On Wednesday, the Estonian Ministry of Finance presented two possible models for the much discussed car tax, which require a fee to be paid at the point of a vehicle's initial registration in Estonia. The planned strategy would mean lower fees for older cars, falling to €300  for those over 20 years old.

According to Ministry of Climate Permanent Undersecretary Keit Kasemets however, reducing tax in this way this would be a mistake.

"Of course, it is good for the environment if a car is used for as long as possible. You don't have to buy new, you can buy second-hand. However, in no way is it beneficial to the environment or Estonia to tax used pre-registered cars at a lower rate than new ones," Kasemets said on social media.

"It should be taken into account that Estonia has one of the oldest car fleets in the European Union and there is no reason why old cars, such as the 20-year-old Audi used in the examples, should be imported into Estonia. We will use cars that are new, or rather are new when they were brought to Estonia," added Kasemets.

One of the two car taxation models presented by the Ministry of Finance on Wednesday envisioned electric car owners paying a significant amount of car tax. The owner of a Porsche Taycan 4S, which costs around €115,000 would be required to pay €1,000 at the point of initial registration, followed by an annual tax of €240 for the first five years of ownership, for instance. Kasemets however, believes that this form of taxation would discourage people from buying electric cars.

"Many international tax recommendations and analyses focus on how to increase the cost differential between the price of purchasing of a car with an internal combustion engine and an electric car. The cheaper it is to buy an electric car, the more electric cars there will be," said Kasemets.

"Estonia's goal should be to first curb the growth of emissions from the transport sector and then to reduce them. One of the first targets on the road to achieving this should be to increase the proportion of new electric cars sold to at least the EU average, from 4 percent to 15 percent."

Kasemets, therefore, said, that of the two taxation alternatives proposed by the Ministry of Finance, he believes that the one, which focuses on carbon emissions as the basis for the car tax, ought to be preferred.

"The experience of other EU countries shows that a CO2-based tax works. 21 out of 27 countries apply either a CO2-based registration tax or user charge. Those that do not have a CO2-based tax have had a car tax in place for a long time and have not reformed it. There are no examples of countries that have introduced a non-CO2-based tax more recently. The OECD (Organization for Economic Cooperation and Development) also concludes in its analyses, that all countries are moving towards a CO2-based car tax. If we were to not do it, we would be doing something that other countries did 20 or more years ago and are no longer doing," Kasemets said.

He added, that it is common in Estonia to buy cars, which produce a lot of pollution, and a CO2-based taxation system would help to improve the situation. "Along with Cyprus and Latvia, we buy the most polluting new cars. In 2021, Estonia's greenhouse gas (GHG) emissions were 142 grams of CO2 per kilometer. This was an increase of 17.9 percent from 2020. The EU average is 116.3 grams of CO2 per kilometer. In Sweden, which has a similar geography and weather conditions, it is 88.3 grams. That's 60 percent less," Kasemets said.

Kasemets added, that in 2021, greenhouse gas (GHG) emissions from passenger cars accounted for around 1 percent of total GHG emissions from Estonia's transport sector and around 14 percent of the country's energy sector. It also accounted for approximately 11 percent of Estonia's total GHG emissions.

Finance minister disagrees

Estonian Minister of Finance Mart Võrklaev (Reform) disagrees with the climate ministry's criticism. In his view, the finance ministry's proposals for the car tax will not encourage increased imports of old cars from abroad into Estonia. He said, that instead, it acts as a compromise, allowing Estonians to sell their old cars at a reasonable rate.

"I dare say, that when you look at the actual value of these cars, the registration tax on older cars is high enough. It should not be a profitable activity to bring more old cars here. We don't want old cars here," said Võrklaev at a government press conference.

"What we have tried to do now is to design it in a way, that enables people to be able to keep driving their old cars to the end. Just for the sake of people's incomes, as they might not be able to buy a new car immediately," the finance minister added.

"Since the registration fee has to be paid, even if the old car is in Estonia before the entry into force of the car tax and I want to sell it, that same registration tax will have to be paid at the point of initial registration. And if we raise that really high, we will deprive people of the possibility to resell the car in Estonia, in order to get a down payment or additional money to buy a new car, for example," said Võrklaev.

"Perhaps all these things are quite closely interconnected and we must not create a situation whereby a person who is driving an older car today, but wants a change in his life, is trapped, because this car is cheaper anyway, so he cannot get rid of that car, in order to bring about a change and buy a newer car," said Võrklaev.

Regional minister backs lower tax for older cars

Minister of Regional and Agricultural Affairs Madis Kallas (SDE) said, that for him, it is important that taxes on older cars should be lower. However, he added, that things should be differentiated by region, so that the car tax is lower in rural areas.

"We know that salaries in rural areas are lower than in Harju County. And if we impose additional tax burdens on residents of rural areas, for whom having a car is vital, and if we have no alternatives to provide, then we have to take that into account," said Kallas.

"The impact of the car tax will be greater in urban areas, in terms of people having to give up cars or switch to smaller ones. In cities, there are better public transport and ridesharing services, but in the countryside there are none," said Kallas.

Kallas also believes that the draft needs to give greater consideration to the issues faced by people with disabilities.

"I am thinking of special vehicles for people with reduced mobility - this part needs to be reviewed. So those whose cars have been converted for wheelchair use are not taxed additionally or, if we do, there are countermeasures in place so that they can get the money, which they have spent, back from the state."

On Wednesday, the Estonian Ministry of Finance unveiled proposals for two potential models for the long-discussed car tax. According to the proposals, the car tax, which will be charged in two parts, the first at the point of initial registration and the second on an annual basis, could be based either on the vehicle's engine power and weight or on CO2 emissions.

Initial registration could cost from €300 to several thousand euros, while annual fees may range between €30 to several hundred euros. Under the proposals, older cars would be taxed at a lower rate.

The exact principles of the taxation system are to be established by the ministry, based on the feedback on the draft development intention plan. The ministry will then produce a draft bill based on this, in the fall. Under current plans, the ministry is aiming for the car tax to come into force next July.

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