Electric Vehicles, Tax incentives and Emissions: Evidence from Norway

WP/21/162 Electric Vehicles, Tax incentives and Emissions: Evidence from Norway by Youssouf Camara, Bjart Holtsmark, and Florian Misch IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2021 International Monetary Fund WP/21/162 IMF Working Paper European Department Electric Vehicles, Tax incentives and Emissions: Evidence from Norway Prepared by Youssouf Camara, Bjart Holtsmark, and Florian Misch1 Authorized for distribution by Peter Dohlman June 2021 Abstract This paper empirically estimates the effects of electric vehicles (EVs) on passenger car emissions to inform the design of policies that encourage EV purchases in Norway. We use exceptionally rich data on the universe of cars and households from Norway, which has a very high share of EVs, thanks to generous tax incentives and other policies. Our estimates suggest that household-level emission savings from the purchase of additional EVs are limited, resulting in high implicit abatement costs of Norway’s tax incentives relative to emission savings. However, the estimated emission savings are much larger if EVs replace the dirtiest cars. Norway’s experience may also help inform similar policies in other countries as they ramp up their own national climate mitigation strategies. JEL Classification Numbers: Q48; R40 Keywords: Electric vehicles; CO2 emissions intensity; Tax reform; Subsidies Author’s E-Mail Address: camarakantona@gmail.com, Bjart.Holtsmark@ssb.no and FMisch@imf.org 1 We thank Peter Dohlman and Jacques Miniane for guidance, and Khalid Elfayoumi for inputs on an earlier version of the paper. We also thank Simon Black, Brita Bye, Taran Faehn, Robert Bjørnøy Norseng, Ian Parry and participants of a presentation during the 2021 virtual IMF Norway Article IV mission for excellent comments. Tan Wang provided research assistance. Bjart Holtsmark’s work has been funded by the Research Council of Norway through the PLATON project. A summary version of a previous version of this paper is available as a Selected Issues Paper. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 3 I. INTRODUCTION Public policies to promote usage of electric vehicles (EVs) feature prominently national recovery programs from the Covid crisis (IEA, 2021), and electric vehicles are often seen as an important element of climate change mitigation strategies (Hausfather, 2019). From a policy perspective, understanding the cost effectiveness of such policies and the environmental benefits of EVs is therefore critical. The objective of this paper is to econometrically estimate emission savings from EV usage at the household level and use the results to compute, back-of-the-envelope style, the cost effectiveness of some of the tax incentives in Norway, a country with a very high share of EVs. There is a large literature that quantifies the direct and indirect greenhouse gas emissions of the production and operation of EVs and internal combustion engine vehicles (ICEVs). Many studies find that EVs have a ‘green lead’ which increases the cleaner the energy mix that is used to produce and operate EVs and the longer the assumed lifespan of EVs is (see Christensen, 2017 and Hausfather, 2019, for examples; by contrast, Archsmith, 2016, finds that EVs could increase emissions in some regions of the U.S. depending on the electricity mix and other assumptions). However, under this approach, the exact emission savings of EVs depend on which specific EVs and ICEVs are compared.2 In this paper, we focus on the reduction of exhaust emissions from conventional cars as a result of acquisition of EVs at the household level.3 In particular, during the transition period towards the full electrification of the passenger car fleet when both EVs and ICEVs are operating alongside one another, substitution crucially matters: The reduction of emissions as a result of the purchase of one additional EV are driven by which ICEVs are substituted and to what extent. For instance, emission savings could differ between households that replace a sparsely used but fuel-efficient ICEV by an EV to those households that add an EV to their stocks of heavily used and dirty ICEVs. We therefore argue that household-level savings of passenger car emissions from the operation of EVs are an empirical matter and complex to predict conceptually as they are likely to depend on a complex interplay of household preferences, habits and other factors. Of course, savings of individual households do not necessarily map one-to-one to eco