Electric vehicle tax guide 2021: The double-edged sword of EV incentives

19 April 2021

The automotive industry has taken some big hits as the world fights back against the COVID-19 pandemic. As many European governments take up arms, the automotive industry is handling a double-edged sword. Autovista Group’s chief economist Dr. Christof Engelskirchen ponders the pros and cons of efforts by governments to incentivise electrically-chargeable vehicle (EV) purchases. Download our updated whitepaper on EV incentive programmes across Europe.

High up-front discounts granted on the purchase of new cars, and their negative impact on residual values (RVs), is a phenomenon often observed within the automotive industry. It was a topic covered recently in Autovista Group’s piece on the impact of sales planning on RVs.

Lower RVs do not only represent a direct economic loss for those with vehicles on their balance sheets. They also prevent profitable new-car sales, as they make it almost impossible to offer competitive and sustainable leasing rates.

Many battles on many fronts

The automotive industry is fighting a number of battles on several fronts. There are new technologies to develop, competitors to keep up with, the shift to zero-emissions and depressed margins. The pandemic and its associated lockdowns have served to intensify these pressures. Furthermore, supply chains are disrupted due to ongoing semiconductor shortages.

The economic recovery will extend well into 2022. Many jobs are still at risk and it is sensible for governments to soften the blow by supporting the EV transition financially. However, incentive programmes that focus solely on stimulating demand for new cars can also be problematic in their own right.

For example, up-front, transparent and long-term incentives send the signal that new cars are overpriced. The lower transaction prices of new cars then have a knock-on effect on used cars, lowering their RVs.

Incentives are like a drug, and an exhausted incentive scheme creates a bigger demand gap. Many push the purchase of their vehicle forward because of a scheme, as observed in France in 2020, where used-car prices are rising because their purchase was incentivised by the government. This scheme has now ended but was replaced by one supporting the purchase of used BEVs with €1,000.

Different approaches

The existing government incentive schemes in the big European markets are diverse and show how differently countries are approaching the topic. For example, there is a very strong stimulating effect derived from the very high purchase incentives for battery-electric vehicles (BEVs) and plug-in hybrids (PHEVs) in France and Germany. Acquisition tax benefits are relatively small in France, Germany and Spain. Where there are company-car tax incentives, they are usually very impactful as stimuli, like in Germany and the UK.

For more on how incentive schemes can be both a saving grace in hard times and a complicating long-term factor, read our whitepaper. It goes on to identify other complications that come about as a result of governments promoting vehicle purchases. There is also a detailed breakdown of the different incentive schemes for 17 European markets and the risk these schemes represent for the RVs of EVs.

And don’t forget to tune in to our next webinar on 22 April; Europe’s used-car market recovery from COVID-19.