Trade-off between EV sales and EU relations leaves carmakers in a fog
UK wants to increase electric car use but this will cost business tariffs under post-Brexit deal with Europe
Ask any business, in any region or sector what they want most from regulators and the same answer always comes back: certainty.
Whether they are setting long-term strategies or short-term sales targets, companies need to know the rules they are required to follow.
Nowhere is this more keenly felt than in the uncharted corporate territory of decarbonisation, where government emissions targets are dictating business plans in everything from energy generation to aircraft manufacturing.
Forcing carmakers to ditch engines, power companies to wean themselves off fossil fuels, or consumer goods groups to make all plastics fully recyclable — the latter being likely under a UN treaty coming next year — requires new business models.
Business needs clarity to navigate these waters. Complying with one set of regulations is feasible. But trouble comes when competing regulations come in at the same time.
The need for regulators or politicians to adjudicate between different priorities inevitably means tense negotiations that often leave businesses in the dark until the very last moment.
The result is that regulation is often not finalised until months — sometimes even weeks — before it comes into force.
A glaring current example is the UK’s electric vehicle dilemma. Policy must meet two very different objectives: boosting EV sales, while at the same time nurturing the country’s post-Brexit relationship with the EU.
It is a cautionary tale of competing regulatory interests that has caught the region’s largest manufacturing industry in its net.
From next year, any car brand operating in the UK must meet a quota of electric vehicle sales. The level starts at 22 per cent of the total, climbing to 28 per cent in 2025, 33 per cent in 2026, and ratcheting up every year to 100 per cent by 2035.
Another set of rules coming in next year means that any carmaker shipping EVs between the UK and EU must pay a 10 per cent tariff if more than 40 per cent of the value of the car battery comes from outside the UK or Europe.
These “rules of origin” requirements, set out in the post-Brexit trade agreement between the UK and EU, are a standard feature of trade deals and are intended to prevent technology from a third party nation, such as China, entering the market in another product.
But there is a catch. Europe and the UK have very little in the way of EV battery production capacity so almost no cars will meet this threshold. Any carmaker wanting to operate in the UK will have to pay the trade tariffs to meet the country’s EV sales quota.
The potential costs look huge. German premium brands BMW, Mercedes and Audi would face a tariff bill of almost half a billion pounds each between 2024 and 2026, according to Financial Times’ calculations. For mass-market brands with higher sales such as Ford and Volkswagen it is even bigger.
For an industry operating on razor-thin margins and facing a squeeze from the coming wave of cut-price EVs from China, these extra costs are damaging.
The UK has asked the EU to waive the “rules of origin” requirements until 2027, by which time the region should have a lot more battery capacity. Carmakers from the UK, France and Germany all agree.
The issue is now with Brussels, which must decide whether the financial hit to some of the region’s biggest companies is worth the political capital of a concession to the UK.
Meanwhile, businesses have no idea what the rules will be in six months’ time and are hurtling towards 2024 with their windscreens fogged.
“An eleventh hour deal is too late,” one chief executive said this week. “We need to know now.”