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Nawar Alsaadi

Nawar Alsaadi

Nawar Alsaadi is a principal at Semper Augustus Capital, a private investment firm with a special focus on the energy sector. He is also a…

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Busting The Myth Of The World’s Hottest Electric Car Market

Norway has been hailed as a model for electric vehicles adoption with EV sales exceeding 57% of new car sales in June of this year. This accomplishment stands at odds with the rest of the world, where despite substantial subsidies, EV sales have lingered in the low single digits. The reality of Norway’s EV sales success is rooted in the simple fact that Norway has created an extremely distorted car market.

Norway’s cold weather makes the country one of the least suitable markets for electric cars since freezing temperatures tend to reduce an EV range by up to 40%. This fact alone makes Norway a less likely market for wide EV adoption. EVs high price tag, range limitations, slow charging time and limited second market makes them a niche product in many markets, said another way, EVs practical inferiority to internal combustion engine (ICE) cars has discouraged their adoption at a wide scale. To counter EVs inherent inferiority, the Norwegian government has introduced a host of market distorting - stick and carrot - initiatives to force EVs adoption:

EV Carrots:

  • EVs are exempt from VAT and other taxes on car purchases and sales.
  • Parking in public parking spaces is free.
  • EVs can use most toll roads and several ferry connections free of charge.
  • EVs are allowed to use bus and collective traffic lanes.
  • The company car tax is 50 per cent lower on EVs, and the annual motor vehicle tax/road tax is also lower.
  • Battery charging is free at a rapidly growing number of publicly funded charging stations.

ICE Sticks:


(Source: European Climate Initiative) 

As result of the above distortions, ICE cars cost more to purchase in Norway and are up to 75% more expensive to operate. Thus, it is no wonder that EV sales have been growing at a brisk rate in Norway. As a matter of fact, it is mind boggling as to why anyone would even purchase an ICE car in Norway under these conditions.

(Source: Norsk Elbilforening)

Having these many incentives come at a great cost to the Norwegian treasury, or more precisely these incentives come at a great cost to the Norwegian taxpayer. Governments may create the conditions for wealth creation, but they don’t create wealth per se, wealth is created by private enterprise and is taxed and redistributed by governments for the public good. The Norwegian government seems to be believe that a switch to EVs (due their supposed CO2 emissions reduction) is in the public interest.   

At what cost?

In 2014, Bjart Holtsmark (Statistics Norway) and Anders Skonhoft (Department of Economics, Norwegian University of Science and Technology) answered this question in an excellent research paper. According to that independent study, the annual EV incentives cost to the Norwegian treasury stands at a staggering $8100 per EV (excluding the value of free charging and bus lane access). At the end of 2018, Norway had 200,000 registered EVs (I am excluding PHEVs from the calculation since they have different incentives), this means the total annual EV subsidy cost to the Norwegian treasury stands at $1.62 billion dollars (14.6B NOK) per year as of the end of 2018. The annual subsidy has grown to around $1.95 billion dollars (21.6B NOK) as of June 30th due to the rapid growth in the EV fleet. Norway has a total of 2.7M private cars, if the country were to convert all of them to EVs under the same incentives scheme, the total annual cost to the Norwegian treasury would reach $22 billion dollars per year (198B NOK). To put these numbers in prospective, here is the breakdown of Norway’s 2018 fiscal budget:

(Source: Government of Norway)

Based on the above, we can see that the annual cost of Norway’s EV support scheme already exceeds the annual cost of Maternity and Paternity leave pay (21.2B NOK) and also exceeds the annual Unemployment Benefit budget (14.2B NOK) and the Child Benefit budget (16.8B NOK). As a matter of fact, if Norway were to convert all its cars to EVs, the country EV budget would become the second largest government expenditure at 198B NOK, only behind the retirement pension budget at 223B NOK.  It is worth noting that Norway is running a sizable 20% primary budget deficit (excluding oil revenues) and 7% deficit including oil revenues. Norway’s EV support is already having a material impact on Norway’s finances, the excise duties on cars and petrol have declined by 25.9B NOK in 5 years from 50.7B NOK in 2013 to 24.8B NOK in 2018. If this revenue item had remained constant, Norway’s budget deficit for 2018 would have shrunk to 4.2% from 7%. Related: The EU Doesn’t Need A Green New Deal

Emissions and social costs

At this stage one may ask what Norway is getting out of all of this? EVs are not a goal into themselves, EVs are a mean to an end, namely, reducing gasoline and diesel consumption, which ultimately means a reduction in CO2 emissions. Let’s take a look at Norway’s petroleum consumption since 2014:

  

(Source: Statistics Norway)

In 2014, Norway consumed a total of 5M liters of auto diesel and gasoline (tax and untaxed), by 2018 that number increased to 5.06M liters or a 1.2% increase. More damming still is that last year alone Norway’s CO2 road traffic emissions increased by 2.8% (excluding EVs CO2 lifecycle emissions). To be fair, road traffic emissions (although increased in 2018) did decline by about 10% from 9.9M tons in 2014 to 9M tons in 2018. Norwegian road traffic emissions statistics don’t capture a vehicle lifecycle emissions which are much higher at the outset for an EV due to the heavy CO2 emissions associated with battery production. This lifecycle gap in the data exaggerates the amount of CO2 emission reduction due to the displacement of emissions from where the car is driven to where it is produced. Another factor we need to consider is the continued improvement in fuel efficiency of newer ICE cars, which means as the ICE car fleet is renewed associated CO2 emissions are reduced naturally. Thus, when we take in consideration these factors, it is probable that the actual four-year reduction in Norwegian CO2 road emissions due to EVs is in the low single digits at best. Related: Iran Offers EU Two Options To Keep Nuclear Deal In Place

In light of the above, it is fair to say that Norway’s massive investment in EVs in eliminating a negligible amount of CO2 comes at a great financial cost. One reason for the muted impact of EVs on Norwegian gasoline and diesel consumption is that 64% of Norwegian households that own an EV also own an ICE car. Two cars households used ICE cars for 60% of their driving needs and EVs for 40%. The second car effect is apparent in the passenger car data: In 2014, Norway had 2.55M passenger cars (including 50K EVs and PHEVs) as compared to 2.76M passenger cars (Including 300K EVs and PHEVs) in 2018. This shows that the ICE fleet has remained constant and that EVs are supplementing ICE cars and not replacing them.

Another interesting feature of the Norwegian EV market is the split between the have and the have nots. The likelihood of purchasing an EV is 15 times higher for the richest 25% of Norwegian households as compared to the bottom 25%. Since the purchase price of an EV is cheaper than an ICE car in Norway that discrepancy can not be explained by the initial cost barrier. The fact that 84% of the richest households own at least one additional ICE car against only 21% of the poorest households seems to indicate that without access to a second ICE car, owning an EV - despite all the incentives - is less appealing to the average person. This is most likely due to EVs inherent limitations as compared to ICE cars. In many ways, Norway’s EV support policy is a second car discount and living cost subsidy mechanism for the rich.  

Cited research by Halvorsen and Froyen Indicates that such an extreme support for EVs is encouraging Norwegians to rely less on public transport and on walking and cycling. Only 14% of EV owners use public transport, cycle, or walk, as compared to more than 50% for non-EV owners.

(Source: Halvorsen & Froyen, Holtsmark & Skonhoft)

Favoring EVs as a policy to reduce CO2 emissions is marginally effective at best and very expensive. The policy creates a number of perverse incentives and contributes to an increase in economic inequality. In the aforementioned research paper on Norway’s EV policy, the authors conclude that the reduction in Norway’s CO2 emissions through EV adoption comes at the extraordinary cost of $13500 per ton of CO2. Considering that Norwegian road traffic emissions stood at 9M tons as of 2018. You can do that math as what it would cost to bring these emissions to zero at $13500 per ton. Several studies have shown that EVs have a relatively limited (17% to 30%) CO2 emissions reduction impact - on lifecycle basis - under the current European electricity mix:

(Source: European Environment Agency)

While it is likely that European electricity will become increasingly emission free in the coming decades, a larger decrease in CO2 transport emissions today can probably be achieved faster (and for a much lower cost) through a policy mix focused on public transport and highly efficient ICE vehicles. A recent study by the respected IFO Institute in Germany concluded that a switch to EVs would actually increase German CO2 road emission in comparison to a policy favoring fuel efficient diesel cars. My point here is not to promote a specific drive train technology, the point is that as a society we need to adapt effective and sustainable environmental and economic policies that will lead to tangible reductions in CO2 emissions. Norway’s model is absolutely not the one to follow. I will state for the record that once Norway reduces its generous EV incentives in 2020/2021, the country multi-year growth in EVs sales will likely reverse as was the case in Denmark in 2017.

Norway has pursued its extreme EV support policy due to the seemingly mistaken belief that one can both fight climate change and maintain a car culture. Considering the limits of of today’s personal vehicle technology and the limitations of public finances, the simultaneous pursuit of these two conflicting objectives is perhaps a well-intentioned folly.      

By Nawar Alsaadi for Oilprice.com

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Leave a comment
  • David Jones on September 02 2019 said:
    This is oil company propaganda, twisting the facts to support an arguement.

    Nawar is ignoring the principle reason for EVs: air pollution. The WHO put annual deaths from air pollution at 8.8m. The fumes from ICE vehicles cause heart disease, strokes, cancer, asthma, dementia, and more. It is a crime that companies are allowed to market these vehicles.

    Today's EV purchasers are doing what mobile/cell phone users did in the 1980s; they are paying for the infrastructure and technology so we can all benefit in the future.

    EVs are already cheaper than ICE vehicles over the life of the vehicle, and these costs are fast falling. In the future transport costs will be vastly reduced due to EVs.

    Great work Norway, keep it up!
  • Nawar Alsaadi on September 02 2019 said:
    Response to David Jones.

    I am not sure which facts are twisted (please clarify). As for the local emissions (air pollution) issue this was addressed in the linked research paper by Bjart Holtsmark and Anders Skonhoft, from the paper:

    There is some support for the EV subsidy policy regarding local emissions, particularly in comparison with diesel vehicles. However, modern gasoline engines fitted with catalysers emit harmful substances in relatively moderate quantities (Ji et al. 2012). The reduction in health-damaging pollutants due to a shift to EV driving should therefore not be exaggerated. Additionally, if the purpose of the EV subsidy policy is to mitigate local environmental problems, promoting a switch from diesel vehicles to gasoline models is possibly both a simpler and a cheaper expedient. It is therefore a 4 paradox that the Norwegian car tax policy favours diesel cars while sacrificing gasoline, meaning that the current (spring 2014) pumping price of gasoline is about 1 NOK/litre above that of diesel.
  • Yuriy Mykhasyak on September 02 2019 said:
    It's investment in infrastructure and culture. It will make EV adoption quicker. In a year there will be many cheaper models to select from
  • George Kamburoff on September 06 2019 said:
    This is what I would expect in an oil journal: "EVs practical inferiority to internal combustion engine (ICE) cars has discouraged their adoption at a wide scale."

    My two electric cars took my PV solar system payback from 15-17 years down to under three years. It powers the entire household and two electric cars, with free power now.

    YOU will have one in a few years, and will love it. think of us eco-freaks when you get it.
  • JOSEPH HALL on September 06 2019 said:
    Nawar Alsaadi - here's what you need to think about. What is OilPrice.com going to call itself when the oil price is zero?

    Let me help you out – in a few very short years the world’s entire fossil fuels industry will be out of business.

    Yep, a few very short years.

    Solar, wind and battery storage is running wild around the globe. Every day the percentage of energy derived from them goes up and up and up. Every day the percentage derived from fossil fuels goes down, down, down. There’s no stopping that trend.

    Tesla is selling hundreds of thousands of EVs with millions more on the way. The other major car manufactures are right behind them. In a few years the thought to owning an ICE vehicle will seem odd - like buying a typewriter or going to Blockbuster video.

    The world’s “Kodak moment” is rapidly approaching. In 1999 Kodak had a market cap of $44 billion – today it’s worthless. This will be the story of Exxon-Mobil, the entire fracking industry and any other entity tied to the fossil fuels industry.

    One day in the not so distant future the whole oil, coal and gas industry is going to topple over. Coal is already gone. Oil only subsidized by a desperate Saudi Arabia(who sees the writing on the wall), and NG will soon follow.

    The age of fossil fuels is over. The age of renewable energy is here. That’s all there is to it…
  • Rudolf Huber on September 06 2019 said:
    Norway was the golden boy from the North for a long time. They were touted to be the richest Europeans, courtesy of Oil & Gas plus fish. But now they are wrecking their economy and we should take note. Only by shoveling massive subsidies towards EV's and beating ICE's with a big stick they get those EV adoption numbers. But that can't go on forever. They either cut welfare or increase taxes massively. I wonder if that sits well with Norwegians. And once an opposition party sees that it can make votes by opposing this crap, we will see landslides again. The second such case to watch is Germany by the way.
  • Jay Khaye on September 25 2019 said:
    This article surely blows holes in the myth that its the ICE vehicles that are the ones being subsidized. The real crime is call BEV zero emissions. They think the energy is free from pollution because it comes out of holes in the wall. Electric vehicles have always made sense, but not ones that carry around their own energy source in the form of Batteries.

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