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An ever greener EU will create winners and losers

The European Union – especially Germany – has relied on the mass production of cars for its success. But things are changing.

The European Union – especially Germany – has relied on the mass production of car for its success. But things are changing.

John Redwood

in Features


The new EU Commission plans a big uplift in green investment. People will be scouring the lists of equities for those companies than can draw on the big new funds to be provided by the European Investment Bank and the other financing institutions to find a profitable way to deploy all this new capital. The EU is talking about a major €1 trillion investment. Those who can make and sell electric cars, renewable power, low emission ships and trains, better insulation and heating systems, more environmentally-friendly farming and the rest will be beneficiaries.

There will also be clear losers. The current EU economy is very dependent on the internal combustion engine. Cars, lorries, ferries and aeroplanes all mainly depend on fossil fuels for their propulsion. Heating systems in homes often remain inefficient, burning carbon-based fuels. This week we have seen more bad figures from the German car industry, as they struggle to meet the latest vehicle emission standards from the EU.

Tough targets

The outgoing Commission put in place tough targets for the car industry. This April EU Regulation 2019/631 set new standards for cars to be phased in from 1 January next year. The industry currently has to ensure that the fleet of new cars it sells sticks to a maximum emission of 130 grams of CO2 per kilometre driven on average. The new standard is just 95 grams per km. This translates into fuel economy of 3.6 litres of diesel per 100 km driven, which is far more frugal than many cars currently being sold.

Any manufacturer that fails to hit the target for their cars sold overall will have to pay a penalty of €95 for each gram of CO2 over target per car. So, if a manufacturer making 100,000 cars a year is just one gram over target they will pay a fine of €9.5m. The new Commission may wish to toughen the targets going forward, as it seeks to accelerate progress to net zero carbon dioxide emissions for the economy overall.

Consumers wary

The public is not fully committed to this approach. If anything they want to buy larger and heavier vehicles, with poorer fuel consumption figures than those laid down in the regulations. They also continue to buy primarily petrol cars, with diesels a good second. Electric cars remain a minority taste though now growing quickly on a small base.

The industry is spending large sums on investing in plant to make more electric cars. It is also spending big sums on innovation, seeking ways to make the electric car more appealing to consumers. It wants to speed up the time it takes to recharge a vehicle. It needs to increase the range of the car on a single charge of the battery. It wants the electric car to match the performance of petrol vehicles in terms of acceleration, torque and top speed.

All this is proving difficult and expensive, and is undertaken against the background of new vehicle designers and manufacturers threatening to challenge the traditional makers, unencumbered by diesel or petrol ranges. Governments can help stimulate electric car demand by subsidies and favourable tax treatments, as one of the issues is the initial cost of the vehicle. Hybrids are more popular than all electric, as they overcome the range and charge time issues. Often they are used as petrol cars, with less use made of the electric capability.

German woes

The impact can be seen in the German car industry, which has traditionally produced a large number of higher-end heavier and faster vehicles with high fuel consumption. This August’s figures of 313,000 new cars compares unfavourably with 452,000 in the same month two years ago. Current output is a little under 400,000 a month on average, compared with 480,000 a month in the first half of 2017. This structural change has occurred at the same time as the Japanese car industry can now export to the EU without a tariff barrier. Weak demand for cars generally in the EU has led the Japanese makers to revise down their plans for EU based car production investment, and in some cases to close factories altogether to improve the loadings in their home plants.

There is some argument as to why car demand is low. Clearly further monetary relaxation and a pickup in general consumer confidence would help. It seems that many potential customers are holding off because they fear the regulatory and tax changes hitting conventional cars but are not yet satisfied with the performance, price and specification of the electric vehicles. It will take time to carry through this massive transition in factory output and consumer tastes.

The new Commission may also want to impose new taxes and restrictions on flying, affecting airlines and travel companies. It may see more environmental levies as a way round some of the limitations placed on its own revenues and capacity to spend at EU level, as well as regarding higher taxes as a good way to encourage greener conduct by citizens. The idea of heading to zero net carbon is radical and will have a big impact on many business areas. We are awaiting the breakthroughs in products and services needed to transform transport, farming, home heating and the other main greenhouse gas emitters. Meanwhile traditional businesses have to cope with lower revenues, higher taxes, and the costs of changing what they do.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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