Sweden’s new bonus-malus scheme: From rocky roads to rounded fells?

Northern Sweden’s countryside is clad in peculiar mountains, called “fells” (fjäll). Rather than the cliché kind of rugged, sharp-edged mountains—think Toblerone—these have been rounded over by massive ice sheets that covered the region millennia ago. These fells resemble the kind of S-curve you commonly see in literature on market adoption of new technologies: a gentle, drawn-out slope in the beginning, followed by a steeper incline that ultimately flattens into a plateau.

Sweden’s electric vehicle (EV) uptake looks nothing like its fells. In a previous blog, we noted peaks in monthly EV market shares followed by sudden drops in sales—in one case from more than 5% to less than 1% in two consecutive months—induced by the rocky funding for the “super green car rebate” (supermiljöbilspremien). But Sweden’s new bonus-malus scheme, or “feebate” (fee + rebate) system, could change all that.

Starting on July 1, 2018, buyers of a car with CO2 emissions between 0 and 60 grams per kilometer (g/km) over the New European Driving Cycle (NEDC)—typically EVs such as battery electric vehicles (BEVs), fuel cell electric vehicles (FCEVs), and most plug-in hybrid electric vehicles (PHEVs) models—receive a rebate, or “bonus.” The maximum bonus is approximately 5,700 euros for zero-emission BEVs and FCEVs and decreases in a linear fashion as CO2 emission levels increase to 1,000 euros for vehicles emitting 60 g/km (see figure below). Prior to the introduction of the feebate scheme, the bonus was 3,800 euros for zero-emission vehicles and a flat rate of 1,800 euros for vehicles emitting 1–50 g CO2/km. (All monetary values here are based on an exchange rate of 1 Swedish krona = 0,0946 euros, which was the rate on 4 September 2018.)

Buyers of new gasoline and diesel cars with CO2 emission values above 95 g/km pay an increased annual ownership tax—the so-called malus (or “fee”)—during the first three years after first registration, and owners of diesel-powered vehicles pay an additional surcharge. After three years, the annual ownership tax is reduced to previous levels (see dotted line in figure below).

To illustrate: The owner of the diesel-fueled Volvo XC60 (the best-selling vehicle model in Sweden in 2017) with a CO2 value of 152 g/km, annually pays approximately 720 euros in the first three years, after which the tax is reduced to just over 300 euros per year. In contrast, the best-selling gasoline car (VW Golf, 129 g CO2/km) is taxed at an annual rate of approximately 300 euros in the first three years and thereafter at an annual rate of about 70 euros. Alternative-fuel vehicles (AFVs) using ethanol or natural gas are unaffected by the new tax rates.

On balance, the government expects the feebate system to generate revenues of about 1.1 billion Swedish krona (approximately 104 million euros) in 2018–2020, despite the substantial incentives for EVs.

Chart: Swedish vehicle tax policy.

Swedish vehicle tax policy in 2018. Solid lines represent the new bonus malus scheme. Dotted lines illustrate the reduced annual ownership tax rates after three years (also representing the ownership tax prior to the bonus malus scheme).

Early results regarding EV uptake look promising for the new feebate scheme. Following its introduction, EV registrations surged to historic highs, reaching 18% in July and 10%–11% in August and September (see figure below), up from an average of 6% in the preceding six months.

Chart: New car registrations, Sweden, 2018

Monthly powertrain/fuel shares of monthly new car registrations in Sweden in 2018 (Source: Statistics Sweden).

But it is too early to gauge the feebate’s overall impact on the Swedish new car market. Anticipating the malus on high-emitting vehicles, Swedes rushed to car dealerships before the feebate system was introduced, causing passenger car sales in June to jump almost 70% compared to June 2017 and, conversely, drop by 50% in July compared to July 2017. Although sales seem to have stabilized in August and September, the next months will furnish more representative data for trends in the Swedish car market. We will follow up on this topic once we can gauge whether EV uptake in Sweden is starting to resemble the fells of the country’s mountainous north.

Sweden needs the feebate system to work. The country is committed to an ambitious 70% reduction in greenhouse gas emissions from domestic transportation by 2030 (compared to a 2010 baseline). By offering substantial incentives for low-carbon vehicles and raising the cost for high emitters, the feebate system can play a vital role in shifting demand toward more efficient vehicles. Moreover, by ensuring that subsidies for EVs will be available for years to come, the feebate system signals to potential EV buyers that the rocky roads of unreliable funding are in the rearview mirror and that a smooth ride up the mountain lies ahead.

The Swedish feebate system, like the French, could resonate with other governments. For one, the shift from the super green car rebate to the feebate system shows off one of the benefits of feebates: if properly designed, they are sustainable, self-funding systems. The Swedish feebate also includes some clever details—like paying the bonus six months after car registration to counter any temptation of a buyer to collect the bonus and then immediately resell the car—that could inform policies elsewhere. What’s more, by increasing fees for gasoline- and diesel-powered vehicles and at the same time raise rebates for EVs—a massive political undertaking—the Swedish government has shown that it is possible to comprehensively overhaul vehicle taxes to support CO2 reduction efforts.

Fiscal policies