Breton’s Warning On The End of Combustion Engine Vehicles
But also — Lula Is Back, EU-US Rifts, Olaf in Beijing, Giorgia in Brussels, Gas
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Bye-bye Combustion Engine? Not So Fast, Thierry Breton Warns
On October 27, the Council and Parliament reached a political agreement on ending the sale of combustion engine cars in the EU market by 2035 — the first ‘Fit for 55’ deal to come to fruition. Internal Market Commissioner Thierry Breton was soon to comment, underlying the challenges lying ahead in what may be the “largest industrial transformation the EU has ever seen”.
THE DEAL • The agreement reached by the two co-legislators aims to ensure that all new cars and vans sold in the EU market will be zero-emission by 2035. An intermediary step is also included in the deal, stating that average emissions of new cars need to be reduced by 55% — and that of new vans by 50% — by 2030. Finally, the agreement features a review clause, meaning that in 2026, the Commission will assess the progress made and could possibly push the 2035 deadline.
CELPA • “The 100% target, the implicit ban on the internal combustion engine, is the most ambitious such target worldwide. We stand for climate-neutral mobility and stand ready to deliver the technologies to make climate-neutral mobility a reality. The most ambitious vehicle target will not succeed, if not accompanied by policies to ensure charging and refuelling infrastructure, green energy, access to raw materials and a just transition.”, said Benjamin Krieger, Secretary General of the European Association of Automotive Suppliers (CLEPA).
BRETON • Thierry Breton shared his concerns on the 2035 deadline with media outlets across Europe. “I said that it was very important that we have a review clause (...) so that we have the time to react if it is necessary — because evidently, we are talking about a gigantic changeover of an entire industrial sector, in the largest sense”, he told Politico. As much as he wants the transition from combustion engines to electric cars to succeed, he advocates for a realistic approach on the challenges entailed by the transformation.
CONFUSION • The Commissioner already announced the creation of a working group to prepare for the 2026 milestone with car producers, consumer associations, cities and electricity operators. Among manufacturers, the idea that the 2035 deadline could be pushed is rather confusing, as many believed it was definitive.
JOB MARKET • According to Thierry Breton, there are numerous issues to tackle if the transition is to go smoothly. For example, the job market will be significantly impacted by the shift to all electric vehicles, which will require careful planning. Estimates from the Commission state that 600,000 jobs will be destroyed during the transition, and the 13 million people involved in the automotive sector could feel the consequences of it in one way or another.
ELECTRIC CARS • But the biggest challenges might concern what we’re replacing combustion engines with, namely, electricity. “An electric vehicle is currently 27% more expensive than its fuel equivalent, which corresponds to a 56,000 euros difference on average”, he explained to French newspaper Les Echos, insisting on the importance of making electric vehicles accessible to everyone. He also underlined the need for more rare metals, a higher level electricity production and more charging infrastructures throughout Europe — currently, 70% of these infrastructures are located in France, Germany and the Netherlands. Due to the weight of batteries, electric vehicles are also heavier than combustion engine vehicles, meaning that they wear out tires and brakes more quickly — which are also components that will need to be produced more ecologically.
GOODBYE…? • “If the EU ends the sale of combustion engines after 2035 in Europe, this does not apply for the rest of the world. The European automotive ecosystem must remain present in this export market”, Breton had tweeted on 1st April. As he makes the same point again today, manufacturers remain puzzled on how producing in the EU market for the African or US markets could be economically beneficial.
MAKE IT WORK • On a side note, the EU might well be advised to follow US Trade Representative Katherine Tai advice. As the EU started complaining about the Inflation Reduction Act (IRA) and its protectionist effects, she basically told the EU to get its own subsidy regime to support electric cars. The IRA, which was unveiled this summer, could considerably favour the US electric cars industry, notably through generous tax breaks for the purchase of electric cars produced in the United States.
Earlier this year, the Commission adopted his new guidelines on State aid for climate, environmental protection and energy. These aim to “create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the Green Deal objectives in a targeted and cost-effective manner”.
NEXT STEPS • The provisional political agreement reached in trilogue negotiations will now have to be formally adopted by the Council and the Parliament.
In Case You Missed It — Mercosur with Lula, US-EU Rift Deepens, Olaf in Beijing, Giorgia in Brussels, Gas
LULA • Lula’s victory in Brazil’s presidential elections on 30 October has been met with a sigh of relief by those who hope this victory will usher in a new era for the Amazon forest and trade with the LATAM area. The EU and Mercosur countries have been negotiating a trade deal for more than twenty years. Since 2019, both sides have refrained from tying the knot, mainly because of Bolsonaro’s proactive deforestation agenda and Macron’s insistence that the trade deal should comply with the Paris Agreement.
Lula’s leftwing and green credentials could help gain support at the EU level. The deal has to pass a vote at the European Parliament, where Lula’s political allies tend to be lukewarm about new trade deals. Russia’s war at Europe’s doorsteps and the need to diversify away from China will also likely boost support for the deal. Pro-trade-agreements Member States, the Czech Republic, Sweden, and Spain, are also holding the Council of the EU rotating presidency, which will also help push the deal through.
All that being said, Lula has made it clear he wants to amend the current deal to get more from the EU in terms of manufacturing and not just be an eternal exporter of agricultural products to the EU. On the EU side, MEPs are expected to give the Commission a tough time if it appears to be too soft on environmental safeguards. In June 2022, the Commission published a plan to further strengthen the implementation and enforcement of Trade and Sustainable Development (TSD) chapters in the EU’s trade agreements. The TSD package includes the possibility to apply “trade sanctions for material breaches of the Paris Climate Agreements”.
TRANSATLANTIC RIFT • Biden's Inflation Reduction Act (IRA) — and its generous tax breaks for electric cars made in the US — is not making the EU happy. At all. The Commission even launched a US-EU Task Force on 26 October. The Financial Times reports that the Commission sent its comments to the US Treasury, lashing out at tax cuts and subsidies with “clearly discriminatory domestic content requirements, in breach of WTO rules”. The Commission also threatens to go nuclear: “Moreover it risks creating tensions that could lead to reciprocal or retaliatory measures”.
The EU is not the only trading heavyweight that has expressed discontent over the IRA-induced subsidy race — South-Korea and Japan have been quite vocal in their opposition. In an interview with the FT last week, US Trade Representative Katherine Tai defended the package, saying that the EU should also start dishing out public money to support the green transition and diversify away from China.
OLAF IN BEIJING • The German Chancellor was in Beijing on 3 November for the first visit to China by a head of government since Xi Jinping was sworn in for a third — unlimited — term as President of the People's Republic of China.
The chancellor was accompanied by representatives of Germany's largest companies — Volkswagen, BASF, Deutsche Bank, among others. This fuels accusations that the Wandel durch Handel — i.e. the German foreign policy of change through trade — is not dead despite the terrible failure of German-Russian relations. Germany was very recently accused of strategic naivety by its European and American allies when Berlin authorised the purchase of 24.9% of one of the terminals of the port of Hamburg by the Chinese giant Cosco.
Paris has been accusing Berlin of going solo for some time. Emmanuel Macron had indicated that a joint trip to Beijing would be preferable. The French president received Xi in Paris in 2019 flanked by Angela Merkel and Jean-Claude Juncker, then president of the European Commission.
In response to his critics, Olaf Scholz wrote an article in Politico in which he defends a pragmatic approach to China — a partner, a competitor and a systemic rival. Certain strategic dependencies must be reduced, but this does not justify "decoupling", according to the Chancellor. Scholz also defended himself from any cavalier attitude: "In the run-up to my visit, we have, therefore, liaised closely with our European partners, including French President Macron, and with our transatlantic friends".
GIORGIA IN BRUSSELS • Italy’s PM Giorgia Meloni went on her first official trip to Brussels on 3 November. She met with the heads of the EU institutions, signalling the government’s willingness to build constructive relations. “We are not Martians. We are real people”, Meloni declared as the motto of a tour designed to reassure those fearing her government to be radically sovereigntist, eurosceptic, and conservative. She multiplied soothing messages, indicating that Italy will remain a trustful, collaborative, and European partner. Several topics have been discussed, including the Russian invasion of Ukraine, migration, and the 200 billion euros earmarked by the EU to finance Italy’s recovery and resilience plan (NRRP).
She additionally defended a European solution to soaring energy prices, such as a ceiling on gas prices, in line with the position of the former government. The prudent moderation displayed by Meloni has been positively welcomed in Brussels. However, this symbolic trip does not set aside the numerous points of contention between the EU and the new Italian government, notably on migration and the renegotiation of the NRRP which the Commission firmly rejects. While committing her government to sincere cooperation with the EU, Meloni made it clear that the national interests of Italy will be assertively defended at the European level.
ENERGY • The price of gas in Europe has fallen since reaching an all-time high of almost €300 per megawatt hour in August, but it is still significantly higher than the region's long-term average of €20 to €30. Prices have decreased as storage facilities have reached capacity and the start of the heating season, when demand for gas is at its peak, has been postponed due to a warm autumn.
However, the International Energy Agency (IEA) is raising concerns about gas supplies for the upcoming winter, telling European leaders not to relax and pleading with them to move quickly to secure supplies. Russian supplies are anticipated to remain mostly cut off. The IEA is urging European governments to take action right away, including accelerating investments in energy efficiency, renewable energy, plans for house insulation, and the transition to heat pumps in order to reduce the need for gas. The organisation, whose advice on energy security is mostly sponsored by OECD members, is about to provide an updated 10-point plan to governments.
What we’ve been reading this week
The CER’s Luigi Scazzieri summarises where the candidates to EU membership stand in the accession process and reminds us why enlargement has become a divisive issue among current member states.
André Sapir for Bruegel and Lucian Cernat for the ECIPE each have insightful posts on the role of globalisation in the contemporary European political economy.
Meanwhile, in his commentary of Chancellor Olaf Scholz’ journey to China In the Financial Times, Martin Sandbu expounds both the difficulty and the necessity of articulating trade policy with the wider requirements of statecraft.
This week’s newsletter is brought to you by Matteo Gorgoni, Maxence de La Rochère, Gabriel Papeians de Morchoven and Augustin Bourleaud. See you next Monday!