Reduced Incentives for Electric Vehicle Ownership Skip to content

Reduced Incentives for Electric Vehicle Ownership

By Ragnar Tómas

driving in reykjavík
Photo: Golli (eastward bound traffic from Reykjavík).

The government has revoked the VAT exemption for electric vehicles and introduced a new per-kilometre charge, affecting electric, plug-in hybrid, and hydrogen vehicles. Despite these changes, driving an electric vehicle will remain cheaper than operating petrol or diesel cars, according to government calculations.

Reduced incentives

As reported by RÚV yesterday, half of the cars sold in Iceland last year were electric vehicles – and that proportion exceeded 90% if cars sold to rental companies are excluded from statistics. Among the appeal of electric and hybrid vehicles to consumers are financial incentives. 

At the start of this new year, however, the costs associated with electric vehicles underwent significant changes. The government decided, for instance, to end the value-added tax exemption previously granted to electric vehicles. (This exemption amounted to a maximum of ISK 1.32 million [$9,600/€8,800].)

As noted in an article in Viðskiptablaðið from last year, incentives for purchasing electric vehicles were introduced in 2012 in the form of value-added tax exemptions: “… They carried no excise duties, unlike internal combustion engine vehicles, which were subject to excise duties ranging from 30 to 45% at registration, on top of which the value-added tax was then applied.”

Buyers may now, however, apply for a tax-free grant of ISK 400,000 to 900,000 [$2,900-6,500/€2,700-6,000] from the Energy Fund for the purchase of an electric vehicle. As noted by RÚV, the amount of the grant varies, based, among other things, on the age of the car. No grant will be given for passenger cars costing more than ISK 10 million [$72,600/€66,400].

Per-kilometre charge introduced

In addition to the revocation of the VAT exemption, a new per-kilometre charge for electric, plug-in hybrid, and hydrogen vehicles was formally adopted at the beginning of this year. This fee amounts to 6 króna per kilometre for electric and hydrogen vehicles and 2 króna per kilometre for plug-in hybrids.

As noted on Vegir okkar allra – a government website outlining the new per-kilometre fee system – based on an annual average driving distance of 14,000 kilometres (the national average for private vehicles), electric car owners can expect to pay ISK 7,000 per month [$51/€46] in kilometre charges, amounting to ISK 84,000 [$610/€557] annually. 

Furthermore, at least once a year, starting at the beginning of 2024, owners of electric, plug-in hybrid, and hydrogen vehicles must track and record their vehicle’s mileage on the website or app Ísland.is. The kilometre charge will be paid monthly, “similarly to how payments are made for electricity and other utility services,” the website notes. Owners must register a reading of their odometres by January 20, 2024, or incur an ISK 20,000 [$145/€133] late fee. 

A new system needed

As noted on Vegir okkar allra, the road system in Iceland is primarily funded by excise duties on oil and petrol. However, revenue from these fees is declining as more drivers switch to electric or hybrid vehicles, which contribute less to road financing, and as traditional vehicles become more fuel-efficient. 

The website notes that with the shift towards alternative energy sources, it has become evident that the current funding model has become unsustainable, especially as road maintenance costs rise. Therefore, a new system is being adopted to ensure fair road financing, independent of the vehicle’s energy source.

Next year, the government plans to introduce a kilometre charge for petrol and diesel vehicles, as well. This way, fees will be collected uniformly instead of being levied as fuel taxes on the latter group.

Still cheaper to drive electric

Although vehicle owners are expected to pay a similar amount for the road system regardless of their energy source, driving an electric vehicle will still be cheaper than petrol and diesel vehicles, according to government calculations.

“All things considered, it will be about ISK 160,000 [$1,162/€1,062] more expensive per year to drive an average petrol car compared to an electric car,” the website Vegir okkar allra notes. This includes costs like a carbon tax of about ISK 12,000 [$87/€80] per year and a significantly higher value-added tax, around ISK 46,000 [$334/€305] annually.

Additionally, it is estimated that the annual vehicle taxes for petrol and diesel cars are, on average, about ISK 3,000 [$87/€80] higher than for electric vehicles. The charges paid at petrol pumps are also expected to be slightly higher than the kilometre charge, averaging an additional ISK 3,000 [$87/€80] annually.

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