Norway Shows the World How to Achieve Electric Car Dominance
- Jun 19, 2021 10:03 am GMT
I love living in Norway. It’s a beautiful country with nothing other than the weather to complain about. But this Nordic dream comes with a sizable oil stain; a foundation built on 50 years of lucrative hydrocarbon exports.
From official data, I estimate that Norway has sold fossil fuels amounting to roughly 44 billion barrels of oil equivalent – a CO2 legacy in the vicinity of 15 gigatons. Norwegian production costs are attractively low, so we can reasonably assume a profit of $23/barrel to reach a cool $1 trillion in historical cumulative hydrocarbon profit (resource rent, to be more precise).
Unlike many other oil nations, Norway has wisely invested a sizable portion of these profits: $360 billion (roughly a third of the historical oil and gas windfall). Investment returns have been stellar, and Norway now sits on an oil fund worth almost $1.3 trillion.
For a country with only 5.3 million people, this is a stupendous amount of money. Think about it this way: Total US Federal tax revenues amount to 16% of GDP. For Norway, a below-average year with a 5% return on the fund’s investments will yield that same 16% of GDP in passive income! On top of that comes ongoing oil and gas rents of about 7% of GDP.
So, it’s not surprising that Norway experiences a little bit of pressure to do something real about climate change. And over the last decade, electric cars emerged as Norway’s shining climate light:
As shown above, battery-electric cars currently claim more than half of all new car sales in Norway, easily more than 10 times the global average. This article will analyze the secret sauce behind this amazing growth.
BEV vs. PHEV vs. HEV
There are three mainstream ways in which electric vehicles are used to reduce emissions in the transportation sector today:
- Battery electric vehicles (BEVs) that draw power from a large battery pack charged with grid electricity
- Plug-in hybrid electric vehicles (PHEVs) that have a smaller battery pack and can switch to an internal combustion engine when needed
- Hybrid electric vehicles (HEVs) that use a small battery and electric motor to optimize efficiency by allowing the internal combustion engine to run under ideal operating conditions more often
In this comparison, we’ll blindly follow the market into Jevons’ paradox and focus on SUVs: the Volkswagen ID4 (BEV), the Toyota RAV4 Prime (PHEV), and the Toyota RAV4 hybrid (HEV).
All three SUVs are essentially the same size and come equipped with all-wheel drive. Here are some other important specs (US pricing and efficiency):
If you look at these stats from a technology-neutral perspective, the RAV4 is the clear winner. But that’s before incentives…
The Benefits of Owning a BEV in Norway
First, it's important to establish that Norway does not subsidize BEVs. Instead, BEVs can avoid almost all the taxes and fees levied on regular vehicles. However, the effect on government finances is the same whether BEVs are incentivized via subsidies (higher expenses) or tax exemptions (lower income). Norway needs high taxes across the economy to finance public spending amounting to more than half of GDP, so large BEV tax exemptions leave a sizable hole in government budgets.
OK, let’s now unpack the incentives available to BEV buyers in Norway. To start, here are the current prices of these three models in Norway compared to the US prices listed above:
Already, the incentives are clearly visible. Whereas the ID4 is the most expensive of the three in the US, it’s the cheapest in Norway. Relative to the US, the ID4 is 12% more expensive in Norway, while the RAV4 hybrid is fully 76% more expensive.
These large differences arise because electric cars are exempt from two big up-front taxes: 25% VAT and a large additional tax dependent on the weight and CO2 emissions of the vehicle.
The RAV4 Prime skips the large additional tax due to its low CO2 emissions, a substantial benefit driving PHEV sales in Norway. Given this benefit, it looks like Toyota enjoys a big mark-up on the Prime, thanks to its status as the top-selling vehicle in Norway so far this year.
In addition, electric cars benefit from several running-cost incentives. First, Norway’s gasoline taxes are among the highest in the world, whereas electricity taxes are very low. The resulting fuel costs look like this:
As shown, the actual cost of fuel is similar between our three SUVs. This is something that all too few people realize: When taxed equally, BEVs offer little fuel cost savings relative to HEVs. In fact, if Norway were to sell gasoline close to the price of production (like electricity), hybrids may be cheaper to fuel.
Next, BEVs enjoy considerably lower tolls and parking fees. In addition, there is an annual insurance tax that is also lower for BEVs. Here’s the graph:
There are also other perks like driving in bus lanes and getting slightly lower loan interest rates. For the sake of comparison, we will assume $500 of value per year for bus lane driving (about $1 per trip) and $100 per year in lower interest. When everything is tallied up over a 5-year ownership period, it looks like this:
The small fees paid by the ID4 are essentially canceled out by the other BEV benefits. In total, the RAV4 Prime pays $23,300 more in taxes, whereas the RAV4 hybrid pays $36,500 more. Put another way, with all the taxes and other fees on the RAV4 in Norway, one could buy a whole extra RAV4 in the US.
CO2 Avoidance Costs
The best thing about BEVs in Norway is that electricity comes almost completely from clean hydropower. This means that BEV emissions relative to conventional cars come only from battery manufacturing.
From the above graph, a BEV like the ID4 with an 80 kWh battery will avoid about 15 tons of CO2 relative to an HEV when electricity emits no CO2 (zero well-to-tank fuel cycle emissions for the BEV). Relative to a PHEV, the saving is about 6 tons of CO2.
Hence, in total, the CO2 avoidance cost of incentivizing people to buy the ID4 in Norway is $36,500/15 = $2400/ton relative to the RAV4 and $23,300/6 = $3900/ton relative to the RAV4 Prime.
For perspective, each barrel of oil that Norway sells to help finance these large tax breaks emits about 0.43 tons of CO2 upon use. Making the $2400 required to avoid one ton of CO2 with the ID4 at the previously assumed resource rent of $23/barrel requires the sale of 104 barrels (45 tons of CO2). Relative to the RAV4 Prime, it comes to 73 tons of oil CO2 per ton of CO2 avoided. These numbers reveal the Norwegian BEV revolution to be little more than a band-aid on a 50-year oil legacy.
What Does This Mean?
To be honest, I'm not sure. Initially, extreme Norwegian BEV incentives made some sense to help a nascent industry get to its feet. But the share of Norwegian BEV sales relative to the rest of the world is no longer significant.
Maybe it’s about national pride. Norway would like to be one of the first countries to reach net-zero. But the country emits a mere 0.1% of global CO2, with only a third of this tiny fraction coming from transportation. Of far greater importance is the combustion of Norway’s oil and gas exports, which emits about 15x more CO2 than Norway emits locally. But we prefer not to talk about that.
Perhaps the most reasonable explanation is that Norway wants to sponsor the world's first large-scale experiment in exclusively electric mobility. So, what have we learned from this multi-billion-dollar-a-year experiment so far? As far as I can determine, there are three primary findings:
- Reaching a majority share of BEVs requires incentives that few other countries will be able to afford and avoids CO2 at a massive cost (even when electricity is 100% renewable).
- BEV incentives that keep rising with the vehicle price cause a large increase in the sales of 2.5-ton luxury SUVs.
- With enough incentives and hydropower, the dominant role of the car in city transportation systems can be preserved indefinitely, even in a carbon-constrained world.
The first finding is useful (although it is blatantly ignored at present), whereas the second and third are rather disappointing. Massive incentives for rich people to import luxury cars is one of the most frustrating aspects of this BEV expansion. Furthermore, an over-dependence on personal cars for city driving (the sweet spot for BEVs) is one of the most wasteful and unhealthy elements of our society.
But BEVs Will Soon Be Super Cheap!
Of course, the big argument for BEVs is that they will soon be so cheap that no one will want to buy a gasoline car anymore. Well, battery pack prices are currently around $140/kWh. If they halve again, they will lop $6500 off the price of the ID4 (including a 20% profit margin) — a mere 18% of the huge incentive the ID4 enjoys relative to the RAV4 in Norway.
The fact is that Norwegians are still buying PHEVs, HEVs, and regular gasoline and diesel cars despite incentives making BEVs a much cheaper option. For example, the ID4 is $15000–19100 cheaper over a 5-year ownership period (assuming that depreciation, insurance, and interest amount to 70% of the purchase cost) than the RAV4 models. Even for affluent Norwegians, that’s a sizable chunk of disposable income.
As far as I can tell, there are currently about 50 different BEV and 50 different PHEV models for sale in Norway, but only about 10 HEV models. Thus, when we look at availability-adjusted sales, BEVs are about twice as popular as PHEVs and similarly popular to HEVs.
This shows how highly car owners value freedom. Despite bigger battery packs and more fast chargers, the freedom offered by BEVs remains limited. The RAV4 hybrid has 500–600 miles of range that can be replenished in 5 minutes anywhere. But the ID4 is a little more complicated:
- It is rated at 260 miles of range in mixed driving. City-oriented use should yield an even greater range.
- For highway driving, however, the range may fall to 190 miles.
- If it’s around freezing point, you’re looking at 160 miles. Very cold (or very hot) days can be even worse.
- After some years with battery degradation, perhaps this goes down to about 140 miles.
- On a road trip, it’s too risky to go all the way to the limit, so you might want to drive only about 120 miles on a cold or hot day before recharging.
- When recharging, you can reach 80% in a reasonable time, but getting a full charge could take too long, cutting the practical range even further.
- If advanced driver-assistance tech one day safely increases highway speed limits, these restrictions will become even more severe.
Clearly, achieving the kind of freedom offered by gasoline will require a much larger battery pack than the ID4 has onboard (in conjunction with much faster chargers). This demand for ever-larger batteries and faster chargers will consume most of the remaining battery cost declines.
And in parallel, HEVs still have plenty of room for further cost reductions and efficiency and performance gains, creating increasingly stiff competition.
BEVs are great. They’re fun to drive, quiet, and free from tailpipe emissions. As a second family car for commuting or navigating the urban jungle, they make a compelling case, even without incentives. They’re also attractive to luxury/performance shoppers, given the electric performance and modest cost of a large battery pack relative to an expensive luxury car.
For the rest of us, though, BEVs are only an option when we receive huge incentives, creating CO2 avoidance costs that dwarf most alternatives. For large developing markets like China and India, electric cars actually emit considerably more CO2 than hybrids (see the final graph in this article).
Even so, policymakers worldwide seem to have developed a BEV obsession, and Norway is still receiving more praise for its progressive BEV policies than critique for its carbon exports.
I find this deeply disappointing. If we want to be progressive about personal mobility, we should transition to living spaces designed for people instead of cars and boost highly efficient virtual mobility. Developments like this one should get much more attention than Elon Musk’s latest tweet.
If Norway wants to do genuine good for the world, how about going all-in on decarbonizing its hydrocarbon exports via blue hydrogen? Capturing and storing just 1% of the carbon currently exported will avoid almost 10x more CO2 than all 350000 electric cars on Norway's roads today. Such an initiative can trigger massive CO2 cuts by setting a new standard for other oil & gas exporters and, as a welcome bonus, it can be quite profitable in a world hungry for low-carbon fuels.
There are signs of these vastly more effective climate and societal actions gaining some momentum, but the pure green ideal of wind, solar, and BEVs still hogs the limelight (and the incentives).
Let’s hope that climate pragmatism prevails in the end.
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