“We come from the land of the ice and snow” – Can the World Follow Norway’s Example for EV Adoption?

By John Auers and Robert Auers

Immigrant Song, released in 1970, was the leading single from Led Zeppelin’s third album (Led Zeppelin III) and described the Vikings leaving Scandinavia in search of new lands to conquer.  Today, Scandinavia (Norway, in particular) has become the world’s poster child for EV adoption and has proposed a complete ban on ICE vehicles beginning in 2025, the earliest of any country.  We will examine the policy that has led Norway to this point and see if widespread EV adoption can “immigrate” to the rest of the world from Norway.

Norway has by far the highest EV adoption rate in the world, with EVs accounting for more than 39% of total Norwegian vehicle sales in 2017.  Moreover, while the country is home to less than 0.1% of global population, it accounted for nearly 5% of global EV sales last year.  These numbers are certainly impressive and many EV proponents have touted Norwegian EV policy as a great success story.  This is, no doubt, true if success is measured by encouraging EV adoption at all costs.

Norway, however, is in a vastly different situation than the majority of the world’s countries, with a small population (~5 million people) and large oil reserves that have allowed the country to build a sovereign wealth fund worth over $1 trillion, or $192,000 per citizen.  The favorable financial situation of the Norwegian government, which is largely a result of the country’s large oil and gas reserves, has allowed them to spend much more than any other country on EV subsidies.  These subsidies include an exception from the purchase tax and the 25% VAT typically applied to new vehicle purchases.  The purchase tax on new vehicles varies based on vehicle weight, engine size, and NOx/CO2 emissions.  The combined value of these two taxes generally represents about 40%-50% of the purchase price of a new car in Norway (meaning that, as compared to the US, one will typically pay 1.5-2 times more for the same car in Norway). According to the Financial Times, a BMW 540i, for example, starts at 770,000 NKr (~100,000 USD) in Norway, while the MSRP for the same car in the U.S. is $58,200. As a result of these subsidies, the upfront cost of an EV (including Plug-in Hybrids or PHEVs) in Norway is typically roughly in line with that of a comparable ICE vehicle.  For luxury or sports cars, EVs can actually be significantly less expensive due to the high taxes placed on larger engines and high vehicle weight.  Still, the subsidies do not stop there.  EV drivers are entitled to free use of toll roads and ferries, free municipal parking, unlimited use of bus and HOV lanes, and a reduced annual road tax (amounting to annual savings of ~$250).  Furthermore, Norway has some of the highest fuel taxes in the world, leading to pump prices of around $7.00/gallon, and relatively low retail electricity prices of about $0.16/kWh (due to cheap hydropower).  As a result, fuel cost savings are much greater in Norway than in most other countries.

This long list of government incentives encouraging EV adoption easily explains the high rate of EV adoption in Norway.  Accordingly, a survey conducted by the Norwegian electric Vehicle Association showed that 72% of EV buyers in the country make their decision on economic grounds, while only 26% cite environmental reasons as the primary driver.  Furthermore, it seems likely that those citing environmental concerns would still choose an ICE vehicle if economics were sufficiently favorable.  In fact, it seems puzzling that EV adoption in the country is not higher, given that upfront costs between the two are similar and ongoing savings are so significant.

Due to the high costs Norway has incurred (and will likely continue to incur), we do not see the Norwegian model for encouraging EV adoption as one that is sustainable or one that can be used in most other countries.  Therefore, we do not believe that the high rate of EV adoption in Norway is a relevant case study demonstrating EVs’ competitiveness with ICE vehicles or a possible future for EVs in other parts of the world, since it is virtually entirely supported by unsustainable government policy.  By our analysis EVs are still not close to becoming completive with ICE vehicles on an unsubsidized basis and continued improvements to ICEs will largely offset decreasing battery costs in EVs over the medium term.  Longer term, EVs could very possibly become the more economical option in most situations, but we do not think this is likely until at least 2035 absent a major technological breakthrough or change in market conditions.

One last issue we will examine is EVs’ actual effect thus far on petroleum consumption in Norway.  The country’s goal, of course, with its EV policy is to decrease CO2 emissions by decreasing petroleum demand across the country.  Replacing ICEs with EVs, one-for-one, without manipulating any other variables, obviously reduces petroleum consumption.  Petroleum and transportation have long gone hand-in-hand, as the large majority of our transport needs are met by petroleum and the large majority of petroleum consumed is used for transport.  Still, in Norway, despite rapid EV adoption, total petroleum demand has grown each of the last three years after bottoming out in 2014.  Obviously this trajectory cannot continue if current EV sales trends in the country continue.  However, it does provide an interesting example of how EV adoption can grow without causing outright petroleum demand declines.  The chart below plots Norwegian demand for petroleum products against the EV share of the total vehicle fleet in Norway.

 

It should be noted that most of the demand growth in the country has been for LPGs, but demand for gasoline and diesel have been relatively flat over the same period (gasoline demand has fallen while diesel demand has increased).  This is largely due to an increase in overall vehicle miles traveled in the country and Norwegians’ general preference towards PHEVs over Battery Electric Vehicles (BEVs) – roughly 2/3 of EVs sold in Norway in 2017 were PHEVs, thus limiting the effect on petroleum demand.

TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for diesel and other petroleum products.  Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook, with the next update due be released this Friday, February 16.  In addition, our Worldwide Refinery Construction Outlook, to be released soon after, provides a detailed list of global proposed refinery construction projects and an estimated likelihood for the eventual completion of each. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting us, visiting our website at turnermason.com or calling Cindy Parker at 214-754-0898.