The "eco-friendly car special consumption tax reduction program" is scheduled to end at the end of this year. Eligible models include electric vehicles, hydrogen vehicles, and hybrid vehicles. The Ministry of Trade, Industry and Resources and the Ministry of Climate, Energy and Environment are reportedly split on whether to extend the program. Both ministries agree to extend the special consumption tax reduction for electric and hydrogen vehicles. But for hybrids, the Ministry of Trade, Industry and Resources reportedly says the reduction "should be extended," while the Ministry of Climate, Energy and Environment says "there is no need." Why is this happening?
◇ MOTI, climate ministry say special consumption tax cuts for EVs and hydrogen cars should be maintained
Under the eco-friendly car special consumption tax reduction program, taxes are cut by up to 3 million won for electric vehicles, up to 4 million won for hydrogen vehicles, and up to 700,000 won for hybrid vehicles. The program applies only to vehicles released by the end of this year.
To determine whether to continue the eco-friendly car special consumption tax reduction program after next year, the Ministry of Finance and Economy recently asked the relevant ministries, MOTI and the Ministry of Climate, Energy and Environment, to submit their views. As all tax exemptions and reductions have grown to 80 trillion won, the Ministry of Finance and Economy is reviewing exemptions and reductions across the board. Its position is to abolish or scale back exemptions and reductions that have no compelling reason to be maintained.
However, the finance ministry also asked MOTI and the climate ministry for their views on expanding purchase subsidies instead of abolishing or reducing the eco-friendly car special consumption tax reduction program.
MOTI and the climate ministry reportedly have no disagreement that the special consumption tax reduction program should be maintained for electric and hydrogen vehicles among eco-friendly cars. While the special consumption tax reduction applies equally to all vehicles, purchase subsidies vary by vehicle or manufacturer. The two ministries believe that even with purchase subsidies, a complete halt to the special consumption tax reduction could significantly reduce demand for electric and hydrogen vehicles. There are also concerns that purchase subsidies could trigger trade frictions.
Accordingly, the two ministries are said to have asked the Ministry of Finance and Economy to "maintain the special consumption tax reduction program for electric and hydrogen vehicles for now while considering gradually reducing the size of the cut."
◇ Over hybrids, climate ministry calls them internal combustion cars; MOTI calls them a stepping stone to future cars
On the hybrid special consumption tax reduction program, MOTI and the climate ministry are at odds. That reflects the two ministries' differing assessments of the nature of hybrids.
First, the climate ministry views hybrids as "internal combustion cars," not "zero-emission cars" that emit no carbon at all, and therefore sees little need to maintain the special consumption tax reduction. It expects that cutting back the special consumption tax reduction for hybrids will in turn boost demand for electric and hydrogen vehicles.
MOTI, on the other hand, argues that hybrids should serve as a stepping stone in the process of phasing out all internal combustion cars. It says that is why the special consumption tax reduction program for hybrids should be maintained. The ministry also took into account that eliminating the hybrid reduction could increase demand for internal combustion cars again.
The finance ministry plans to include whether to extend the eco-friendly car special consumption tax reduction and its scope in the tax reform plan to be announced at the end of this month, after consolidating the views of MOTI and the climate ministry.
An auto industry official said, "This will decide whether to continue supporting hybrids as a transitional technology for the shift to future cars, or to shift the policy's center of gravity to a zero-emission system focused on electric and hydrogen vehicles."