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