## 1. Econometric Results ## Source details **Canonical URL:** [1. Econometric Results](https://www.imf.org/-/media/files/publications/cr/2021/english/1norea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1norea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1norea2021002.pdf.json) --- ### A. Introduction - Norway: around half of cars sold annually are EVs, supported by generous tax and other incentives. - EVs are exempt from VAT and from one-off motor vehicle registration taxes that have a green component; combined incentives can amount to more than 40 percent of the pre-tax price depending on assumptions. - Other advantages for EV owners include lower annual vehicle license fees, reductions of certain tolls and parking fees, and access to special road lanes. - Norway targets 100 percent EVs for all new vehicle sales by 2025. - Objective: analyze environmental effectiveness of tax incentives for EV purchase, estimate emission reductions from EVs and implied costs of tax incentives per tCO2 saved, and explore ways to enhance environmental benefits. ### B. Stylized Facts — Ownership, Sales, Income Distribution, and Tax Incentives - EV market share and sales - The share of EVs in total sales of new cars reached around 50 percent. - EV ownership as a stock of total cars was around 9 percent as of 2019. - At current trends, full electrification of Norway’s car fleet would take several decades; the share of EVs in new car registrations and in total cars now exceeds 50 and 10 percent, respectively. - Household distribution of EV ownership and income - Of households that owned EVs in 2018: 37 percent owned only EVs, 46 percent owned EV(s) plus one or more conventional cars, and 17 percent had other combinations. - Median income of households owning at least one EV was above 900,000 NOK, around 50 percent higher than that of households owning only conventional cars, and about twice the median household income in Norway over the 2010–18 period (413,000 NOK). - In 2019, the average price of EVs was around 525,000 NOK and of internal combustion engine vehicles (ICEVs) around 485,000 NOK. - Tax incentives and fiscal magnitude - EVs are exempt from VAT (conventional cars taxed at the standard rate of 25 percent). - Implicit total cost of the VAT exemptions in 2019 (number of new EVs × average price of new EVs × 25 percent) totaled 0.26 percent of mainland GDP. - For a hypothetical conventional car with median weight and emissions and priced at the average price of EVs, the VAT exemption and the saved one-off registration taxes combined amount to almost 42 percent of the pre-tax price of the averaged priced EV and a combined 0.43 percent of mainland GDP. (One-off registration taxes ignored in most of the paper.) - Motor vehicles tax revenue declined from around 1.9 to 0.9 percent of mainland GDP between 2010 and 2020, while VAT revenue increased slightly. - Distributional incidence of VAT exemption - The top 20 percent of households by income secured almost 30 percent of the implicit cost of the VAT exemptions for EVs—almost three times as much as the poorest quintile—indicating a regressive distribution of the VAT exemption benefits. ### C. CO2 Emissions Context - Passenger cars account for 10 percent of Norway’s total domestic CO2 emissions and around 15 percent of total emissions excluding emissions from oil and gas extraction. - Since 2010, passenger car emissions fell by more than 10 percent. - Emissions concentration - Combined passenger car CO2 emissions of households in the highest income quintile are more than seven times higher than those of households in the lowest income decile. - 5 percent of passenger cars account for 15 percent of all emissions from passenger cars. - Trade-off: high-income households are the largest emitters (so the largest emission reductions from EV purchases accrue to them), while VAT exemption benefits are concentrated in higher income groups—creating a climate-equity tension. ### D. Econometric Estimation — Specification and Key Results - Estimation approach - Dependent variable: total household CO2 emissions from passenger cars (kgCO2) — product of annual mileage and CO2 emissions per km, summed over all cars owned by the household. - Key regressor: number of EVs owned by the household. - Controls: socio-demographic variables including household income and net wealth; household fixed effects and municipality-year fixed effects. - Sample: all households owning EVs, ICEVs, or non-plug-in hybrid vehicles; plug-in hybrids and some other car types omitted. - Main regression results (Table 1, 9,358,297 observations, R-squared 0.65, municipality-year FE YES, household FE YES) - Specification 1: coefficient on no_ev = -1,171.96*** (standard error 3.78) — purchasing an additional EV lowers household-level emissions by 1.17 tCO2 annually. - Specification 2 (heterogeneity by EV count): ev_1st_hh = -1,187.88*** (4.03); ev_2nd_hh = -1,082.85*** (15.41); ev_3rd_more_hh = -287.63*** (88.16). Effect decreases with additional EVs after the first. - Specification 3 (pre/post 2016): pre2016#no_ev = -996.74*** (6.29); post2015#no_ev = -1,209.00*** (3.89) — larger emission savings in recent years. - Specification 4 (ownership type): only_ev#no_ev = -2,176.03*** (5.17); icev&ev#no_ev = -630.94*** (4.33) — emission savings much larger for households that own only EVs. - Additional socio-demographic coefficients: - head_age = -15.82*** (0.22) - head_female = -84.00*** (2.38) - no_adult = 535.78*** (2.01) - no_child = 122.50*** (1.65) - netinc = 0.01* (0.00) - netwealth ≈ -0.09 (not statistically significant) - Interpretation: one additional EV reduces annual household passenger car emissions by about 1.17 tCO2, roughly half the average emissions from passenger cars of the average car-owning household (2.3 tCO2 annually). ### E. Cost Effectiveness and Aggregate Emission Savings - Back-of-the-envelope calculation inputs and assumptions - Regression-based annual emission savings per additional EV = 1.17 tCO2 (i.e., 1.17 e t CO2 per year). - Assumed EV lifetime = 15 years. - Average price of newly purchased EVs in 2019 by households ≈ NOK 525,000. - Implicit cost of the VAT exemption per EV ≈ NOK 131,000 or USD 12,500. - One-off registration taxes excluded from the cost-effectiveness calculation. - Lifetime emission savings per EV - 15 × 1.17 e t CO2 = 17.55 e t CO2. - Implied cost per tCO2 saved (VAT exemption only) - Cost per tCO2 ≈ USD 710. - Norway’s Ministry of Finance estimated implicit cost of all tax benefits for purchase and operation of EVs (including VAT exemption) at around USD 1,400 per tCO2 saved in the 2021 budget—broadly consistent with the analysis. - Comparison to literature - The estimated cost per tCO2 of EV purchase incentives is in the upper range of abatement cost estimates in the literature and much larger than costs associated with alternatives such as a cash-for-clunker program, changes in land use, or increases in energy efficiency. ### Emission effectiveness of Norway’s EV tax subsidies - Emission savings can double for households that buy one additional EV and that do not own conventional cars (in line with specification 4, Table 1). - Emission savings can more than triple if households buy a new EV and replace a car whose annual emissions are in the top quintile of all conventional cars (Camara et al. (2021)). - The emission savings of individual EVs could grow in the future if maximum range increases so that they are used more. ### Aggregate emissions impact - Multiplying the emission savings per EV from regressions with the number of EVs owned by households in 2018 yields total annual carbon emission savings. - When 10 percent of all household-owned cars are EVs (slightly more than the actual share in 2019) versus a scenario with no EVs, the difference in aggregate emissions amounts to only 8 percent — i.e., without EVs, aggregate emissions would exceed current passenger car emissions by 8 percent. - Aggregate emission savings would be larger if dirty conventional cars are replaced; however, aggregate savings only obtain if replaced conventional cars are scrapped and not used elsewhere. ### Caveats and limitations of the back-of-the-envelope calculations - Estimates do not account for: - Lower EV production costs from economies of scale, learning by doing, and overcoming adverse network externalities. - Positive spillovers such as a demonstration effect prompting other countries to imitate Norway’s tax incentives. - Estimates ignore general equilibrium effects which could increase costs if replaced conventional vehicles are not scrapped but sold for use elsewhere. - Whether replaced conventional cars are sold or scrapped depends on policies. ### Fiscal costs and cost-effectiveness - The foregone revenue from the VAT exemptions and potential foregone one-off registration taxes are each at less than 0.25 percent of GDP. - The implied fiscal costs of the VAT exemptions per ton of CO2 emission cuts are in the range of USD 710 in 2019. - The annual mileage of EVs is shown to be lower than that of conventional cars, even after controlling for confounding factors. - A majority of EV-owning households also own conventional cars, reflecting that EVs are used in addition to conventional cars. ### Policy implications and recommendations - Norway demonstrates that bold policy action can dramatically speed up EV adoption at limited fiscal costs in terms of GDP. - If the share of EVs in the sale of new cars increases, the aggregate cost of the VAT exemptions would also grow (eventually roughly doubling under current policies, when all new vehicle purchases are EVs) in the absence of policy reform. - Authorities could consider recalibrating tax incentives for new EV purchases in a revenue neutral way to magnify environmental benefits and complement Norway’s target that all new cars are electric by 2025. - Recalibration measures could include: - Targeted subsidies to scrap dirty cars when replaced by EVs to ensure replaced conventional cars are scrapped. - Tax or regulatory measures to encourage replacement of the least fuel efficient and most polluting existing cars. - Revenue neutrality achieved by increasing the tax burden on high-end EVs (e.g., capping the amount of the VAT exemption and/or levying annual road tax on some of the most luxurious EVs). - Further research based on the data used in this paper could determine the exact parameters of such recalibration. *Source: 1norea2021002 (IMF PDF chapter excerpt).* ### 1. Econometric Results _________________________________________________________________________ 9 ### 1. Econometric Results ### A. Introduction - Norway has a much higher share of battery powered electric vehicles (EVs) than other countries, with around half of cars sold annually being EVs, supported by generous tax and other incentives. - EVs are exempt from VAT and from one-off motor vehicle registration taxes that have a green component; combined incentives can amount to more than 40 percent of the pre-tax price depending on assumptions. - Other advantages for EV owners include lower annual vehicle license fees, reductions of certain tolls and parking fees, and access to special road lanes. - Norway targets 100 percent EVs for all new vehicle sales by 2025. - Objective: analyze environmental effectiveness of tax incentives for EV purchase, estimate emission reductions from EVs and implied costs of tax incentives per tCO2 saved, and explore ways to enhance environmental benefits. ### B. Stylized Facts — Ownership, Sales, Income Distribution, and Tax Incentives - EV market share and sales - The share of EVs in total sales of new cars reached around 50 percent. - EV ownership as a stock of total cars was around 9 percent as of 2019. - At current trends, full electrification of Norway’s car fleet would take several decades; the share of EVs in new car registrations and in total cars now exceeds 50 and 10 percent, respectively (latest data note). - Household distribution of EV ownership and income - Of households that owned EVs in 2018: 37 percent owned only EVs, 46 percent owned EV(s) plus one or more conventional cars, and 17 percent had other combinations. - Median income of households owning at least one EV was above 900,000 NOK, around 50 percent higher than that of households owning only conventional cars, and about twice the median household income in Norway over the 2010–18 period (413,000 NOK). - In 2019, the average price of EVs was around 525,000 NOK and of internal combustion engine vehicles (ICEVs) around 485,000 NOK. - Tax incentives and fiscal magnitude - EVs are exempt from VAT (conventional cars taxed at the standard rate of 25 percent). - Implicit total cost of the VAT exemptions in 2019 (number of new EVs × average price of new EVs × 25 percent) totaled 0.26 percent of mainland GDP. - For a hypothetical conventional car with median weight and emissions and priced at the average price of EVs, the VAT exemption and the saved one-off registration taxes combined amount to almost 42 percent of the pre-tax price of the averaged priced EV and a combined 0.43 percent of mainland GDP. (One-off registration taxes ignored in most of the paper.) - Motor vehicles tax revenue declined from around 1.9 to 0.9 percent of mainland GDP between 2010 and 2020, while VAT revenue increased slightly. - Distributional incidence of VAT exemption - The top 20 percent of households by income secured almost 30 percent of the implicit cost of the VAT exemptions for EVs—almost three times as much as the poorest quintile—indicating a regressive distribution of the VAT exemption benefits. ### C. CO2 Emissions Context - Passenger cars account for 10 percent of Norway’s total domestic CO2 emissions and around 15 percent of total emissions excluding emissions from oil and gas extraction. - Since 2010, passenger car emissions fell by more than 10 percent. - Emissions concentration - Combined passenger car CO2 emissions of households in the highest income quintile are more than seven times higher than those of households in the lowest income decile. - 5 percent of passenger cars account for 15 percent of all emissions from passenger cars. - Trade-off noted: high-income households are the largest emitters (so the largest emission reductions from EV purchases accrue to them), while VAT exemption benefits are concentrated in higher income groups—creating a climate-equity tension. ### D. Econometric Estimation — Specification and Key Results - Estimation approach - Dependent variable: total household CO2 emissions from passenger cars (kgCO2) — product of annual mileage and CO2 emissions per km, summed over all cars owned by the household. - Key regressor: number of EVs owned by the household. - Controls: socio-demographic variables including household income and net wealth; household fixed effects and municipality-year fixed effects to address omitted variable bias. - Sample: all households owning EVs, ICEVs, or non-plug-in hybrid vehicles; plug-in hybrids and some other car types omitted. - Main regression results (Table 1, 9,358,297 observations, R-squared 0.65, municipality-year FE YES, household FE YES) - Specification 1: coefficient on no_ev = -1,171.96*** (standard error 3.78) — purchasing an additional EV lowers household-level emissions by 1.17 tCO2 annually. - Specification 2 (heterogeneity by EV count): ev_1st_hh = -1,187.88*** (4.03); ev_2nd_hh = -1,082.85*** (15.41); ev_3rd_more_hh = -287.63*** (88.16). Effect decreases with additional EVs after the first. - Specification 3 (pre/post 2016): pre2016#no_ev = -996.74*** (6.29); post2015#no_ev = -1,209.00*** (3.89) — larger emission savings in recent years. - Specification 4 (ownership type): only_ev#no_ev = -2,176.03*** (5.17); icev&ev#no_ev = -630.94*** (4.33) — emission savings much larger for households that own only EVs. - Additional socio-demographic coefficients (consistent across specifications): - head_age = -15.82*** (0.22) - head_female = -84.00*** (2.38) - no_adult = 535.78*** (2.01) - no_child = 122.50*** (1.65) - netinc = 0.01* (0.00) - netwealth ≈ -0.09 (not statistically significant) - Interpretation: one additional EV reduces annual household passenger car emissions by about 1.17 tCO2, roughly half the average emissions from passenger cars of the average car-owning household (2.3 tCO2 annually). ### E. Cost Effectiveness and Aggregate Emission Savings - Back-of-the-envelope calculation inputs and assumptions - Regression-based annual emission savings per additional EV = 1.17 tCO2 (i.e., 1.17 e t CO2 per year). - Assumed EV lifetime = 15 years. - Average price of newly purchased EVs in 2019 by households ≈ NOK 525,000. - Implicit cost of the VAT exemption per EV ≈ NOK 131,000 or USD 12,500. - One-off registration taxes excluded from the cost-effectiveness calculation. - Lifetime emission savings per EV - 15 × 1.17 e t CO2 = 17.55 e t CO2. - Implied cost per tCO2 saved (VAT exemption only) - Cost per tCO2 ≈ USD 710. - Note: Norway’s Ministry of Finance estimated implicit cost of all tax benefits for purchase and operation of EVs (including VAT exemption) at around USD 1,400 per tCO2 saved in the 2021 budget—broadly consistent with the analysis. - Comparison to literature - The estimated cost per tCO2 of EV purchase incentives is in the upper range of abatement cost estimates in the literature and much larger than costs associated with alternatives such as a cash-for-clunker program, changes in land use, or increases in energy efficiency. *Source: IMF selected issues paper based on Camara et al. (2021), “Electric Vehicles, Tax Incentives and Emissions: Evidence from Norway,” May 14, 2021.* ### 21. However, the cost effectiveness of Norway’s EV tax subsidies can be significantly ### 1norea2021002 - 21. However, the cost effectiveness of Norway’s EV tax subsidies can be significantly ### Emission effectiveness of Norway’s EV tax subsidies - Emission savings can double for households that buy one additional EV and that do not own conventional cars (in line with specification 4, Table 1). - Emission savings can more than triple if households buy a new EV and replace a car whose annual emissions are in the top quintile of all conventional cars (Camara et al. (2021)). - The emission savings of individual EVs could grow in the future if maximum range increases so that they are used more. ### Aggregate emissions impact - Multiplying the emission savings per EV from regressions with the number of EVs owned by households in 2018 yields total annual carbon emission savings. - Comparison illustrated: when 10 percent of all household-owned cars are EVs (slightly more than the actual share in 2019) versus a scenario with no EVs, the difference in aggregate emissions amounts to only 8 percent — i.e., without EVs, aggregate emissions would exceed current passenger car emissions by 8 percent. - Aggregate emission savings would be larger if dirty conventional cars are replaced; however, aggregate savings only obtain if replaced conventional cars are scrapped and not used elsewhere. ### Caveats and limitations of the back-of-the-envelope calculations - Estimates do not account for: - Lower EV production costs from economies of scale, learning by doing, and overcoming adverse network externalities. - Positive spillovers such as a demonstration effect prompting other countries to imitate Norway’s tax incentives. - Estimates also ignore general equilibrium effects which could increase costs if replaced conventional vehicles are not scrapped but sold for use elsewhere. - Whether replaced conventional cars are sold or scrapped depends on policies. ### Fiscal costs and cost-effectiveness - The foregone revenue from the VAT exemptions and potential foregone one-off registration taxes are each at less than 0.25 percent of GDP. - The implied fiscal costs of the VAT exemptions per ton of CO2 emission cuts are in the range of USD 710 in 2019. - The annual mileage of EVs is shown to be lower than that of conventional cars, even after controlling for confounding factors. - A majority of EV-owning households also own conventional cars, reflecting that EVs are used in addition to conventional cars. ### Policy implications and recommendations - Norway demonstrates that bold policy action can dramatically speed up EV adoption at limited fiscal costs in terms of GDP. - If the share of EVs in the sale of new cars increases, the aggregate cost of the VAT exemptions would also grow (eventually roughly doubling under current policies, when all new vehicle purchases are EVs) in the absence of policy reform. - Authorities could consider recalibrating tax incentives for new EV purchases in a revenue neutral way to magnify environmental benefits and complement Norway’s target that all new cars are electric by 2025. - Recalibration measures could include: - Targeted subsidies to scrap dirty cars when replaced by EVs to ensure replaced conventional cars are scrapped. - Tax or regulatory measures to encourage replacement of the least fuel efficient and most polluting existing cars. - Revenue neutrality achieved by increasing the tax burden on high-end EVs (e.g., capping the amount of the VAT exemption and/or levying annual road tax on some of the most luxurious EVs). - Further research based on the data used in this paper could determine the exact parameters of such recalibration. *Source: 1norea2021002 (IMF PDF chapter excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1norea2021002.pdf_