In 2021, about two-thirds of new passenger vehicles sold in Norway were fully electric. Norway’s success in promoting electric vehicles has mainly been driven by generous tax incentives, including the exemption of zero-emission vehicles (ZEVs) from the registration tax, VAT and motor fuel taxes, as well as at least a 50% reduction in road taxes, and ferry and parking fees. These fiscal incentives were essential for shifting demand towards ZEVs and increasing their share in the car fleet. Given the success of electric mobility, the government is now working towards building a sustainable vehicle taxation system.
Norway’s evolving incentives for zero-emission vehicles
Abstract
Challenge
Norway is a northern European country with a small population of 5.4 million people and a large coastline of nearly 29 000 km, including fjords and bays. The country’s sparsely populated areas make it difficult to develop a dense public transport system that connects urban agglomerations across the country. Road transport is therefore by far the most popular mode of transport.
For a long time, the rapidly growing demand for mobility has outpaced progress in decarbonising the transport sector. Transport emissions peaked in 2012 (15 million tonnes of CO2-eq) and decreased by 8.9% from 2005 to 2019 thanks to Norway’s ambitious transport decarbonisation policies. The government heavily supported the take-up of zero-emission vehicles (ZEVs) to accelerate electrification of the road transport sector. This strategy has been successful. According to national projections, transport emissions are projected to decrease by nearly one-third from 2019 to 2030. Nevertheless, Norway needs to further accelerate electrification of the transport sector to halve transport GHG emissions by 2030.
Approach
To encourage the purchase of ZEVs, Norway introduced a comprehensive package of generous tax incentives, including the exemption of ZEVs from the registration tax, VAT and motor fuel taxes, as well as at least a 50% reduction in road taxes, and ferry and parking fees. These fiscal incentives were essential for shifting demand towards ZEVs (which are now cheaper than petrol or diesel cars) and increasing the share of ZEVs in the car fleet. According to government projections, the stock of ZEVs might reach 1.25 million by 2030 (compared to 225 000 without incentives). This represents 44.5% of the current vehicle fleet. As the ZEV market has become better established, the government has started scaling back some of these incentives.
ZEV rollout was also boosted through public investment in the development of a dense network of charging stations, as well as low costs of batteries and related services. In 2020, Norway counted more than 13 000 charging points, including nearly 1 600 high-speed charging points, which were developed with public subsidies. The state-owned enterprise Enova has supported a charging infrastructure for nearly 150 city buses in Oslo.
Results
No other country in the world has gone as far as Norway in the decarbonisation of its transport sector: two-thirds of new passenger vehicles sold in 2021 were fully electric. Norway also electrified a third of its domestic ferries and is a pioneer in electric aviation. Norway had some 470 000 ZEVs, the largest number in Europe and 16% of total stock. ZEVs and hybrid vehicles represent close to a quarter of Norway’s passenger car fleet. The country is making progress towards its goal of registering all new passenger cars and light vans as ZEVs by 2025. The impacts of Norway’s ZEV rollout and related emission cuts became strongly visible as of 2016. According to national projections, transport emissions are projected to decrease by nearly one-third from 2019 to 2030 (OECD, 2022).
However, the push to persuade households to purchase ZEVs has come at a price. The policy has contributed to a sizeable revenue decline from car-related excise duties. The tax expenditure from the VAT exemption reached NOK 11.3 billion (USD 1.3 billion) in 2021. The overall advantage of electric vehicles (fully battery electric and plug-in hybrid) was estimated at NOK 30 billion (USD 3.5 billion) in 2021. While policy measures triggered a strong increase in the purchase of ZEVs, the related tax revenue losses represented close to a third of environmental tax revenue. These taxes are a victim of their own success: reducing environmentally harmful activities has undercut the tax base. Given the success of electric mobility, the government is now working towards building a sustainable vehicle taxation system.
Lessons learnt
Fiscal incentives were essential for shifting demand towards ZEVs and increasing the share of ZEVs in the car fleet. As the EV market is maturing, it makes economic sense to reduce tax incentives gradually. The government recently re-introduced the traffic insurance tax for ZEVs. The government is also considering introduction of VAT on the most expensive EVs. These are first steps towards sharing the financial burden of road maintenance, infrastructure development and other externalities. An introduction of a time- and place-based road use tax would be welcome.
Changing the overall composition of Norway’s vehicle fleet will take time. Despite the sharp increase in the number of ZEVs, diesel and petrol cars still made up 45% and 34% of Norway’s car fleet, respectively, in 2020. While infrastructure for ZEVs is increasingly dense, Norway needs to pursue public financial support to establish and maintain public charging stations in areas that lack a commercial market, particularly in the north.
Despite its great achievements in the ZEV sector, Norway needs to redouble efforts and make more structural changes to establish sustainable transport systems. This involves promoting behavioural changes, placing a stronger focus on shared mobility services and shifting from increased mobility towards improved accessibility. The post-COVID-19 period is an opportune moment to rethink mobility and develop a socially fair and spatially balanced transport system.
Further information
OECD (2022), OECD Environmental Performance Reviews: Norway 2022, OECD Environmental Performance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/59e71c13-en.
OECD (2022), OECD Economic Surveys: Norway 2022, OECD Publishing, Paris, https://doi.org/10.1787/df7b87ab-en.
Featured publication
OECD (2022), OECD Environmental Performance Reviews: Norway 2022, OECD Environmental Performance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/59e71c13-en.
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Norway’s Zero-Growth Goal for major urban areas, IPAC | International Programme for Action on Climate | Policies In Practice - OECD.
