Optimal road taxation for electric cars in Europe

Abstract

This paper determines the optimal kilometer tax (or subsidy) for electric vehicles (EVs) in 30 European countries, for both urban and rural areas. The analysis uses a second-best spatial equilibrium model, considering a market where gasoline and diesel cars are still in use. We analyze how interactions with the broader fiscal system affect the definition of this tax and its implications. Moreover, for each country, we show how the km-tax on EVs should be adjusted as the electric market share changes. Our study addresses an open question in the literature, exploring why different studies found taxing EVs to be optimal rather than subsidizing them in rural areas. We demonstrate this outcome is due to limited externalities’ impact in rural areas, which reduces the weight of the corrective component of the km-tax. Consequently, the fiscal interaction effect – positive when EVs’ share approaches zero – dominates, making taxation the optimal policy.