Nepal has emerged as the country with the second-highest adoption rate of four-wheel electric vehicles (EVs) among new vehicles in the past year. While the short-term trend has been welcomed, policymakers are yet to address the long-term implications of the EV boom. The Post’s Biken K Dawadi spoke to Bigyan Babu Regmi, an economist at the Centre for Energy Economics and Policy at ETH Zurich, to discuss the causes, impact and long-term policy-level needs to sustain the EV adoption trend.

Nepal’s EV transition has got the world’s attention, with around 75 percent of newly registered vehicles being EVs. How do you analyse the boom in EV adoption in Nepal?

The boom in EV adoption is certainly a positive trend as it is in line with emissions reduction targets and our Nationally Determined Contributions. We had the target to have 90 percent adoption by 2030 and the recent trend indicates that we are on the right track.

Our electricity consumption has been fairly low. Nepal’s power consumption per capita is one of the lowest in South Asia, with a meagre 200 units of consumption. This consumption is on the rise due to the adoption of durable goods such as refrigerators and air conditioners, but also EVs. So the EV boom has a positive impact on our increasing electricity consumption.

Nepal is over-reliant on petroleum-based fuel imports from India. Annually, the country imports around Rs 300 billion worth of such fuel, which needs to be decreased. The rise in EV adoption is a welcome trend as it can cut, albeit marginally, our over-reliance on such imports.

What factors are driving this boom in EV adoption?

The EV adoption boom in Nepal is a fairly recent trend, visible especially after 2020. In 2020, a policy was introduced promoting EV imports by imposing 13 percent customs duty and 10 percent VAT, totalling 23 percent tax on import. Compared to this taxation, Nepal imposes up to 261 percent customs duty on Internal Combustion Engine (ICE) vehicles. The difference in customs duty was a big push factor, propelling the change.

Another factor was the financing terms offered by banks for EV purchase. Initially, banks had as high as a 90 percent financing cap for EV, which was recently pushed down to 60 percent by the law. The access to financing, therefore, was another factor pushing the trend.

Collectively, these two factors decreased the up-front cost of EVs as compared to ICE vehicles, as well as the overall lifetime cost. Consumers make decisions based on the up-front costs. And EVs have costs comparable with ICE vehicles; sometimes, even cheaper than ICE vehicles.

Does the high adoption rate of four-wheel EVs mean the transport sector of Nepal has become inspiringly green?

We have to assess the overall transport sector to get a better picture of the green transition. Our EV story is dominated by four-wheelers. We also have to think about two-wheelers, which comprise around 85 percent of total registered vehicles. Four-wheeler passenger vehicles amount to around seven percent of the total market. Nepal has around 203,000 new vehicle registrations annually, and 85 percent of them are two-wheelers. Only about 16,000 new four-wheelers are registered in a year and of them, 75 percent are EVs.

Is the transport sector one of the most polluting sectors? Of course it is. But are four-wheel vehicles one of the significant polluting factors? Definitely no, because they have such a tiny market share. Studies show that two-stroke engine two-wheelers and four-stroke engine two-wheelers can be less energy efficient, in general contributing higher CO2 emissions.

We cannot use such a small segment of the transport sector to paint ourselves as the heroes of EVs. Market leaders in two-wheeler imports still report that consumers prefer traditional makes and models. Nepal needs to decide whether to change the consumption pattern from two-wheelers to four-wheelers or to greenify the two-wheelers market.

Is the trend in EV adoption sustainable in the long run?

Our EV adoption trend is not a behavioural change. Consumers are not transitioning to EVs as they think that such vehicles are more fuel-efficient or have positive environmental effects. Of course, there are outliers in this trend. But staunch environmentalists with a strong preference for EV make up only a tiny portion of the consumers.

For now, financial facilities and favourable customs duty are driving the EV boom by lowering up-front costs. When we compare our situation to Norway, for example, 90 percent of the passenger vehicles are EVs in the European state. There is no significant difference in customs duty as the country provides a 50 percent exemption on VAT on four-wheel EVs as compared to ICE vehicles, as well as exemptions on other taxes, including ferrying taxes. Thus, the high EV adoption rate in the country seems sustainable and driven by a behavioural shift of consumers, which is not the case in Nepal.

What are the implications of the preferential policy for EV imports?

Assume a family of four wants to buy a car. For now, EVs and ICE vehicles may have comparable costs, with lower operational costs for EVs. But if the taxes on ICE vehicles were brought down to the level of taxes on EVs, ICE vehicles would witness a sharp spike in adoption. The family would more likely buy the ICE vehicle.

From the perspective of overall economic welfare, the government imposed certain decisions on consumers by restricting their choices to EVs. It is crucial to solve this riddle to sustain our EV adoption rate.

What are the other long-term consequences of greater EV adoption?

The technology of EV, especially relating to Lithium-ion batteries, is nascent and recent. Nepal depends heavily on China for EV imports. More than 80 percent of our EV imports are from China. And Chinese manufacturers offer an 8-10 year guarantee on the vehicle’s battery. We cannot assess how reliable that guarantee is, since we do not have enough data points to analyse it.

The battery price of EVs is very high. Would it make more sense to replace the battery or to buy a new vehicle? We are yet to figure it out. The technology used for EV production is developing rapidly. We might have a significantly advanced battery in 8-10 years. But, would such batteries still be compatible with the make and model of the vehicles bought 8-10 years earlier? We might have no other option than to junk the old vehicle.

The resale value for EVs is very less as we are yet to figure out how to assess battery and battery life. We also do not have a provision for financing the batteries, which makes a high portion of the cost. Therefore, this EV boom might have unintended consequences. The EV transition might look good for this decade, but without effective mechanisms in place, we will face the next challenges of waste management and battery replacement.

How do we solve this potential problem?

The government needs to assess the recent EV adoption trend and think about the future market. When we can anticipate the problems with batteries, perhaps we can push car manufacturers to set up battery manufacturing plants in Nepal. We also need to set up processing plants for the maintenance of vehicles, as well as recycling plants for anticipated salvage vehicles. We already have a problem in e-waste management. We now also need to pay some attention to EV waste management.

How can we shape our policies to make EV adoption a behavioural change and therefore, sustainable in the long run?

The main question is how long a time window policymakers are thinking of while making policies related to EVs. We are not generating enough revenue for public expenditure. The 261 percent tax on ICE vehicles was to generate revenue, and surely not to protect the domestic infant industries that manufacture vehicles, or for environmental reasons. We need to find a right balance between environmental and economic perspectives.

We also need to formulate top-down and bottom-up policies. There is a need to install mechanisms and instruments whereby you make sure that the consumers are aware of what they are getting, both on the technical side as well as what they are getting from the EV. This can be done by enforcing some requirements on EV importers. But, at the same time, the government needs to educate the people about the vehicles they are purchasing.

Assume EV imports skyrocket in this decade but the economy faces problems in revenue generation. Then we might have to increase the customs duty. In that case, what if the person shifts back to commercial vehicles? For a sustainable positive EV adoption trend, we need to focus on creating cushioning mechanisms whereby the goal is not just the adoption of EV vehicles but to make behavioural shifts and ecosystem change towards an EV-friendly market.

Nepal faces a problem in transitioning public transport to EVs, especially given all the transport-related cartels. How do we move forward?

If we can greenify public transport, CO2 emissions would be offset and fuel imports go down. It would also decrease two-wheeler imports. There are political and social challenges, as you hinted.

In such a scenario, we should prioritise low-hanging fruits such as the taxi industry. Taxi companies could be mandated to use only EVs. When there are these ‘cartels’ involved, co-designing and co-creating policies with these cartels is a must. Otherwise, lobbying from this group could either stall such policies or such policies might be scrapped with a change in government.