On Thursday, the European Council announced it had officially approved a proposal to extend the current rules on the origin of electric vehicles for an additional three years until the end of 2026. This means the strict new regulations initially set to take effect on January 1, 2024, have been postponed.
In 2020, the EU and the UK devised new origin rules to enhance the localization level of the supply chain. Under the original plan, from January 1, 2024, electric vehicles circulating between the two markets would need to meet higher local content requirements (45% of the total cost of an electric vehicle and 60% of its battery from local sources) to enjoy the current tax exemption. Otherwise, they would face a 10% tariff.
The EU stated that when the rules were formulated three years ago, they did not anticipate a series of unforeseen events such as the Russia-Ukraine conflict and the COVID-19 pandemic, which have complicated the supply chain. This has made it more challenging for electric vehicle manufacturers to comply with the new rules, especially as the domestic battery industry has not taken off as quickly as expected. To respond to industry calls, maintain competitiveness, and allow more growth time for the domestic industry, the EU ultimately decided to postpone the implementation of the new rules.
The UK and the EU are each other's largest electric vehicle export markets. With the push for green transformation, electric vehicle sales have increased, but European factories struggle to supply enough batteries. As batteries account for about half the cost of an electric vehicle, the absence of local battery factories makes long-distance imports from abroad both cumbersome and expensive. According to the UK government, the 10% tariff resulting from the new rules' implementation would bring an additional cost of up to £4.3 billion for manufacturers and consumers.
The European automotive industry has welcomed the delay in implementing the new rules. The European Automobile Manufacturers Association (ACEA) stated that the postponement provides much-needed certainty for Europe's growing electric vehicle battery supply chain and will support the competitiveness of the regional electric vehicle manufacturing industry.
Sigrid de Vries, the organization's general secretary, believes that the European electric vehicle manufacturing industry is at risk of losing to China and the United States. She suggests that the EU lacks a robust industrial strategy to promote supply chain localization and advises European legislators to focus on developing an EU-level industrial strategy for the entire green value chain, including research and development, mining, refining, and manufacturing.
In its latest statement, the EU reiterated its strategic support policy for the domestic battery industry and announced the establishment of a dedicated tool under the Innovation Fund. The plan is to provide up to €3 billion in incentives over three years to the most sustainable European battery manufacturers. Brussels believes this will have a significant spillover effect across the entire EU battery value chain, particularly in the upstream segment, and also support the assembly of European electric vehicles.
The latest developments are particularly significant for the UK. Compared to the EU's large market of 27 countries, the UK has almost no local battery production capacity and is even less likely to meet the higher localization requirements in the short term. Britishvolt, a UK-based startup supported by the Johnson government, had planned to build a £3.8 billion battery factory in northern England but struggled to raise funds and filed for bankruptcy protection in January. The company was later acquired by Australian firm Recharge, which has yet to announce its plans.
Currently, the UK has only a small electric vehicle battery factory operated by Nissan in Sunderland. At the end of November, Nissan announced an additional investment of £2 billion. The company's second factory is under construction.
Under the new rules, if the UK continues to have almost zero local battery production capacity, many car factories will shift to the European mainland, "and the UK will lose 800,000 jobs related to the automotive industry," according to Andy Palmer, former COO of Nissan.
Since the UK's Brexit at the end of 2020, experts have continuously warned that the UK could lose a significant portion of its automotive industry without a superfactory for electric vehicle batteries.
Stellantis, the world's fourth-largest car company, warned in May that if the new rules took effect as scheduled, it would lead to the closure of UK car factories and the loss of thousands of jobs. This concern was echoed by American multinational giant Ford and European automotive trade organizations, reflecting widespread industry apprehension. Ford also stated that the new rules would simultaneously hit manufacturers in the UK and the EU and slow down the transition to electric vehicles.
In recent months, the Sunak government has been negotiating with Brussels, hoping to delay the implementation of the new rules. Additionally, the UK plans to seek a three-year extension of the origin rules with Turkey to support British car companies, which are major exporters to the Turkish market. At the same time, the UK hopes to start negotiations with Turkey on a new free trade agreement next year.
