Electric vehicles hit high gear
Electric vehicles represent the biggest change in personal transport since the end of the horse and cart, but governments are grappling with how to wind back financial incentives. Are there better ways to drive the buyers towards a lower emission fleet?
In early 2019, government financial support for the global electric vehicle market looked to be running out of gas.
China, the world’s biggest market for EVs, with close to 800,000 pure electric vehicle registrations in 2018, was threatening to end its range of tax incentives.
Market commentators in the US pointed to looming caps on tax credits there for the biggest dealers, including Tesla and General Motors, and forecast a difficult road ahead.
And some key European markets, including Germany and Norway, were on track to wind incentives back, at least in part.
Roll forward a year and the landscape has changed.
“As governments start to look at clean air targets in cities as well as how they meet emissions targets, EVs are a big part of the answer.”
– Steve Freeman
An estimated 2.2 million passenger EVs were sold in 2019, up more than 10 per cent on the previous year, and taking a market share of 2.5 per cent of the total vehicle market.
Demand in 2020 is expected to be even stronger, with a range of countries that have been late to introduce EV incentives beginning to see the impact of subsidies and credits.
So how critical is the prolonged use of EV incentives to help this emerging section of the automotive sector hit high gear?
Steve Freeman heads the National Motor Sector Practice for Baker Tilly’s UK firm MHA MacIntyre Hudson, as well as working across borders with other firms in the network on the sector.
He says financial incentives are the obvious way to move buyers from internal combustion engine or ICE cars to EVs, but they are only one part of a bigger mix of government options needed to encourage the sector.
“Right now it is all about tax incentives, and when you look at countries like the Nordic region, one of the reasons EVs are so attractive there is because of the significant tax breaks,” he says.
“But when you think about how governments look at things like climate change and air pollution, transport is one of the areas where you can really influence energy policy in the longer term. Transport is one of the easiest ways that you can address the climate change challenge.
“As governments start to look at clean air targets in cities as well as how they meet emissions targets, EVs are a big part of the answer.”
The world’s biggest EV market is in China — with three times the number of EVs as the US and 16 times as many as the third biggest market, Norway.
The market for EVs in China has been fuelled by a range of incentives – the cars are not subject to registration restrictions or driving bans on certain days, for example, conditions that apply to vehicles with internal combustion engines (ICEs) in Chinese megacities. Purchase incentives have also been thrown into the bargain.
Yet the country signalled in March 2019 that it would reduce incentives on offer for EVs and had considered phasing them out altogether, although it has since changed tack.
As the first changes in the incentive policy took effect, sales of electric and hybrid vehicles in China during 2019 dropped for the first time in more than two years. By October, deliveries in China had fallen 48% year-on-year, dropping below the levels seen in 2017.
As incentive changes took effect, sales in China during 2019 dropped for the first time in more than two years. By October, deliveries had fallen 48% year-on-year, below 2017 levels.
In January, China announced it would not make any further cuts to its New Energy Vehicle incentive program this year, reassuring markets – but the point was made.
Other countries that had sought to pare back EV inducements are now putting the reductions on hold or are considering a slower withdrawal rate for support.
Germany’s incentives were due to end at the conclusion of 2020, but after failing to meet its target of a million EVs on the road by 2020 this has been delayed to 2025, and comes with a promise to also invest €3.5 billion to expand the number of electric car charging stations to 50,000 by 2022, en route to a million by 2030.
Norway’s EV incentives, already extended from a 2017 sunset to 2020, will now remain in place until at least 2021, and the country is on track to stop the sales of ICEs by 2025.
One jurisdiction where credits have diminished is the US, where lawmakers decided not to support an expanded EV tax credit, although this hasn’t appeared to slow sales.
The US EV tax credit provides $7,500 consumer tax credit only to a carmaker’s first 200,000 electric cars — a cap both Tesla and General Motors have already hit and which Nissan is nearing.
A bipartisan bill to expand the scheme to allow a $7,000 credit for the next 400,000 sold was left out of Congressional bills in December despite furious lobbying by the car makers.
Emissions targets help steer policy
While incentives work, other factors are spurring the market along — particularly the pressure on governments to curb vehicle emissions, with transport the fastest growing contributor to global emissions.
The UK, which has targeted vehicles as a way to meet goal of Net Zero Emissions by 2050, was already working to a tight timeframe to phase out ICE vehicles by 2040, says Jon Pollock, EV Consultancy Lead at MHA Macintyre Hudson.
But in late January, the phase-out date for ICE vehicles was brought forward five years to 2035, according to a commitment from Prime Minister Boris Johnson.
Controversially that ban is set to include hybrid cars – that is, petrol-electric vehicles – a move fiercely criticised by the automotive industry, which is relying on consumers buying hybrid cars as a step towards battery electric vehicles.
The news served to focus the mind of car buyers and online searches for electric cars surged in the hours following the announcement.
“If the right investment goes into the grid, then the onus comes on the manufacturers to make the vehicles available.”
– Jon Pollock
Mr Pollock says the UK Government is a key enabler for the EV market, with control of the levers that could incentivise sales as well as the infrastructure to support EVs on the road.
“The National Grid effectively is the first enabler for infrastructure, whether it is public charging or home charging,” he says.
“If the right investment goes into the grid to deliver the infrastructure, then the onus becomes on the manufacturers to make the vehicles available.
“It is about working smarter in terms of the how the grid is used. If the government commits to that infrastructure support, which it is likely to do in light of this announcement, then manufacturers need to make the product and bring it to market.”
In a post-Brexit environment, price will remain a critical issue for the UK’s take-up of EVs, particularly at the consumer level, Mr Pollock says, with government support able to help consumers bridge the gap between the EV they want and the ICE they can afford.
“In the first instance people are overly influenced by the raw price, and, of course, the incentives around that,” he says.
“The government’s part of the deal here is to continue to support and or possibly increase support either through tax relief or through related benefits, like, for example, being allowed to use electric vehicles as fast lanes.
“The fiscal benefits given to the retail consumer will pull them along. That then allows the manufacturer, as battery technology improves and costs decline, to start bringing the price closer to parity between a nice internal combustion engine car and an electric car.
“The tipping point for that kind of price alignment is around about 2025. Of course, that can be brought forward particularly by government-related incentives.”
How the UK plans to break with ICEs
It is becoming increasingly attractive to operate an electric vehicle in the United Kingdom thanks to a combination of incentives and penalties designed to slash emissions.
Alongside emissions charges cropping up for vehicles entering the biggest British cities are several tax breaks for EVs and their green cousins, ultra-low-emission vehicles or ULEVs.
They include generous concessions for benefit-in-kind (or BiK) taxes on company cars over the next three years, a 100 per cent corporation tax offset within the first year of buying an electric vehicle, and a significantly lower VAT for electricity when compared to petrol or diesel.
A plug-in grant from the government which shaves up to GBP3500 from the purchase price of an electric vehicle is set to end in 2020, unless lobbying to retain it is successful.
MHA Macintyre Hudson employment tax director Nigel Morris says a company will pay no BiK tax on an EV or ULEV in 2020-21, compared with 16 per cent for other vehicles, and 1 per cent and 2 per cent, respectively, over the following two years.
“That is influencing decisions quite a lot and we’re getting quite a lot of calls from individuals and businesses,” Mr Morris says.
“There’s still a lot of misunderstanding or lack of awareness of what all of this looks like from a benefit-in-kind perspective, and from a capital allowances leasing perspective.”
Factors like the higher purchase cost of an EV and a lack of compatible charging infrastructure mean it is not yet an automatic choice for fleet buyers to go electric, but the latest push by the UK Government to close the window on ICEs (and potentially on hybrids) is likely to assist.
“Our overriding message will always be to have a fleet policy that is a hybrid — look at your users and look at the requirements of those users and then fit to those users the type of vehicles and procurement method that’s most appropriate,” Mr Morris says.
“There will be more and more drivers that where full electric vehicles are the answer compared to where they weren’t. Hybrid and internal combustion engine vehicles are still the answer for some.
“Fleet buyers typically operate on a three to four-year cycle. At the moment these is no one-size-fits-all for a fleet decision maker for the next cycle.
“In the next cycle there’ll be even more businesses where full electric is the right answer and fewer where hybrid or ICE is the answer. At the moment it’s an even split between the three.
“It would be our hope and expectation, given everything we’re aware of that’s going on, that in three years’ time it will be a very different landscape and a lot more supportive in ecosystem terms.”
Ongoing tax breaks for EVs raises the question of how transport infrastructure can be funded in the future when revenue from taxing fossil fuel-driven vehicles falls away. But Mr Morris says it is not yet a concern.
“The tipping point is quite a long way in the future where the loss of revenue on fuel duty has any kind of significant impact on the Treasury,” Mr Morris says.
Unlike some of its European neighbours, the UK has few toll roads and little appetite from British motorists to pay for them but an alternative form of road pricing in which technology is used to record a vehicle’s road use would avoid the cost of setting up tolling.
“That would be the nirvana for everyone. It’s road pricing but without the physical infrastructure.”
Why New Zealand’s EV drive hasn’t left first gear
For countries with limited or no incentives, the contrast with EV-embracing nations such as Norway can seem stark.
Annette Azuma is a Business Advisory Director with Baker Tilly Staples Rodway in New Zealand and a long-time board member of the country’s EV group Drive Electric.
Back in 2016, New Zealand set a target of having 64,000 EV cars on the road, she says, and followed this up in 2017 with a goal of having half the government-owned fleet electric by 2025.
But despite the lofty goals, neither is close to being achieved.
Only 19,285 EVs were registered as of January 2020 and the EV fleet initiative was abandoned late last year with news that just 73 cars out of 15,400 government vehicles were EVs.
“There is a lot of interest in New Zealand, because we tend to be an early adopter, the younger generation in particular is very interested in the environment, and in general people are open to the idea of EVs,” Ms Azuma says.
“But we are very different to Norway, which provided subsidies to individuals so more people could purchase electric vehicles. New Zealand has none of that.”
With 5.3 million vehicles, and only 4.9 million people, New Zealand’s car market is an unusual one.
“The government ‘carrot’ to help progress the changeover is hardly there and actual tax or cash incentives have still not eventuated.”
– Annette Azuma
The country has a comparatively old light vehicle fleet – with an average vehicle age of 14 years. That’s nearly five years older than in neighbouring Australia, three years older than in the US, and almost seven years older than the UK. Limited public transport infrastructure also mean families regularly have two or three cars, making for a large per capita fleet.
The age of the New Zealand fleet is heavily influenced by the second-hand import market from Japan, Ms Azuma says, and while this initially saw an influx of plug-in hybrids, used EVs are slowly making their way into the car market as well.
“New Zealand is probably the largest importer of second hand cars from Japan and a lot of hybrids came in under the second hand market,” she says.
“But the government ‘carrot’ to help progress the changeover is hardly there and actual tax incentives or cash incentives have still not eventuated.”
Drive Electric has put forward a range of options that New Zealand government could explore, from increasing the depreciation rate for EVs, to lowering the fringe benefits tax rate or eliminating it altogether.
Another option would be to allow drivers to claim back a higher mileage rebate for commercial use or enable employers to make low-interest loans for employees to buy EVs.
Despite the sluggish take-up, one area where New Zealand is seeing movement is among corporate buyers — with fleet purchases seen as a way of demonstrating corporate social responsibility.
“A lot of New Zealand companies want to have good reputations and be able to say, ‘we are making a given per cent of our fleet electric’ by a certain date,” she says.
“At Drive Electric we would really like to see this supported because corporates have a lot more money to buy EVs and then when their employees are driving them, you will start to see greater awareness.”
In the absence of a carrot incentive, there is the possibility of emissions targets acting as a stick.
At 180g CO₂/km, the emissions of newly imported vehicles in New Zealand are 50 per cent higher than in Europe. Because of the lack of a fuel efficiency standard, importers provide less efficient versions of their best-sellers to the New Zealand market.
But Ms Azuma says a proposed fuel efficiency standard would require car importers to either meet it or pay a fine. The suggested standard is 150gCO₂/km in 2021, falling to 105gCO₂/km in 2025, with further falls thereafter.
Cars emitting less than the current threshold would receive a discount, initially up to NZ$1800 for an efficient petrol car, up to NZ$4800 for a hybrid and up to NZ$8000 for a battery electric car. Cars costing more than NZ$80,000 would not receive a discount.