Published on September 8th, 2020 |
by Jesper Berggreen
September 8th, 2020 by Jesper Berggreen
The Danish taxation system on vehicles is one of the world’s most expensive, complicated, and confusing of its kind. It has roots reaching a century back when cars var considered a pure luxury item, and not something you would ever own for the purpose of running a business or commute to work. It’s a system based on purchase price, and while this strange tax vanished from items like fountain pens and gold watches, it remained in place for cars. Why? Because it became a primary source of tax income that every government in modern Danish history has become dependent on.
There are 2.7 million cars on the roads in this tiny country populated by 6 million people (ICE 98.5%, BEV 0.8%, PHEV 0.7%), and the annual purchase of new vehicles pour about DKK 50 billion ($8 billion) in registration tax alone into the nations budget. EVs threaten to kill this cash cow, because their higher base price would make them impossible to sell without any form of tax credit (current EV sales are still very low though). The current system exempts the first DKK 400,000 ($63,500) of an EVs price from taxes, making a car like the entry level Tesla Model 3 at DKK 373,000 ($59,200) tax-free and thus comparable to an equivalent mid size luxury sedan from e.g. Audi or BMW.
Here’s an example of current prices of a Tesla Long Range AWD Model 3 and a comparable Audi A5: The base price for the Tesla is DKK 468,500 ($74,400) and the price including taxes is DKK 484,300 ($76,900). The base price for the Audi is DKK 248,400 ($39,400) and the price including taxes is DKK 499,800 ($79,400 – I kid you not!)
So, once you have based such a large chunk of a national budget on registration taxes on new conventional vehicles for a century, how do you persuade people to transition to cleaner and — for the time being — more expensive commodities without losing this vast tax income?
That question is attempted answered today in a report, 18 months after a so called Automobile Commission under the Danish ministry of finance was given the task to come up with viable solutions. The report is called Roads to a greener vehicle taxation, and the answer is not uplifting, if you only believe in politics that is. If you believe in market forces it’s a whole other story, which I will get back to later.
Both the former right leaning and current left leaning Danish governments have flirted with numbers between 500,000 and 1 million EVs (or non-fossil fuel burning vehicle of some sort) on the roads by 2030. According to the commission’s findings the 500,000 is somewhat realistic, but 1 million is deemed being impossible.
Why not just make diesel and gas car purchases illegal by 2030 then? Well, the commission finds that such a policy would in itself be illegal in the EU system, so they don’t recommend going down that road. Okay, but what if we just do nothing? The commission believes that leaving market forces to themselves will result in about 400,000 non-polluting vehicles on the road by 2030.
Anyway, let’s sum up what the commission found to be useful to some degree, as tools to compensate for not putting market-killing taxes on EVs at this point.
The Commission proposes continuous taxes on the following elements as alternatives to changing the registration taxes too radically:
The commission thinks that the existing technological solutions for a mileage-based road pricing system is not adequately developed and tested for implementation nationally at present. The commission instead proposes introduction of a tax for the use of the Danish road infrastructure in general of DKK 1,000 ($160) per vehicle per year starting in 2023. The tax applies to all vehicles — both Danish and foreign.
In several tax models, the commission proposes that fuel taxes be increased by DKK 1 per liter ($0.6 per US gallon) starting in 2021 to encourage motorists to use green fuels and thus reduce CO2 emissions in the short term, where the contribution from the conversion to zero- and low-emission cars is limited. In addition, the commission presents a tax model in which fuel taxes are gradually raised by a further DKK 1 by 2030. Current fuel prices in Denmark is DKK 9 to 10 per liter ($6 per US gallon), so we are talking about a 10 — 20% increase over 9 years.
A temporary plan ending in 2021 where electric car owners with a subscription scheme have had the opportunity to lower electricity tax will be considered for future development. Tax changes on electricity for charging will be included in the commission’s further work on, for example, the development of charging infrastructure and the electricity grid. Think rebates and dynamic pricing based on demand and generation.
Tax on motor liability insurance
The current national vehicle registration tax includes a number of surcharges and deductions for different types of safety equipment. As safety equipment becomes standard equipment in most cars, the current supplements and deductions have limited importance in relation to constituting an incentive for the purchase of safety equipment, just as the current supplements and deductions in the registration tax primarily focuses on the users of the car.
The commission therefore proposes that supplements and deductions for safety equipment in the registration tax is abolished. In addition, the commission proposes to increase the current tax on motor third party liability insurance from 42.9% to 60% of the insurance premium. Thus, the tax payment is sought to greater extent to target the socio-economic costs of accidents.
Though this reorganization of the tax structure does not include a direct financial incentive in the registration tax for the car owner’s choice of additional safety equipment, it does incentivise insurance companies to take into account both safety equipment, car type, driving pattern, and the driver of the car when determining the insurance premium.
On top of this the commission proposes that new electric car owners should have an annual subsidy of DKK 2,500 ($400) until 2030.
The registration tax in general must also be adjusted to be based more on how much CO2 the car emits and less on the purchase price of the car.
The commission proposes different combinations of these tools into models that enables from 500,000 to 1 million zero- to low-emission vehicles on the road by 2030. But herein is the dilemma: 500,000 might be affordable but is not enough to reach the ambitious goal of 70% emission reduction by 2030, versus the 1 million that has a chance to realize the emission reduction goal, but is way too expensive.
The Automobile Commission’s chairman, Anders Eldrup, said at the press conference:
“You can put together a model where you get a million electric cars by 2030. But it will be a very expensive solution for the economy. The model with 750,000 electric cars, on the other hand, is more balanced.”
Hard to predict the future isn’t it … wait for it.
In an email from the Danish motorist association FDM, CEO of Thomas Møller Thomsen has this to say about the commission’s report:
“FDM would have liked the Automobile Commission to have given greater weight to the technical properties of the car. Instead, they have chosen to maintain a value-based taxation that is primarily based on what the car costs. The problem with the value-based registration tax is that it counteracts new and more expensive technology such as low and zero emission cars.
“FDM would rather have seen a model where the registration tax for new low- and zero-emission cars is removed and replaced by an annual, technical tax based on the car’s energy efficiency and weight. The tax should then be phased in as the cars come down in price, which will probably happen by 2030.”
The Danish Climate Council — which advises the government on the climate issue — disagrees with the commission’s conclusions. They insist that there must be 1 million electric cars by 2030 if we are to achieve the goal of reducing our greenhouse gas emissions by 70%.
In the Climate Council’s latest report, the council even mentions that 1.5 million electric cars may be needed in 2030, depending on how much the greenhouse gas emissions are reduced in other sectors, but the Automobile Commission has not looked into that scenario at all.
To the national media dr.dk chairman Peter Møllgaard states:
“Otherwise you have to find reductions elsewhere in society. We still believe that it is a good way to do it, and it should be possible to reach 1 million electric cars. It would have been nice to see that calculation as well.”
Peter Møllgaard is not afraid it might become expensive for the owners of gas and diesel cars and adds bluntly: “Of course it will affect people who own or buy gas and diesel cars, that’s the point.”
Our own Minister of Taxation Morten Bødskov sounds a bit nervous though: “Hopefully we can make a broad [political] deal pretty quickly, because I think that’s important for the sake of the car market.” and adds: “We must remember that we get DKK 50 billion a year in revenue from registration taxes and fuel taxes, so there is a lot of money at stake here. And if you just adjust a little on those levers, you risk paying a very high price, pretty quickly.”
Now, that last point from Peter Møllgaard is all well and good. However, I don’t think tax policies will punish owners of fossil fuel burning vehicles in the not so distant future. The price of new EVs will. The minute the EV reaches base price parity, the internal combustion engine (ICE) is dead weight.
I don’t mean to dismiss all the good intentions of commissions and arguments of politicians, but with all due respect, reality has a habit of surprising those who are busy with other things. The world is changing right in front of us, and remember, if you think linearly 50% is half way, but if you think exponentially then 1% can be half way.
If you have been following the mind boggling innovations and production plans in the electric vehicle industry lately, you will know that we are in the midst of a global transportation disruption of a scale not seen since the great wars. If you have not been following, you will not know what hit you.
It boils down to one thing only: The point at which a clean vehicle with comparable specifications to a not so clean vehicle is the cheapest to buy. I believe this price-fight stands solely between a pure electric vehicle and an internal combustion vehicle. In principle there is reasons why other technologies like hydrogen and hybrids would work too, but they are simply running out of time.
Battery capacity is rising. Battery prices are plummeting. Motor efficiency is rising. Motor size is shrinking. Electronic capabilities are expanding. Body manufacturing efficiency is rising. Material recycling is expanding. The list goes on, and many of these developments are exponential in nature, and the limits for the EV are not even close. For ICE technology not much more can be achieved, and any other technology ever so slightly more complicated than using only electrons from generation source over storage medium to propulsion unit, is doomed to fail in my opinion.
When this price inflection point is reached, which might be much sooner than we all think, it’s game over for the legacy industry. Only a very few, very aggressive contenders will win most of the global market, and the rest will either comply to survive or succumb to their own pride.
To be clear: Even though I have been all in favor for these disruptive technologies for ages, my actions will have been utterly insignificant. I will lead no such revolution. My neighbours will. The people who have shrugged at my endeavours enduring with cheap low range EVs and later rolled their eyes at me thriving with expensive long range EVs is the consumer army that legacy should fear. When my neighbours begin buying cheap, long range, fast charging EVs, demand will explode. It can all be over in very few years. History has a habit of repeating itself.
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