While record electric vehicle (EV) sales in high income countries keep making headlines they’re struggling to take off anywhere else. Sarah Keay-Bright plots a pathway for change. Like anywhere else, public investment must come first, carefully paving the way for private to follow. So that means getting the tax regime right. As taxes rise to disincentivise fossil cars those revenues will fall as people go electric. So they need to be replaced. New taxes are never popular – particularly when borne by low income people in low income countries – so making them socially equitable and then communicating the benefits to voters is essential. Softening the blow with smart charging, smart infrastructure and better market design will make the system more efficient and cheaper going forward. Electrifying public transport and even cycling will also ease the transition. Other important policies include expanding the market for second-hand EVs as they are more affordable to low income citizens. This article is part 1: part 2 focuses on scaling up private investment and reducing the cost of bus electrification. Let’s not forget that without low income nations electrifying transport, this journey is going nowhere.
This year’s IEA Global Electric Vehicle Outlook provides ample evidence that electromobility is spreading fast globally. In countries of east Europe there’s much evidence of policy action to promote electromobility. Nevertheless, the take up of electric vehicles (EVs) and roll out of publicly accessible charging infrastructure in east Europe generally lags far behind the EU’s market leaders.
In lower income countries, the harsh reality is that public budgets are often very strained, administrative capacity and capability is relatively weak and politicians are very sensitive to the impact of policies on the lower socio-economic classes and any public resistance.
Front-runners are most Western and Nordic countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Sweden and the UK
Followers: Italy, Portugal and Spain
Slow starters: Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia.
EV take-up in low income countries
While countries such as Poland and Hungary are leaders in east Europe with regard to adopting policy and legal frameworks to promote and prepare for electromobility, many countries sit and wait. As time goes on, however, this becomes an increasingly risky strategy. Higher income countries of the EU have successfully driven EV adoption and price reductions for the European market while EU legislation limiting CO2 emissions from cars has forced manufacturers to increase their EV offerings. Purchase price parity between internal combustion engines (ICEs) and EVs is not far away, with BNEF estimating 2022 for large car segments.
Being prepared for electromobility makes it easier to minimise costs and maximise the benefits while being ill-prepared risks unnecessarily higher costs and greater political risk, which deters investors. Indeed, it may take many years for EV numbers to increase to significant levels, but it also takes many years to develop and implement reforms to taxation regimes and power market design, among other things. This policy change for the longer term needs to be in motion now.
This article, in two parts, discusses some policy approaches and measures that will help lower income countries to proactively prepare for electromobility while keeping the costs down, which is crucial for ensuring social acceptance.
Expand the market for second-hand EVs
In lower income countries, people tend to buy used cars and just one car, which they use for all trips. This contrasts with richer countries where the EV is often the second car for households. Where incentives do exist in lower income countries to promote EVs, plug-in hybrid electric vehicles (PHEVs) are often far more popular than battery electric vehicles (BEVs) as they can be charged very cheaply at home and can be used for all trips, as PHEVs provide the back-up of an ICE (internal combustion engine), which is essential when publicly accessible charging infrastructure is not available.
Governments of lower income countries have typically not been able to raise enough revenues from polluting cars to sustainably fund the incentives needed to close the price gap between ICEs and EVs. Consequently, demand for EVs is too weak to attract private investment in charging infrastructure.
Some lower income countries, however, have managed to close the price gap on used PHEVs. For example, large numbers of used PHEVs were imported into the Ukraine, Jordan and Sri Lanka (all with GDP per capita under Euro 3,890 (2018)) in response to tax discounts and exemptions for EVs. Unfortunately, the governments of Sri Lanka and Jordan, surprised by the success of their policies in promoting EVs, have since acted to reverse the loss in taxation revenues by removing the tax breaks for EVs rather than raising taxes on polluting cars. Romania’s Rabla Programme provides another example of unsustainable fiscal policy as generous subsidies, approximately equivalent to Euro 10,000, were introduced to encourage new BEV purchases but political efforts to increase revenues through an environmental tax on vehicles are currently stalled.
In the European market, large volumes of used cars flow from higher income countries to lower income countries. While the share of used EVs in this flow is sure to grow, the share of highly polluting vehicles is currently significant and problematic. It is possible, as evidenced by T&E (European Federation for Transport & Environment) and UNEP/UNECE, for importing countries to adopt measures that promote the import of EVs and very low emission vehicles and prevent the import of highly polluting cars. This policy approach, which for EU members would need to be compatible with the single market, essentially regulates the quality of supply of used cars.
Make taxes both socially equitable and effective
Many countries in east Europe apply one-off purchase taxes or registration fees and annual taxes to vehicles. While discounts and exemptions for EVs are common, linking taxes to emissions is uncommon. Furthermore, fiscal policies in these countries typically have far weaker influence on purchase choices of used cars compared to new cars.
In some vehicle taxation regimes, social policy is evident and perverse incentives to purchase polluting cars exist. For example, vehicle taxes in Turkey decline with the age of the vehicle and increase with sales price. ICCT analysis shows that Turkey’s uptake of EVs is relatively low despite its vehicle taxes being among the very highest in Europe and that restructuring vehicle taxation by linking to emissions performance would change that. Similarly, analysis by T&E sets out how vehicle and fuel taxes could be reformed in order to reduce emissions while being socially equitable and economically smart. Taxes raised must cover the cost of any incentives and as the policy takes effect, with consequent decline in revenues, it must be possible to make timely adjustments.
In the longer term, when consumers start purchasing EVs in significant numbers, the pressure on governments to address declining revenues will intensify as many countries will lose taxes on diesel and gasoline fuels and not fully regain them through electricity taxes or rates. This is because electricity is often subsidised and network or utility tariffs fail to fully recover costs, plus EVs are simply far more efficient compared to ICEs. As with vehicle and fuel taxes, public resistance to increases in electricity prices is a common and critical challenge for governments.
As fossil cars decline, that tax source must be replaced
Nevertheless, governments must attempt to raise sufficient revenues to fund the maintenance and development of transport infrastructure and services as well as to address the transport-related externalities that will continue to persist, such as congestion, accidents and infrastructure damage. Sufficient revenues are also needed to decarbonise, modernise and maintain the power system. Importantly, full cost recovery is a condition for attracting private investment.
The key drivers of road costs, environmental degradation and congestion, which should be the basis for any tax policy design, include emissions, width and weight of vehicles, the miles driven and the time and location of travel. Different mechanisms, or a combination, can be used to levy the taxes, such as road-user charging, taxation on electricity (via dynamic prices/tariffs designed for smart charging – discussed later in more detail) and the more traditional purchase/registration and annual vehicle taxes.
The social acceptability of tax reforms is clearly something that needs very careful consideration. A well-designed consultation process needs to accompany development of reforms and should include all stakeholders, particularly consumers. The logic underpinning the tax policy design needs to be transparent and well-communicated and could include explanation of how revenues will be allocated or spent and how the tax policy is incorporated within a wider strategy and policy package. Quantifying and communicating the value of societal benefits will also be helpful. The impact on different socio-economic groups needs to be assessed and taken into account though any support for low income households and individuals can be provided through separate, targeted social policy measures. Restructuring taxation without initially increasing the total tax take along with gradual phase-in of any increases can also help secure public support.
Grid balancing: exploit demand response and enable smart-charging
Cost-effective integration of EVs into power systems requires smart-charging, which involves control of the timing, power draw and duration of charging. A recent report by IRENA illustrates how smart-charging of EVs can save billions of Euros in grid investments by minimising the negative impact of EVs on the power system and by providing cost-effective flexibility to integrate variable renewable energy into the grid.
In many lower income countries, grids are often suffering from under-investment as tariffs fail to fully recover costs and reliability performance is consequently poor. For example, distribution grids in Romania and Poland are among the most unreliable in the EU and uncontrolled charging of relatively large EV loads at distribution level could easily exacerbate this. Consider that a full recharge of the Peugeot iOn would consume around 3 times the average daily electricity consumption of a Romanian household, which is just under 5 kWh/day (for comparison, the average Norwegian household consumes 41 kWh/day).
At first, relatively simple dynamic prices such as time-of-use (TOU) tariffs, with different prices for different blocks of time (e.g. day and night), can be used in combination with automatic timers. It is encouraging that some countries in east Europe – such as Poland, Czechia, Slovakia, Hungary and Croatia – are starting to use TOU pricing to manage energy demand. Romania is a leader in the region as its experience with dynamic pricing includes TOU and more sophisticated hourly real-time pricing and critical peak pricing.
Smart-charging 2.0, better market design
More sophisticated smart-charging, which will deliver much larger cost savings according to a study by Artelys, will require EV owners to contract with third parties that can aggregate loads and respond to multiple price signals from various sources including the wholesale power markets and networks. EU Member States have the benefit of a new ‘Clean Energy for all Europeans’ package of legislation that, among other things, introduces reforms to electricity market design aimed at ensuring: electricity prices better reflect scarcity or surplus of power supply or network capacity; electricity markets are open to demand response and aggregators; DSOs play a more proactive role in enabling electromobility and in using demand response; and consumers are entitled to a dynamic electricity price contract. Early implementation of this legislation is a no-regrets strategy for EU members. Non-EU countries can exploit the opportunity to tap EU experience and adopt the key provisions relevant to enabling demand response and electromobility preparedness.
Smart-charging needs more than smart prices, however, as it cannot be tapped unless charging infrastructure has adequate smart functionality and interoperability. Analysis by the Regulatory Assistance Project makes the case for countries to get this right at the earliest stage and to strategically exploit existing grid and transport infrastructure in order to minimise costs. Priority actions must also include swift adoption of common communications protocols and standards, vehicle equipment standards and charger equipment standards. Governments also need to ensure universal access to charging infrastructure, competition among service providers, consumer data protection and availability of data regarding location and status of charging stations. The EU’s Sustainable Transport Forum currently discusses relevant issues that may require further EU legislation or regulations, including reform of Directive 2014/94 on alternative fuels infrastructure.
Stronger policy to electrify cycling and public transport
Cycling and public transport provide more affordable and environmentally-friendly mobility compared with private cars. The introduction of fiscal reforms to increase revenues from polluting cars would likely be more socially acceptable if presented as part of a wider policy package involving stronger policy support for cycling and public transport. Furthermore, research by the UK’s Bicycle Association and European Cycling Federation shows that the cost-benefit-analysis of policies to support electrification of cycling are considerably more favourable compared with those for private EVs.
Public procurement mandates and licensing requirements for public transport services are proven, effective policy interventions that can kick-start demand for EVs and charging infrastructure. There exists plenty of scope for modal shift from passenger cars to buses. As public procurement accounts for 75% of all new bus registrations in the EU, part 2 focuses on the opportunities to scale up private investment and reduce costs in bus electrification through coordinated mass public procurement and innovative financing mechanisms.
Sarah Keay-Bright is the former Head of Energy Efficiency at the Energy Charter Secretariat