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Tax incentives and electric vehicles: what can Ireland learn from other countries?

Recent overhaul of regime in Denmark represents a major U-turn on tax breaks

At a global level, tight emissions rules are pushing car makers towards cleaner combustion engines and ultimately electric vehicles (EVs). At national levels, governments are tweaking taxes and incentives to influence consumer choice, and pull them towards EVs.

Every incentive or tax change carries the risk of unintended consequences. As with most tax rules, the devil is in the detail and it’s often a game of whack-a-mole. With the Government considering changes to Ireland’s tax regime around EVs, it’s worth examining how these structures have worked – and not worked – in other countries.

Tax and incentives play a major part in a car buyer's purchasing decisions.

On July 1st 2008 the Irish motor tax regime moved to a system based on the CO2 emissions of newly registered cars instead of engine size. The move favoured diesel engine cars over petrol ones. Of the new cars sold that year, 63 per cent had petrol engines and 35 per cent diesel. Within two years, 64 per cent of sales were diesels and 32 per cent petrol cars.

In October 2019 the government removed a €3,800 grant for businesses purchasing electric cars or plug-in hybrids. In the first six months of 2020, sales of new electric cars to private buyers rose 13 per cent, but sales to companies fell 38 per cent.

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In the face of the greatest automotive revolution since Bertha Benz went for a drive in 1888, the move away from fossil fuels to electric power involves a lot of push and pull policies from legislators.

Tax and incentives play a major part in a car buyer’s purchasing decisions.

Consumers, meanwhile, faced with new technology and a new transport routine, are looking for a degree of certainty when it comes to the purchase price and running costs of what is for most the second greatest outlay after their home.

Changes

In Budget 2022, the Government is considering changes to the current tax regime that would see a drop in the cap for tax relief on electric cars to €40,000, with the current €5,000 Vehicle Registration Tax (VRT) relief tapering off from €30,000. Given the price point of most EVs on the Irish market, it would effectively end tax relief on the majority of the current best-selling electric cars.

Needless to say the motor trade is up in arms, calling it “regressive” and “unconscionable”.

However, legislators are equally concerned about the cost of these tax incentives to the public purse, particularly as the volume of new EV sales grows. A Government spending review in 2019 warned that if the Climate Action Plan target of reaching 840,000 electric passenger cars on the road by 2030 were reached, the exchequer will lose approximately €1.5 billion worth of revenue annually from motor tax, VAT and fuel excise.

In some countries there has also been a backlash about incentives that largely benefit wealthier households who can afford the relatively expensive new electric cars. It has led many governments to cap the incentive schemes.

It’s a difficult call though, for mainstream consumers are evidently influenced by these tax changes, as the Danes will attest.

Last December, Denmark overhauled its motor tax regime, setting a goal of having at least 775,000 electric cars (including hybrids) on its roads by 2030. According to its tax minister Morten Boedskov, "the average electric car will be significantly cheaper in the coming years".

The tax changes represent a major U-turn. In 2015 Denmark opted to phase out tax breaks for electric cars. Under that plan, tax incentives were to wind down and would disappear entirely by 2020. In a country where the taxes on new cars can hit 180 per cent, removing the discounted rates dramatically pushed up the price of EVs. The reason given was to restore tax income.

Sales of EVs in the first six months of 2016 fell 80 per cent compared with the same period the year before. By the end of last year there was an estimated 20,000 EVs in Denmark out of 2.5 million cars on its roads.

Major tax relief on EVs and a few other initial perks lured buyers to make the change

Denmark's neighbour, Norway, is often cited as the role model for the transition to electric vehicles. Last year 54 per cent of all new cars sold were electric, up from 42 per cent in 2019 and just 1 per cent a decade ago. By contrast, cars with diesel-only engines have tumbled from a peak of 75.7 per cent of the overall Norwegian market in 2011 to just 8.6 per cent last year.

In a high tax regime country, major tax relief on EVs and a few other initial perks lured buyers to make the change to electric.

But the policy comes at a substantial cost. According to a recent Reuters report it’s estimated by the ruling centre-right coalition at 19.2 billion Norwegian crowns (€1.9 billion) in lost state revenue last year. An IMF paper in June called for taxes to be reinstated on luxury EV cars.

Here in Ireland, of a fleet of 2.2 million private cars, there were 13,694 EVs on our roads by the end of 2020, according to figures from the Department of Transport, with a further 7,800 sold so far this year.

Alongside changes to the tax incentives on EVs, the Government’s tax strategy group also proposed increasing vehicle registration tax (VRT) on regular cars with emissions above 100g/km by between 2 and 5 per cent. That would see new car prices rise by an average of €1,500, with some of the more popular family models receiving a price hike of up to €2,800 according to the Society of the Irish Motor Industry (Simi).

A further change would see the 0 per cent benefit-in-kind tax incentive on EVs taper off until it is fully removed entirely from 2025.

Uncertainty

The problem with all these changes is that they create uncertainty in the market. Changes to the price of new cars – and their incentives – invariably impact on used car prices. That hits everyone on the road, not just the new car buyers. For the families who can’t afford a new electric car, it can mean a lower value on their trade-in and a price rise for a cleaner, lower emissions alternative.

Motorists are already grappling with what a move to electric will mean for their daily transport needs, from charging points to electricity costs. Confusion over taxes can ultimately lead motorists to stand still. Price rises will simply encourage people to keep their older, more polluting cars for longer, countering efforts to reduce transport emissions.

Already Ireland has more than 900,000 cars that are more than 10 years old, from a time when emissions of new cars were 30 per cent higher than they are now.

It’s worth remembering the scale of the Irish market in the global scene. Annual car sales are equivalent to those of an average English city. Government policy here is unlikely to influence the engineering decisions made by the automotive giants. It’s up to the EU to push the manufacturers.

What’s needed from our Government is clarity. A clear roadmap for the coming years in terms of taxes and incentives will deliver certainty to the buyers and the motor trade. Given the changes to everyday motoring life a move to electric entails, motorists desperately need to be sure that there will be no surprises courtesy of tax U-turns.