles.
The VAT can add thousands if not tens of thousands of dollars to the price of a new car in Norway. The exemption means electric and plug-in hybrid cars cost the same or sometimes less to purchase than a traditional diesel or gasoline powered car. But it is set to expire at the end of this year and Norway needs permission from ESA for it to continue, going forward.
For its part, the EEA is signaling that the need for VAT relief may be coming to an end. “We do not believe that electric cars need to be more expensive than conventional cars, but we see that there are several things that are about to happen, which reduces the need for tax relief,” Gjermund Mathisen, director of competition and state aid at ESA tells Norwegian news source Aftenposten.
Mathisen points out that electric car prices are falling, the charging infrastructure for electric cars has increased dramatically in recent years, electric cars now have far greater range than they did a few years ago, making them suitable for the needs of more drivers, and public attitudes toward electric cars are becoming more positive.
“This has happened while the support level, exemption from VAT, is the same,” Mathisen notes. “Then the question is whether we are not soon at the point where the state is spending more money than necessary to subsidize electric cars. The authorities can achieve the same with less support,” he says.
Mathisen agrees that a country may use tax policies to promote environmental objectives but such assistance must not be more extensive than necessary. It is the job of ESA to determine when enough is enough. And when will the ESA pull the plug, so to speak, on Norway’s VAT exemption for electric cars? “It depends on the development, but we are talking about maybe one to five years,” he says.
The Norwegian government has officially requested an extension of the zero VAT provision until 2020. Now it is a matter of negotiation between the government and the ESA as to when the exemption will end. According to Magnus Blaker, auto industry analyst for Norways’s Side3 News, “Norway must have EU/ESA approval for today’s differential treatment of electric cars, and the EU has signaled that they believe the current system is approaching [the end of its useful life]. If the ESA puts its foot down, you will at the very least have to introduce value added tax on electric cars. That will will send shock waves into the electric car market — for both new and used cars.”
Ending the VAT exemption will have a massive impact on the price of electric cars sold in Norway. It could add $20,000 to a Tesla Model S 75D or $36,000 to that of a Tesla Model X P100D. Norway is one of Tesla’s best overseas markets, thanks in large part to the fact that the VAT exemption makes its cars less expensive to buy than equivalent models from Mercedes, BWM, and Audi. The price of a Nissan LEAF would jump by $8,500 and a Volkswagen e-Golf by $9,500.
The effect of Norway’s policies can be measured by looking at electric car sales in neighboring Sweden, Denmark, and Finland which have far less aggressive incentives or none at all. Last month, EVs accounted for 5% of new car sales in Sweden. In Denmark, which recently eliminated its EV incentives and lowered taxes on conventional cars, sales are measured in dozens and hundreds not thousands. The situation is pretty much the same in Finland. In Norway, electric cars accounted for 43% of all new car sales last month and that number is expected to exceed 50% in the months ahead, assuming the ESA doesn’t slam the door closed on the VAT exemption.
The debate about how much government should do to promote new technology is going on in China, the US, and many other nations. Taxpayers never want to see their hard earned dollars go into someone else’s pocket and who can blame them? Clearly, EV incentives cannot go on forever. Nevertheless, the tipping point where electric cars become more affordable than conventional cars is on the horizon but it isn’t here quite yet.
Hat tip to Leif Hansen, our correspondent at the Scandinavian desk.