Net zero, the car industry and political tensions

As the German election approaches, the European Union (EU) is finding the core policies of the union – freedom of movement and net zero – are under fire from radical parties.

The German CDU conservatives are well ahead of the SPD Chancellor’s party in the polls. It has just caused controversy by tabling a motion on immigration which gets the support of the AFD anti-migrant party. Some think this will lose the CDU moderate support, whilst others think it might gain them AFD-inclined support.

The Netherlands and US elections are a reminder of the importance of migration issues to current voters. The CDU has always denied it would enter a coalition with the AFD, but that leaves open the possibility of a minority CDU government that could win some votes with AFD support that it had not directly sought.

Antagonism to high levels of migration remains strong in a significant bloc of voters across the continent, with governments struggling to tighten border controls and find ways to repatriate illegal migrants. Now that President Trump is speaking out and seeking to take tough action, there is more pressure on European politicians.

The radical parties are also increasingly disagreeing with ‘net-zero’ policies like President Trump. In the Netherlands, a Farmer-Citizen Movement became popular in resisting moves to decarbonise agriculture. There is a marked reluctance by many people to buy a battery car or to replace a gas boiler with a heat pump, with a significant minority of voters wanting the government to stop trying to push these products.

Popular movements are seeking both to bring down incumbent governments, and to undermine the drive to ‘net zero’ by querying bans, subsidies and taxes designed to promote a faster transition. They are finding a ready audience, as they put ‘net zero’ on the ballot paper. In the UK, the Reform party is now leading in some polls and is strongly against the ‘net-zero’ drive.

Vehicle production

In the UK in December, car production hit a new low. Over 2024, there was a fall of 13.9% in production. It was the worst outcome since 1954, 70 years ago. Only 45,000 cars were made in the last month, 27% down on the previous year and well down on the more normal monthly run rate for what was a one-million-a-year industry.

The manufacturers pointed to the costs and disruptions of switching from petrol and diesel to battery cars. Exports to a depressed Europe were down 24%, with exports to the US a rare bright spot, up 38%. They had to downplay their petrol and diesel cars and try harder to sell some battery ones.

The carmakers are in discussion over the 28% battery car sales target for 2025, given the difficulty of getting to 22% last year. They are seeking removal of the high £15,000 tax on each petrol or diesel car sold over the percentage allowed. At least in the UK, battery car sales did rise last year thanks to government and company buying along with heavy discounting and company tax advantages. Individual buyers remained very reluctant to consider a battery car for the well-rehearsed issues over range, recharging points, battery life and cost.

Talks with the government include a possible subsidy or cheap finance for people buying a battery car, along with government assistance to roll out more recharging points to reduce range anxieties amongst electric car drivers. The government will want to offer some help but does not have a lot of money to subsidise the car industry on top of its other commitments.

In the EU, vehicle production has been flat, with the annual result growth of just 0.8%. Within that, Germany and France were down a little, whilst Spain was better. Battery cars were only 13.6% of the total, with petrol cars at 33% and hybrids at 31%.

There is a long way to go to switch European vehicles to all-electric. Only 3.9% of the current cars in use are chargeable, with 1.3% of the vans and 0.1% of the trucks. To complete the transition, the industry needs to get to a much higher proportion of battery car sales very quickly, to start to run down the petrol and diesel dominance in the car park.

The EU leads on much of the policy as part of its green transition. There is some suggestion that it is downplaying this a bit, though it remains central to all the published plans and much of the pattern of financing and programmes. The EU has agonised over whether to impose a high tariff on Chinese battery car imports like the US to protect domestic manufacturers, or whether to back some of the major European car companies that have Chinese factories and are worried about a high tariff. It has compromised with a range of tariffs all below 50% compared to the US tariff at 100%.

The scramble to compete

Germany is particularly dependent on automotive industry success, given the importance of manufacturing to the economy and the scale of vehicle manufacture within that. The industry is in decline, with Tesla taking some of its higher-end car sales and China now making more lower-priced electric products.

Germany has also been slow to respond to the dominance of China in battery production, and in acquiring access to the crucial metals and minerals for their fabrication. There will need to be more money spent on completing new ranges of battery cars. Prices will need to come down, eroding margins.

The extra costs of energy transition

Meanwhile, the EU – like the UK – is stuck with expensive electricity which adversely affects industry. The more a factory automates, the more power it needs to carry out its functions.

It is argued that adding a lot more renewable power will lower electricity and wider energy costs in the longer term, as there is, of course, no charge for the power of the sun or wind compared to the costs of gas and coal extracted from the ground. In the shorter term, however, adding renewables can increase the costs of electricity, which is already very high.

There need to be subsidies or good rewards for those making the capital commitment to put in the wind turbines. There needs to be generous terms to the owners of gas and coal-powered stations to keep their stations in good order and on standby for when the wind does not blow. The overheads of the capital-intensive fossil-fuel generation plants have to be recouped from far lower sales volumes of electricity.

Quite often, when the wind and sun are absent, there will be spikes in the price of the gas and the gas-fired capacity needed to suddenly replace the missing output, adding to the average cost and price of the generated power. As the cost of electricity is often four times that of gas, if a business switches to using electricity from gas it does not necessarily enjoy a running cost reduction even though the electric plant may be considerably more fuel efficient than the gas plant.

Heat pumps are much more efficient than gas boilers, but they are fired by electricity. Battery cars also need large amounts of electrical power for recharge and can incur higher costs when seeking to recharge at times when wind and sun power are in short supply.

There is now a great experiment both sides of the Atlantic

The two sides of the Atlantic could not be more different. The US has now renounced climate-change theory and is busily removing bans and subsidies designed to boost the transition to renewable electrical power.

The EU and UK strongly endorse the climate change imperative, and are seeking to extend their range of subsidies, taxes and bans to speed-up transition. The result is the European side are, and will be, paying much more for their energy for the time being as it seeks to force the pace of change. The European motor industry is in decline, with extensive Chinese pressures on it, and high energy using industries like petrochemicals, steel, glass, ceramics and metals are under cost pressure.

It is likely China will continue to be the dominant players in the ‘net-zero’ products and industries, with the US doing better in those activities still relying on gas and other fossil fuels. Both Europe and the UK face a battle to keep what industry they currently have and to get a bigger presence in the new industries of the future. All is still set for faster US and Chinese growth, with European economies only enjoying a modest recovery as interest rates come down.