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EV Policy Changes in Europe and the U.S. - EU and U.S. are shifting their focus from concentrating on decarbonization to securing jobs and industrial hegemony -

    Jan. 10, 2025

    1. Multifaceted positionings of EVs

    As described below, EVs have a multifaceted nature for the nation, which influences policy for EVs.

    [EVs are the key for the transportation sector in decarbonization policy]
    The transportation sector accounts for 23% of total global CO2 emissions. Passenger cars and commercial vehicles account for about 45% and 30% of these emissions, respectively, and three-quarters of transportation sector emissions originate from automobiles. With 17-18% of the world's total CO2 emissions coming from automobiles, zero-carbonization of automobiles is a key decarbonization issue.
    [EVs have a significant impact on employment]
    The percentage of employment in the automotive industry to the total workforce is large. It ranges from 0.6% to 1.6% in Japan, Europe, and the U.S., even when limited to manufacturing such as assembly and parts. The shift to EVs is expected to reduce employment in parts industries such as engine drive-related industries, which will become unnecessary, and reduce labor intensity in the assembly industry, making job losses in the automotive industry a potential political issue.
    [EVs are in a core industry that supports economic and technological hegemony]
    The automotive industry is considered a major industry, accounting for 3% of the world's GDP. The shift to EVs will cause a structural shift in the automotive industry based on competitive advantages that differ from existing engine and other technologies. The growth of emerging automakers such as Tesla and BYD that differ from existing automakers provides an opportunity for major changes in the competitiveness of each country's automotive industry.

    2. Recent sales trends of EVs

    (1) Sales trends in Europe and the U.S. in 2023-2024

    EVs accounted for 18% of global new car sales in 2023. New EV (passenger car) registrations in 2023 were 13.8 million units worldwide (+35% YoY). In terms of region, China accounted for the majority, with China, Europe, and the U.S. accounting for more than 90%. In 2024, however, a slowdown in the pace of sales has been noted, especially in the U.S. and European markets. European and U.S. companies have also announced a series of revisions to their EV sales and investment plans.

    Factors behind the slowdown of EVs in the U.S. and European markets in 2024 include (1) sluggish sales of new cars, (2) reductions in subsidies, and (3) early adopters’ completing the cycle. In addition, structural factors that have long posed challenges to the spread of EVs are also pointed out, such as limited cruising range and uncertainty about recharging networks. As a result, they have not led to the capture of an early majority share of the market. This situation is working toward lowering the percentage of battery electric vehicles (BEVs) sold and increasing that of plug-in hybrid electric vehicles (PHEVs) sold.

    (2) Sales outlook for EVs

    The medium-term goals of the U.S. government (Biden administration) and EU for the period 2030-2035 are as follows:

    [U.S.]
    2030: Make zero-emission vehicles (ZEVs: EVs, PHEVs, and internal combustion engines (ICEs) that do not emit greenhouse gases) account for 50% of total new cars sold
    [EU]
    2035: 100% of new cars sold to be ZEVs

    With the current sluggish sales of EVs in the U.S. and European markets, many market participants are revising downward their near-term outlook for EVs. Various market participants' outlooks for 2030 show the following trends:

    1. The BEV/EV penetration rate is basically on an upward trend through 2030 in all countries and regions, despite the downward revision of the current growth rate.
    2. In the Chinese market, the BEV ratio will increase to around 40-60% by 2030, which is relatively favorable.
    3. Regarding the outlook for the U.S. and European markets, many believe that BEV penetration will increase through 2030, but their outlooks are wide-ranged. In addition, many believe that it will be difficult to achieve the U.S. government's policy target of making ZEVs account for 50% of new car sales.

    Factors that may affect the outlook for the U.S. and European markets include policy developments such as the degree of incentives and support offered to the EV industry, and the extent to which countries open their markets to foreign manufacturers, including the acceptance of direct investment from price-competitive Chinese EV manufacturers. Even the prospect of how long it will take to attract an early majority will depend on what policies the U.S. and European countries adopt.

    3. Trends and changes in EV policies in Europe and the U.S.

    (1) EU policy

    [Policy trends]
    For the EU and other major European countries, fostering and promoting the EV industry have become policy goals to secure jobs and economic and technological hegemony, as well as ways to promote decarbonization in line with the concept of the European Green Deal. The policy menu, which focuses on securing jobs and economic and technological hegemony, can be divided into (1) policies that focus on supporting domestic industry, such as subsidies (purchase subsidies, production subsidies, charging network development, etc.) and (2) policies that are geared to eliminate competing countries, such as additional tariffs linked to subsidy investigations on EVs produced in China. The policy of excluding competing countries has been conspicuous since late 2023.
    [Decarbonization promotion]
    CO2 emissions reduction from 2021 2025 2030 2035
    Passenger car -15% -55% -100%
    Light commercial vehicle -50%
    Table 1: CO2 emissions reduction rates required for passenger cars and light commercial vehicles (new vehicles sold)
    (Source) Compiled by Hitachi Research Institute based on various information.

    In March 2024, the EU Energy Ministerial Council changed its policy of banning all sales of new ICE vehicles in 2035 and beyond and, at the request of Germany, decided to allow their sales only if they use synthetic fuels with zero greenhouse gas emissions

    [Securing jobs/industrial hegemony]
      Policies (home industry support/competitor exclusion)
    Purchase subsidies in EU countries
    [Germany]
    Home industry support
    The subsidy program for the purchase of new EVs, introduced in 2016, has so far provided €10 billion in subsidies for 2.1 million EVs. However, the diversion of the unused COVID-19 relief funding became difficult because it was ruled unconstitutional by the court and the program was ended in December 2023.
    [France]
    Home industry support
    In October 2023, the French government changed its program to subsidize EV purchases, taking into account an "environmental score" calculated based on carbon dioxide (CO2) emissions during the manufacturing and transportation processes of EVs. Subsidies of up to 27% of the purchase price of a new EV, with a maximum of €5,000 for individuals and €3,000 for corporations.
    Competitor exclusion
    Production in Asia, which requires transportation from outside Europe, is at a disadvantage. Then, EVs produced in China are not eligible for subsidies.
    [Sweden]
    Home industry support
    In November 2022, the program to provide a benefit called the Climate Bonus for the purchase of low-emission vehicles, which had begun in 2018, was ended. The background of terminating the program was that it became balanced between the purchase and maintenance costs of gasoline/diesel vehicles and those of low-emission vehicles. Sales ratio of EVs also reached about 60%.
    R&D subsidy for battery production in EU
    [EU/seven countries in the region]
    Home industry support
    In December 2019, the EU approved up to €3.2 billion in R&D subsidy benefits for 17 companies involved in battery production in the region from seven governments, including Germany, France, and Italy. In January 2021, the scope of support was expanded to 42 companies in 12 countries.
    Subsidy investigation and additional tariffs on Chinese EVs
    【EU】
    Competitor exclusion
    Subsidy investigation began in October 2023 on subsidies for EVs by the Chinese government. Up to 35.3% on top of the 10% tariff added on electric vehicles (EVs) imported from China since October 6, 2024.
    Table 2: EU policies for securing jobs/industrial hegemony
    (Source) Compiled by Hitachi Research Institute based on various information.

    Subsidies for EVs are usually provided on a country basis. Purchase subsidies are generally granted to not only local manufacturers as part of EV promotion measures. France has nevertheless excluded Chinese EVs by taking into consideration CO2 emissions from the EVs’ transportation process as a condition for granting subsidies. The EU, concerned about the rising presence of Chinese EVs in the EU region due to China's policy support, launched a subsidy investigation in October 2023, and on October 4, 2024, decided to impose additional tariffs on Chinese EVs.

    (2) U.S. policy

    [Policy trends]
    While some states in the U.S. have adopted policies to promote ZEVs, the Biden administration has made policy responses to climate change and the development of green industries key themes for the federal government. As a result, federal EV support policies were institutionalized, primarily in the form of tax cuts and subsidies. The Inflation Reduction Act, which drives this policy, is structured to make a sharp distinction between the U.S. and its competing countries and to link policy measures to the strengthening of the U.S. industrial hegemony. In addition, additional tariffs and other measures will be applied to China.
    [Decarbonization promotion]
    In August 2021, President Biden issued a presidential decree to the effect that by 2030 over 50% of new cars (LDVs: passenger cars and light trucks) would be EVs. In March 2024, the U.S. Environmental Protection Agency (EPA) published the final rule for the Corporate Average Fuel Economy (CAFÉ) standards (miles per gallon) for 2027 LDV models and beyond. These fuel efficiency standards were revised downward from the proposal in July 2023, based on comments from the automobile industry and other factors (passenger cars should see an improvement of 2% per year until the 2031 model).
    Apart from the federal level, some states have more stringent fuel economy regulations. In September 2020, California issued a gubernatorial decree requiring all new cars (passenger cars, light trucks, etc.) sold in the state to be ZEVs by 2035. More than a dozen other states, including those in the eastern and western U.S., are also working on regulations to shift to ZEVs.
    [Securing jobs/industrial hegemony]
      Policies (home industry support/competitor exclusion)
    Inflation Reduction Act (IRA) (August 2022)
    [Tax credit for purchasers]
    • (Eligibility) Applicable to BEVs, PHEVs, and FCEVs whose final assembly takes place in North America (either in the U.S., Canada, or Mexico) and which are purchased after April 2023.
    • (Requirements and respective tax credits) Totaling $7,500 credits if the following two conditions are met:
    • Battery requirements ($3,750)
      • Manufactured in North America: Requirement for price of parts manufactured in North America to be gradually increased from 50% (2023) to the full amount (2029).
    • The battery's critical minerals are mined or processed in North America or an FTA country, or recycled in North America: Requirement for price of critical minerals to be gradually increased from 40% (2023) to 80% (2027 onward).
    [Tax credit for capital investment]
    For capital investment: Tax credits for investments in advanced energy manufacturing equipment up to 30%, with a maximum total of $10 billion. Advanced energy manufacturing equipment eligible for the investment tax credit includes small, medium, and large electric and fuel cell vehicles and related technologies, components, materials, and charging and refueling infrastructure.
    [Tax credit for production]
    Production of fuel cells and critical minerals is also supported.
    Infrastructure Investment and Jobs Act
    (November 2021)
    [Subsidies, etc.]
    Development of electric vehicle charging network (total subsidy of $7.5 billion), etc.
    Additional tariffs on Chinese EVs
    (September 2024)
    [Additional tariffs on Chinese-made EVs]
    The Biden administration announced in May 2024 that regarding tariffs on Chinese EVs and other products, under Section 301 of the U.S. Trade Act, tariff rates on EVs would be increased from the current 25% to 100%, and those on EV batteries from the current 7.5% to 25%, among others. Effective September 27, 2024.
    Table 3: U.S. (Biden administration) policies for securing jobs/industrial hegemony
    (Source) Compiled by Hitachi Research Institute based on various information.

    EV industry policy promotion at the federal level moved forward with the enactment of the Inflation Reduction Act in August 2022. The program promotes domestic production and capital investment while promoting decarbonized EVs and at the same time excluding competing countries through selective tax credits. In addition, the decision to increase tariffs on EVs, batteries, and other products against China is intended to protect jobs and industries from Chinese EVs in a precautionary manner.

    4. Changes in U.S. and European policy stances on EVs and outlook

    (1) EU and the U.S. shifting their focus from decarbonization to securing jobs and industrial hegemony

    The main policy objective of the EU’s EV policy has been to decarbonize the transportation sector, focusing on fuel efficiency regulations and subsidies seeking to reduce CO2 emissions. However, due to financial resource issues and the fact that EVs have spread to a certain extent, purchase subsidies are being reduced or eliminated.

    On the other hand, along with the rise of Chinese EV manufacturers, policies have been adopted to protect the European EV auto industry and jobs in the region with an eye on Chinese EVs, such as tariffs on EVs against China and subsidies based on France's environmental score.

    The U.S. Inflation Reduction Act has initiated a subsidy policy that prioritizes the production of EVs, batteries, and materials in North America. Together with tariff measures against China, industrial hegemony of EVs and considerations for jobs are emphasized.

    In setting targets for carbon neutrality and introducing fuel efficiency regulations, considerations for realistic responses have been given in order not to impose impossible obligations. For example, the EU has approved zero-emission ICEs using synthetic fuels, while the U.S. has revised its fuel efficiency standards downward from the initial proposal, based on comments from the automobile industry and other factors.

    (2) Background of changes in policy stances to emphasize securing industrial hegemony and jobs

    The followings are possible reasons for these changes in policy stances:

    [Rapid mainstreaming of EVs will require a huge financial burden]
    Looking at the recent slowdown in EV sales and the companies' revised targets, the U.S. target of 50% EVs by 2030 is difficult to achieve, and the EU target of 100% EVs by 2035 will not be easy, either. If these targets were to be forced through policies, the government would need to bear an enormous burden for developing recharging networks, providing subsidies, etc. In addition to the policy measures that have been taken to date, the European and U.S. governments are in no position to take fiscal measures for providing new large-scale subsidies.
    [Changing implications of decarbonizing the transportation sector as carbon neutrality goal becomes more difficult to achieve]
    In many countries, the 2030 Nationally Determined Contribution (NDC) targets that countries have determined as their greenhouse gas emission reduction targets are becoming increasingly difficult to achieve. As a result, no clear path is in sight to maintain a reduction commitment toward the 2050 carbon neutrality goal, making it difficult to return to a path toward achieving the original goal for the transportation sector (achieving carbon neutrality in the transportation sector in 2050). Given such realistic constraints, the target of 100% ZEVs is expected to be pushed back. In re-setting the target, however, the policy target and the path to realizing it may have to be made more realistic, taking into account the issues of securing jobs and securing industrial hegemony that have emerged in the progress of EVs. In particular, if the electricity supply does not become carbon neutral, with a residual dependence on fossil fuels for power generation, the significance of EVs for decarbonization policy will be questionable to some extent.
    [Growing alarm over the dominance of Chinese EVs, which are undermining jobs and industrial hegemony]
    The shift to EVs raises concerns about job loss, and the change in technology required for manufacturing has the potential to alter the industrial structure and significantly change the traditional industrial hegemony. Fundamentally, the introduction of price-competitive Chinese EVs into the market would be expected to increase the percentage of EV sales and contribute to decarbonization targets. However, due to industrial hegemony and job considerations in the U.S. and EU, the policy in the direction of penalizing Chinese EV manufacturers is given priority by excluding Chinese EVs from purchase subsidies or imposing additional tariffs on them, etc.
    One of the reasons for this is that while the price competitiveness gap between Chinese local manufacturers and existing U.S. and European ones is becoming clear, there is more concern than before about the risk of job loss in the U.S. and Europe due to the increased export of Chinese EVs. In the U.S., President-elect Trump appealed to the United Auto Workers for support during his presidential campaign, saying he would stop promoting EVs. Job losses associated with EVs can become a political issue.
    There is also a growing awareness of industrial hegemony, protecting key U.S. and European industries from unfair Chinese competition. The EU's formal decision to impose tariffs in October 2024, based on its investigation of China on EV subsidies, was prompted by concerns that Chinese cars would dominate the market. Genuine Chinese brands' share of EV sales in Europe jumped from 0.5% in 2019 to 9% in 2023 and 14% in January-June 2024 (Nikkei on October 4, 2024). “The future of European competitiveness," a report on EU competitiveness by former Italian Prime Minister Mario Draghi, published by the EU in September 2024, presents a simulation by the European Central Bank (ECB) that "if the Chinese EV industry follows the same subsidy trajectory as the solar power industry, domestic production of EVs in the EU will decline by 70% and the global market share of EU producers will drop by 30 percentage points." There is a strong sense of caution about industrial hegemony by Chinese companies supported by China’s subsidy policy.
    On the other hand, however, for the EU's formal decision on additional tariffs against China in October 2024, five countries including Germany opposed it, twelve countries including Spain and Sweden abstained, and only ten countries including France and Italy voted in favor. It should be noted that there is not necessarily monolithic unity within the EU, as Germany, which has high expectations for sales in the Chinese market and is wary of reactive sanctions from China, was opposed, while some countries that can expect EV investment from China into their countries were opposed or abstaining. Therefore, it is possible that there will continue to some swings in policy strength regarding industrial hegemony.
    On top of that, even if the EU agrees to certain compromises with the Chinese government in the future, the EU's caution as indicated in the Draghi Report will continue. Although the percentage of Chinese EVs in the domestic market is currently low in the U.S., the Biden administration has already raised tariffs on EVs to 100% against China, in addition to removing Chinese EVs from the subsidy. The administration continues to exercise precautionary vigilance against Chinese EVs while sending out a political message.
    The EU has so far focused on fuel efficiency regulations, purchase subsidies, and other policies that help promote decarbonization in the transportation sector. At the moment, however, the EU is shifting its policy emphasis from decarbonization to securing industrial hegemony and jobs, while in the U.S. the emphasis is also on securing industrial hegemony and jobs. This is due to the fact that the carbon neutrality goal is becoming more difficult to achieve, and that they are no longer in a situation where they can provide significant support only to EVs to achieve the decarbonization goal. Also contributing to the shift in the policy emphasis is a fear that Chinese cars will dominate the market. The job and industrial hegemony aspects of EVs will continue to be a politically sensitive issue in the U.S. and European automobile-producing countries, and the competition to secure industrial hegemony among nations will become tougher. As a result, the policy trend in the U.S. and Europe is expected to continue, and the exclusive policy toward EVs will further make global EV markets fragmented and mosaic-patterned into Europe, the U.S., and China.

    (3) Policy shifts under the Trump administration

    The above policy shifts will advance under the second Trump administration, which will begin in 2025. Going forward, there is uncertainty regarding the elimination or revision of EV support measures under the Inflation Reduction Act, as some Republican legislators' hometowns are benefitting from EVs. However, on top of the existing IRA, there is little incentive for the Trump administration to provide additional support for EVs, either in terms of climate change policy or job retention. Moreover, the Trump administration may also cast a stern eye on Chinese EV imports and further tighten restrictions on them. The policy trend will therefore adversely affect the spread of EVs.

    Note: This report is based on information available up to early November 2024.

    Author’s Introduction

    Teruaki Kotaka

    Chief Researcher, Global Intelligence and Research Office, Hitachi Research Institute

    Since February 2020, he has been engaged in research in the geopolitical and other fields at HRI. After graduating from Hitotsubashi University with a bachelor's degree in economics, he worked at Japan Bank for International Cooperation, including as Representative in Manila and Senior Representative in Washington, D.C., conducting political and economic research in emerging economies and geopolitical research before assuming his current position. MSc in Economic Analysis and Policy, University of Warwick

    Author’s Introduction

    Teruaki Kotaka

    Chief Researcher, Global Intelligence and Research Office

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