Abstract Transition to electric vehicles (EVs) requires multidimensional policy measures incorporating vehicle fleets, energy systems, consumer behaviours, and socio-economic developments. The main objective of this paper is to evaluate the implications of a tax-induced EV transition in Iceland for GHG mitigation, energy security, and economic benefits. The analytical tools include a techno-economic simulation model of the integrated energy-transport system which is linked to an Icelandic macroeconomic general equilibrium model. The impact of a new tax reform proposal by the government is compared with the current vehicle tax policy. The government proposal scenario is also examined under further inducements for EVs incorporating a value added tax exemption and banning the sale of new petroleum fuel vehicles. All scenarios are examined under a wide range of future changes in petroleum fuel prices and EV cost reduction. The results indicate that the overall macroeconomic benefits will be negligible, but they are expected to be positive in the long term as road electrification is deepened. The results show that although the tax-induced technological solution aimed at encouraging the adoption of EVs will enable a deep GHG emissions reduction in the long term, it will not be enough to meet the short-term climate targets.