Tax Policies And The Car Market In Denmark

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In Denmark, taxation on cars is one of the highest in the world. There are two taxes that car owners in Denmark have to pay. The green tax and registration tax. Electric vehicles were previously exempt from paying both these taxes till 2015 and as a result sale for EV´s had risen to 4489 in 2015(Appendix 1). But then in that same year the government decided to remove the tax exemption for registration that Electric vehicle owners had. In addition, the registration tax for fossil fuelled cars was reduced in 2016. These two tax changes led to a decline in sales for EV´s but at the same time helped increase sales for fossil fuel cars.

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These two tax changes have resulted in changing the prices for both electric and fossil fuelled cars. Using the theory of price elasticities of demand, I will be assessing the impact the policies had on the sales for EV´s but also cross price elasticity of demand for electric and fossil fuelled vehicles. This analysis could help us find an appropriate policy for promoting electric vehicles. EV´s are also useful for reducing environmental externalities, including CO2 emissions that arise from the combustion of fossil fuels in cars. The theory of externalities will be used to assess whether the tax policies are beneficial for the economy but also society. Taxes are a way to control the demand for cars in a country. Therefore, I will be seeing to what extent the tax policies affected the Danish electric car market from 2014-17?

Methodology for Data Collection: For my research a key component needed was the sales data for cars. I couldn´t just count all the EV and cannot distinguish a diesel car from petrol car. Therefore, I had to use secondary sources, such as the governments websites, car magazines and local newspapers to find my data. The sales data was used to calculate the price elasticities of demand (PED) and cross price elasticities of demand (XED). They were calculated using their respective equations which I found in my economics coursebook from school. To further understand the tax changes and policies. I visited the Danish tax authority website were the new tax rules and payment methods were given, which helped me understand when exactly the policies were implemented. To find evidence for the negative effects of the policies I went to the OECD´s statistics website and looked for the CO2 emissions from cars from 2014-2017 and tax revenue from transport. The tax revenue was used to prove that the number of fossil fuelled cars is increasing; also, that EV´s are being charged registration tax, as the government is now getting more revenue. To find the prices of cars I visited the company website of the respective cars I had chosen to get an idea of the prices now and before the policies were implemented.

However, it would have been better if I had a larger range of electric and fossil fuelled vehicles, as then the average calculations would be a closer value to what the real-life value for the elasticities should be for the cars. The four Models were chosen with consideration, as they should be of similar price or calibre and should be able act as substitutes to one another. The Peugeot 208 was the most popular car in Denmark in 2016 and 2017; Is a more affordable and cheaper car. The Audi A6 however is a luxury car similar to a Tesla and is quite expensive with a similar price to the Tesla. Theories applied: As discussed above I will be using the economic theory of cross price elasticities of demand, price elasticities of demand, taxes and externalities. But first I will define them and explain how they apply to our real-life situation. Taxes are put on companies in the first place to compensate for the negative externalities they have for consuming and producing the product.

This is because their marginal private cost is lower than the actual cost society has to pay, marginal social cost. Generally, these negative externalities are related to air pollution, congestion of roads and accidents. More specifically externalities are the effect a transaction between the producers and consumers has on a 3rd party. Markets normally are unable to internalise the costs from these externalities in the price of cars. Taxes and subsidies however, shift the supply curve, thereby changing the cost of production which changes the sales of cars. In this way they are used to mitigate the effects of the negative externalities as they increase the cost producers have to pay and thereby governments get more money to pay for the problems caused by the sales of cars. Taxes on cars change the prices that consumers pay and therefore the other way to assess the effect of tax policies is cross price elasticities (XED) and price elasticities (PED). The XED measures the change in demand for a product to the change in price of another product. In our investigation I will be comparing change in demand for EV`s due to change in price of diesel cars; also, the taxes themselves and what change they bought in the demand for EV´s. Price elasticity of Demand is the measure of how much the demand changes due to a change in price of that product. But for both the price elasticities I will only be calculating them with reference EV´s as they are my main focus. PED for cars can have values greater or less than 0 (Fig 1) and if the sign is negative, it shows the inverse relationship between price and quantity demanded of the product. An elasticity less than 1 shows inelastic demand and vice versa. XED can also have a value greater or less than 1 but if the value is negative the two good compared are substitutes for one another and vice versa. The greater the value is to positive one the stronger the relationship between the products is as substitutes. According to a review of literature, the PED for European cars is -1. 09 while the XED is 0. 76. . The PED for electric cars when compared to other cars only is very high, as there are various substitutes for each car and therefore a slight change in price will reduce consumer demand significantly for that car, as people will buy other models that are cheaper or better. Which is why the XED is also very low as even a slight change in price for one car will make many more people buy different brands.

The XED is the measure of the change in demand for one product of one product over the change in demand for another. I hypothesize based on above that. The demand for electric cars is elastic and hence the PED for Electric cars is around -1 and the XED for Electric cars should be 0. 8. XED=%∆ in Demand A%∆ Price BPED=%∆ in Demand A%∆ Price AThese are equation which I will use to calculate the elasticities. Removal of Tax Break for EV´s: In 2015 the Danish government decided to remove the tax breaks electric vehicles had and planned to slowly increase the registration tax over a five-year period. At the time non-EV owners had to pay the large registration tax of 105% for cars below 81,000 Kr and 180% for cars above that price. The governments initial plan was to introduce a 20% registration tax in 2016, 40% in 2017, 65% in 2018 and finally 100% in 2019. The main reason for this sudden shift in policy was because the government felt that the electric car industry was becoming more self-sufficient; that they would respond positively to the change by developing more cheaper technology which would lower the price of production.

However, the Nissan leaf was very price elastic for change in the price of production and in our case, it indicates that the Demand had shifted significantly more than the supply, which implies that for a relatively smaller change in price, consumers will buy alternative cars or substitutes. Which means that the government policy greatly damaged the sales for electric cars. On average the PED was -1. 26, which means that electric cars were highly sensitive to the introduction of the registration tax implemented by the government. We can also conclude that Tesla was more inelastic compared to the Nissan leaf. This could be because it was a Veblen good; therefore, the high prices would still not deter as many customers as most of the people who buy Tesla´s have a surplus of disposable income. While people who buy the Nissan are form the middle class and will switch to substitutes instead buying the same car for more. Veblen goods are goods which are luxurious and make us feel richer and wealthier, therefore cars like Tesla become a symbol of wealth in society as we associate them with the rich. That is why even though the price goes up still the number of people not buying the Tesla will be lower as they think the price will be undermined by the praise and recognition they get from society. But in general, we can see that it reduced the demand for EV´s and caused prices for the EV´s to surge. Reduction of Registration Tax for Non-EV´s: The next year the government wanted to alter the car market and increase sales for diesel and petrol fuelled cars in mid-sized households, so that they could afford more safer and eco-friendly cars.

Prior to 2016, if diesel and petrol vehicles were above 81,700 Kr, they would be charged 180% in registration tax fees and 105% if below that price. The government then reduced the upper limit of the tax considerably to 150%, which saw an increase in sales for diesel, petrol and hybrid cars. The Sales will increase due to the increased demand caused by the lower prices, this can on a national level increase consumer spending and create job opportunities to meet the increased demand. The elasticities also effect the employment in an industry as, If the demand rises quickly over a short period, then the companies have to hire the appropriate number of workers needed for the increased demand. AD demand shifts to the left. AD=C+I+G+(X-i)Consumer spending on Cars has increased overalltherefore, diesel companies have upped production and hired more workers. Overall the number of Diesel cars sold went from 61,900 in 2015 to 77,581 in 2016. While Hybrid cars sold went from 2590 to 3358 in the same time period (Appendix 1). There is also another underlying reason as to why the registration tax was reduced, as it would enable middle class household to purchase more eco-friendly and efficient vehicles, which would reduce the car owner’s expenditure due to green-tax. Green Tax, is a fuel efficiency-based tax, which was introduced in 1997 to replace the old weight-based tax. This was done to make people buy eco-friendlier and energy efficient cars; to reduce pollution. Currently the green tax is payed annually or every 3-6 months. It is charged based on the electricity consumed per kilometre for electric and hybrid cars while for fossil fuelled cars, it is based off of their fuel(energy) consumed per kilometre. If people buy cleaner cars, then they can reduce their own expenditure, which means they can have more money to spend on other products or services, opportunity cost. To see how much the sales for electric cars were affected by the changes in price of the diesel cars. We can calculate the cross-price elasticities of demand. But first to see to what extent the policy in 2016 affected the fossil fuelled cars, we must calculate the Price elasticities for demand of fossil fuelled cars.

This proves indicates that the expensive fossil fuelled cars benefited more from the tax reduction, which is expected as it was the upper end for the registration tax that was slashed to a 150 %. But overall, we can see that the fossil fuelled market responded positively to the changes and was very responsive to the changes in price, as increase in demand was much greater than the change in price. It also indicates that even though the Audi is more expensive, relatively more new customers bought Audi´s, as it is a luxury good which people desire. As for XED, they will be calculated from the years of 2016-17. We will us the change in demand values based off the electric vehicles sales data and for the changes in price, we will use the data of the fossil fuelled vehicles. This because the policy in 2016 was aimed at fossil fuelled vehicles so it only changed the prices of those type of vehicles. %∆ Demand Tesla=15-7878×100=-80. 8 %%∆ Price Audi A6=-8. 6XED=%∆ in Demand A%∆ Price BXED of Tesla to Audi=-80. 8 %-8. 67%=9. 32XED of Nissan to Citroen=-89. 8 %-3. 73%=23. 97This indicates that they are very strong substitutes to each other and that the policy greatly affected the sales of electric cars in Denmark and was a major blow to the recovering Electric vehicle market. Which is why overall the sales plummeted from 1189 electric vehicles sold in 2016 to 286 the next year (Appendix 1).

15 April 2020

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