Fiscal Policy Can Suppress Electric Vehicle Prices: Here's the Scheme

To reduce air pollution from motor vehicle emissions, Indonesian society needs to transition to electric vehicles.

However, this transition requires government support, including fiscal policies in the domestic vehicle market.

This is implied in the academic paper *Standard Carbon Kendaraan dan Feebate/Rebate Fiscal Policy Percepatan Kendaraan Listrik* (2022) from the Leaded Gasoline Elimination Committee (KPBB).

According to the document, to accelerate the electric vehicle transition, the government first needs to establish Vehicle Carbon Standards, namely the maximum emission standard that vehicles may produce, measured in grams of carbon dioxide per kilometer (grCO2/km).

After that, the government is proposed to implement a fiscal policy in the form of incentives (rebate) for vehicles that meet the standard, and simultaneously impose disincentives (feebate)/additional costs/excise duties on vehicles that violate the standard.

The proceeds from the feebate or excise duty can then be used to pay incentives for vehicles that meet the emission standards.

"Thus, this scheme does not burden government finances. Even if many vehicle products do not meet the carbon standard, there is potential for increased government revenue from excise duties," said the KPBB team in their academic paper.

Simulation of the Effect of Fiscal Policy on Vehicle Prices

KPBB also created a simulation calculating vehicle prices with a rebate and feebate scheme based on carbon emission standards.

For example, a 125-kilowatt (kW) battery electric vehicle (BEV) currently sells for Rp715 million per unit on the market, with a cost of goods sold/production cost before rebate/feebate of Rp429.43 million per unit.

Because BEVs are free from carbon emissions, BEVs can receive a fiscal incentive (rebate) of approximately Rp54.8 million per unit.

After adding other state taxes/levies and the company's profit margin, the BEV can then be sold at a new price of Rp486.28 million.

On the other hand, hybrid electric vehicles (HEVs) can be given smaller incentives (rebate) because they still emit carbon.

Conventional gasoline and diesel-based vehicles can be subject to disincentives (feebate)/excise duties due to their high carbon emissions, so their new selling price becomes more expensive than BEVs, as shown in the graph.

"The application of incentives for low-carbon vehicles based on PP No. 74/2021 has not been effective in controlling carbon emissions. This is because the incentives provided are not able to influence the total price of the car that consumers have to pay, where ICE technology and HEV vehicles are still much cheaper than BEV electric vehicles," said the KPBB team.

"Whereas if the feebate/rebate scheme is implemented, it will effectively impact a new equilibrium where the price of BEVs is cheaper than vehicles with ICE technology, so they are relatively able to compete and penetrate the market," they continued.