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IMF working paper calls tax-free EVs costly way to net zero

17 June 2021 Cristina Brooks

Electrification of passenger cars as a pathway to reducing household emissions is not as cost-effective or as fast as it should be because buyers keep their old cars even after they buy an electric vehicle (EV), warned a working paper published by the International Monetary Fund (IMF).

The working paper, commissioned by the IMF and published on 8 June, estimates the cost-effectiveness of using sales tax-exempt EV purchases to cut household emissions.

The paper draws insight from EV policy in Norway to inform other countries' creation of climate strategies, especially as EVs feature strongly in the national recovery plans created by countries in the wake of the COVID-19 pandemic, the authors said.

For example, the EC's plan for the EU's Recovery and Resilience Facility, a €672 finance package intended to facilitate a green recovery, supports installation of 1 million electric car charging points by 2025 and 500 hydrogen refueling stations, according to IHS Markit analysts.

Norway has a very high share of EVs in its car fleet, owing to tax incentives and other policies that cut 40% from the pre-tax price. In 2020, 54.3% of new cars sold in the country were pure electric cars, according to the national government.

Norway's EV sales now make up more than 10% of Europe's, where 4% of cars sold are pure electric, according to Norway's Road Traffic Information Council.

Norway also has one of the highest levels of public charging stations per capita. In 2016, the government published a target to sell only zero-emissions vehicles (ZEV) by 2025 alongside plans to pass a ban on sales of fossil fuel-powered cars.

The household-level emissions savings of one EV in Norway amount to around half the level of emissions from passenger cars of the average car-owning household (2.3 mt CO2 annually), the paper revealed.

But the paper argues that, even with the current and future high market share of EVs in Norway, it would be "several decades" before the vehicle fleet would be fully electrified at current rates.

The authors assume the emissions savings from the purchase of one EV are 17.55 mt CO2, implying a cost from the VAT exemption for EVs of around $710/mt CO2. The $710 figure overshot a simulated benchmark for marginal abatement costs that was capped at $420/mt CO2. What is more, Norway's Ministry of Finance estimated the cost of all tax benefits, including the VAT exemption, to be around $1,400/mt CO2 saved.

Another negative finding was that in households that own EVs and at least one internal combustion engine (ICEV) car, EVs are used 18% less than the median ICE vehicle. Only about a third of EV-owning households own EVs exclusively.

"This suggests that the degree of substitution between EVs and ICEVs could be an important factor for the environmental impact of EVs," said the paper's authors.

The paper showed that the emissions savings from purchasing EVs are larger in households that only own EVs, and when these fully rather than partially replace conventional cars. Also, emissions savings are largest if EVs fully replace the most-polluting ICEVs, which is not always the situation, according to the report.

The working paper suggested scrapping households' ICEVs to create greater emissions savings, rather than allowing those cars to be sold domestically or abroad.

In the paper, the authors also looked at the way household income affected emissions savings, noting they consider Norway to be among the most socially equal countries.

Emissions reductions from EVs across all households were similar, but richer households bought them more often. The median income of households owning electric cars was NOK 900,000 ($105,000).

Norway's sales tax exemption for EVs favors wealthier households in part because those households are more likely to buy a car or multiple cars. This inequality might be corrected with tax rebates for low-income households and higher taxes on the use of conventional cars, the paper's authors suggest.

Climate and Sustainability News has been renamed Net-Zero Business Daily™ in order to better reflect our focus on the business and financial impacts of the global transition to a lower-carbon and, eventually, net-zero carbon global economy. Each day, IHS Markit will bring you accurate and detailed information on recent developments, as well as far-sighted analysis on the challenges that lie ahead.

Posted 17 June 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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