How Can Tiny Norway Afford to Buy So Many Teslas? (Ep. 182)

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(Photo: Tesla Motors)

(Photo: Tesla Motors)

Until recently, tiny Norway (population 5 million) has been the second largest market for Teslas (after the U.S.). Earlier this year, Tesla’s Model S became the best-selling car in the country ever for a one-month period. Not bad for a luxury electric vehicle whose base price in Norway is over $100,000. What’s behind this Tesla boom?

That’s the question we try to answer in this episode of Freakonomics Radio. It’s called “How Can Tiny Norway Afford to Buy So Many Teslas?” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

It turns out that Teslas, along with other electric vehicles, are massively subsidized by the Norwegian government. Tesla’s website advertises the generous incentives available to Norwegian buyers, including exemptions from very hefty sales taxes. What does that do to the net price of a Tesla? We asked Martin Skancke, a former high-ranking government official:

MARTIN SKANCKE: The difference between the price of a Tesla and the price of a similar gasoline-driven car is huge in Norway compared to other countries. So in relative terms, the Tesla is a lot cheaper than other cars.

By most measures, Norway is among the greenest countries on Earth. It gets virtually all of its electricity from hydropower; it plans to cut its greenhouse emissions by 30% by 2020; and it has more electric vehicles per capita than any country in the world. But Norway is also the biggest oil producer in Western Europe and the world’s third-largest exporter of natural gas. All that petroleum money allows Norway to subsidize its green lifestyle; it has also helped create what is now the largest sovereign wealth fund in the world, soon projected to top $1 trillion.

You might think that discovering all that petroleum would be an unambiguous blessing. But Norway’s economy struggled in the beginning, thanks to an affliction known as “Dutch Disease.” (The Netherlands faced similar faced similar problems after it began exporting natural gas.) As explained by Daron Acemoglu, an MIT economist and co-author of Why Nations Fail:

DARON ACEMOGLU: The economy becomes too specialized in the production and the export of the natural resources, crowding out the other sectors of the economy.

Norway created its sovereign wealth fund in large part to avoid this malady, and to ensure future prosperity for its citizens.  Martin Skancke was one of the civil servants tasked with creating the fund:

SKANCKE: So I think it was seen primarily as a tool to stabilize the economy and to introduce sort of a buffer between the very volatile oil revenues and the non-oil economy.

“Dutch Disease” is, as Acemoglu tells us, just one facet of what is more broadly known as “the natural-resource curse”:

ACEMOGLU: What the abundance of natural resources does is it incentivizes lots of groups to become much more conflictual in order to take control of state institutions, be able to be become politically powerful, or blocking actors in order to be able to benefit from these natural resource rents. And the extreme form of this is the sort of civil wars that have ravaged countries like Sierra Leone and Angola where diamonds, another form of natural resource that’s perhaps even easier to mine and exploit than oil, have played a major role, or the huge political instabilities that have erupted in places like Venezuela and Nigeria around the oil economy.

The fact is that Norway is the only liberal democracy among the countries that have the richest sovereign wealth funds, a list including Saudi Arabia, China, the United Arab Emirates, and Kuwait.

Special thanks to Dag Lausund at Innotown, who inspired this episode, and to Norwegian journalists Solvår Øyen and Sindre Leganger for on-the-ground reporting. Check out Leganger’s Norwegian language podcast NRK Radiodokumentaren.

Thanks also to Jay Cole at Inside EVs, John Stoll at The Wall Street Journal, Chuck Jones at Forbes, and Angelo Young at The International Business Times for helping us sort through electric-vehicle sales data.


Don Conley

Always thought that spending money was the same as voting ... Economically that is. We all want batteries to improve at a faster rate. Vote for batteries. When we all started portable computing the need for portable batteries sent economic resources towards portable batteries. Batteries improved.
A Tesla is a big battery on wheels. How many laptops equal a Tesla? How much of the economic river of resources diverts towards battery technology with each Tesla sold?
Enough about batteries. What about economically voting for a company that makes cars that don't polute the air. Somebody has to buy Teslas or there won't be any. Isn't it a worthy cause? They should buy a Mercedes instead? Should they keep sending all the economic resources to companies that still put CD players and internal combustion engines into their expensive automobiles?
Don't exactly understand the hypocrisy argument but it is the only argument you bring up. What about the economic voting argument? Economic voting, it is as saying let the market decide. You missed the opportunity to teach an important lesson about money, what it is and how it works. Instead you decided to link spending money to being a hypocrite. Now what am I doing if I support your podcast?

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Christopher

When I visited Norway last year, one Norwegian I met pointed out that Norwegians appreciate the value of the public wealth, and see it as part of their own private wealth - an interesting attitude that shapes the way people see things like high taxes, and presumably, the sovereign wealth fund: the oil wealth belongs to everyone, and not just everyone *now*, but in perpetuity; to use it up now would be to steal the wealth from future generations.

Kristian V

I think this is absolutely true, and it goes much deeper than a political sales pitch. The public wealth is very much your own when someone in family gets sick or injured, or if loose your job.

This attitude is very much under pressure though. The ghost of Ayn Rand is everywhere.

AJ Lau

Love the show; adore the latest podcast. However, I would go even deeper than just Norway (love the paradox, as their environmental record isn't the cleanest).

Highlight 3rd World / Developing country import / export issues.

A good case in point is Burundi. The country has relatively good internal road networks, but it cannot export its goods using the most direct route to sea since the inland infrastructure of Tanzania is poorly connected to the port of Dar es Salaam, reflecting issues of infrastructure dependency. Meanwhile, though Burundi relies on Kenya’s port of Mombasa for export to circumnavigate Tanzania’s lack of infrastructure, this route was severed briefly in the 1990s when political relations fell with Kenya. Finally, reflecting dependency on internal stability of transit neighbors, Burundi’s exports could not pass through Mozambique around the same time due to violent civil conflict. Thus, Burundi had to export its goods using a route that stretched for 4500 km, crossing several borders and modal changes, to use the port of Durban in South Africa. Other examples of landlocked dependency are the difficulties Mali faced in order to export its goods in the 1990s as nearly all its transit neighbors (Algeria, Togo, Ghana, Sierra Leone, Liberia, Guinea and Côte d'Ivoire) were effectively engaged in civil conflict around the same time and the Central African Republic, where its travel routes for export depend on the season, as during the rainy season Cameroon’s roads are too poor to travel on and during the dry season the Democratic Republic of Congo’s Oubangui River water levels are poorly maintained for adequate maritime travel.

Can you highlight the issues of landlocked countries, in terms of relying on unstable neighbors?

It's a Terrible Day in the Neighborhood, and it's Not Our Fault!

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Mark Twain

Tesla cars aren’t subsizidized. All other cars have a sales tax of more than 100%. Tesla has something less.

There is a massive network of tunnels and bridges built to handle the population in weird places (like where I have worked).

It costs about $12 in tolls to drive from one of the islands (where many people live) to the mainland for work. Electric cars don’t pay it.

Electric cars get free parking. Normal cars pay 80 dollars a month in the cities.

Electric cars get free recharges at work.

Are Torvik

Also, I think you would find more Top Gear fans per capita too. Thousands of owner operated car services (taxi drivers) in Norway are probably conflicted. 'Should I get a new Mercedes with a V8 or V12 before gas cars are outlawed, or go green and get a Tesla?'. The performance and total cost of ownership of each is probably about the same after all tax credits/deductions. The V8/V12 might come out slightly higher due to the amount of marketing and packaging that goes into the cost structure those kinds of engines that keeps the oil industry twice as much in demand per capita.

Bhloul Al-Akkari

Plz stop saying "download our free podcast" it's not free at all it cost me 3.3 cent per epside.

Paul Natsuo Kishimoto

This was a fun podcast—I enjoyed the jokes about fish and potatoes :)

I also like the progression of theories on natural resources:
— They're good to have!
— …except, many countries that have them do not seem to have done well.
— The exception to the exception is countries with strong institutions, like Norway.

But—I'm Canadian. We're not a despotic petrostate, but have we done well by our natural resources? Our province of Alberta managed to set up a sovereign wealth fund, but it hasn't grown very robustly, and at one point (just before an election…) was used to send a $400 cheque to everyone in the province. Canada is a liberal democracy and a wealthy country, so at first glance one would think we *do* have strong institutions.

Does Canada lack one of Norway's advantages—small size, homogeneity, an overabundance of hydropower? Or is there some other factor (perhaps our southern neighbour) to explain the difference? I wish you had asked your guests.

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Kristian V

Interesting question!

In many ways, norwegians tend to think of Canada like a larger version of Norway. It's a lot of what (we think) makes Norway work, scaled up to a nation of 35 million people. I suppose in many ways Canada is a look into a possible future for us, so I'm hoping for an insightful answer to your question. :)