Estonia’s new car tax and registration fee: Are they changing consumer demand?

By Zuzana Smidova and Vaiva Šeckute, OECD

At the beginning of the year, Estonia introduced a vehicle registration fee and an annual car tax linked to the vehicle’s greenhouse gas (GHG) emissions. Until then, it was one of the few European countries without motor vehicle taxes.

OECD countries increasingly use vehicle taxation to encourage drivers to switch to cleaner cars and reduce emissions, as well as to raise revenue, by linking these taxes to emissions. Although motor fuels are already taxed, consumers tend to undervalue the long-term savings from choosing more efficient vehicles, so registration fees can help change purchasing patterns.

Estonia’s car fleet is one of the oldest in the EU and has some of the largest engines (Figure 1). Transport emissions account for around one fifth of Estonia’s total greenhouse gas emissions. Achieving the target of a 25% decrease by 2035 compared to the 2005 level is proving challenging with emissions remaining stable in recent years.

In 2023, the average CO2 emissions per kilometre from new passenger cars were among the highest in the EU (Figure 2).  This partly reflects reliance on purchases of second-hand cars from western Europe and the absence of an emissions-based motor vehicle tax.

Data from the first eight months of the year show that, since the tax was introduced, purchasing has moved more rapidly than before towards cars emitting less emissions (Figure 3). The overall number of passenger car registrations dropped as many consumers who had planned to buy a car did their purchases last year in anticipation of the tax. Looking at the breakdown by vehicle type, there has been a shift towards cleaner vehicles. The data shows that the registrations of electric vehicles increased, while registrations of hybrid cars declined less than petrol and diesel cars compared to the same period of last year. As a result, the share of electric vehicles rose from about 5% last year to 10% and the share of hybrid vehicles grew from some 25% to almost 40%. Encouragingly, based on these first estimates, average emissions from newly registered cars also fell by 10% (ERR, 2025).

Introducing the registration fee and annual tax are a significant achievement and the link to emissions and engine size seem to be bearing fruits. Nevertheless, some of its features could be improved further. The annual tax decreases with vehicle age. While this aims to make it more affordable for those on low incomes who tend to have old cars, it undermines the incentives to switch to more efficient cars. Instead, a targeted car scrappage scheme for older vehicles financed by the revenues from the motor tax could be considered.

Decreasing emissions from transport will require strong incentives on multiple fronts – increasing availability of public transport, introducing stricter minimum emission standards and moving towards distance-based charging, which can allow for higher charges where alternatives for cleaner modes of transport exist (OECD, 2024; van Dender, 2019).

References

ERR (2025): Automaks on pannud ostma väiksema heitega autosid

OECD (2024), OECD Economic Surveys – Estonia, OECD Publishing, Paris.

Van Dender, K. (2019), Taxing vehicles, fuels and road use: Opportunities for improving transport tax practice, OECD Taxation Working Papers No. 44, OECD Publishing, Paris.