The EU’s Dual Approach: Green Subsidies and Tarriffs on Chinese EVs

Imran Khalid

 November 21, 2024
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On October 29, 2024, the European Commission unveiled new countervailing duties on Chinese electric vehicle (EV) imports, effective the following day. This move is framed as part of a broader aggressive strategy to safeguard European industries, but it overlooks a significant reality. The EU itself has long been an active player in subsidizing its own green transition, including the EV sector.

Recent EU statistics reveal that Brussels and its member states have poured substantial financial support into the “new trio” industries—lithium batteries, photovoltaic products, and electric vehicles—through a mix of grants, tax breaks, low-interest loans, loan guarantees, and price subsidies. These subsidies, which are often justified by the need to boost competitiveness and drive regional development, have granted the EU a commanding role in emerging industries.

Although the EU has rules to limit state funding, it has allowed member states to provide targeted financial support. On top of this, the EU itself has established dedicated funds for direct grants. In 2022 alone, the EU allocated a staggering 25 billion euros to solar power through its various financial mechanisms. This extensive dual-channel support, blending EU funds with member-state aid, has given European green industries a major competitive edge, which stands in sharp contrast to the tariffs now imposed on China’s own green transition.

The European Union, under the pretext of advancing the green transition and aiding underdeveloped regions, has created an extensive network of at least 11 subsidy funds targeting emerging industries like lithium batteries, photovoltaics, and electric vehicles. These funds, including the Recovery and Resilience Facility (RRF), Horizon Europe, and the Just Transition Fund, among others, form a robust financial infrastructure designed to fuel the EU’s competitive edge. With the EU’s strategic investment in these sectors, the bloc aims to dominate critical green technologies even as China’s similar efforts are increasingly met with tariffs and restrictions.

As of April 2024, the RRF has allocated 87.9 billion euros to sustainable transportation projects, particularly in zero- and low-emission vehicles, reinforcing the EU’s green agenda. Horizon Europe, with a total budget of 93.5 billion euros for the 2021-2027 period, has already dispersed 22.7 million euros to bolster research and innovation. Meanwhile, the Innovation Fund, fueled by EU carbon emissions trading revenue, is expected to grant at least 40 billion euros by 2030 to advance low-carbon technologies. The European Regional Development Fund (ERDF), with a defined objective of narrowing the development gap between regions, has allocated 104.3 billion euros from 2021 to 2027. This sum will support green initiatives like energy transitions and sustainable urban mobility, furthering the EU’s low-emission agenda. The Connecting Europe Facility (CEF) also plays a crucial role, investing in interconnected, high-performance trans-European networks. From 2021 to 2022 alone, the CEF awarded 1.66 billion euros to 18 energy projects, spanning electricity, carbon dioxide, and renewable energy.

The European Union’s focus on electric vehicles has elevated the battery industry as a key player, with EU funds pouring substantial support into this sector. Among the “new trio” industries, battery projects have garnered the largest subsidies, often covering over half of their total costs. Horizon Europe, for instance, allocated 873 million euros to 307 battery R&D initiatives between 2014 and 2020. The Innovation Fund provided 161 million euros to eight battery projects from 2021 to 2022. Meanwhile, the European Regional Development Fund (ERDF) channeled 319 million euros into 459 battery-related initiatives across 14 member states.

By 2023, the European Union had also firmly committed to the electrification of its transport sector, with all 27 member states enacting at least one electric vehicle (EV) consumption subsidy policy. These efforts have largely been driven by tax incentives and direct grants, offering substantial financial support for EV adoption. Among the frontrunners, Germany stands out, having allocated a remarkable 10 billion euros in subsidies to foster electric vehicle adoption. It has also extended motor vehicle tax exemptions for electric vehicles multiple times since 2012, including a 10-year circulation tax exemption for EVs, which began in 2016. Also that year, Germany introduced the “Government Programme for Electric Mobility” by committing 1.2 billion euros for environmental bonuses for electric and plug-in hybrid cars, alongside 300 million euros to expand charging infrastructure.

France, meanwhile, offers a 50 percent reduction on registration fees and a full exemption on license plate registration for both fully electric and hybrid vehicles. Spain, in 2023, introduced a 15 percent personal income tax reduction for electric vehicle purchases and charging infrastructure, with deductions reaching up to 20,000 euros for EVs and 4,000 euros for chargers. Grants, too, play a crucial role in the push for EV consumption across the EU. France’s 8 billion euro “Automotive Industry Revitalization Plan,” launched in 2020, includes direct subsidies for the purchase of electric vehicles, alongside trade-in bonuses for consumers who replace older fossil-fuel cars with greener alternatives. Locally, 131 cities in the Paris metropolitan area have offered varying degrees of aid to EV buyers.

As the European Union escalates its efforts to counter Chinese electric vehicle (EV) imports with new tariffs, subsidies often account for over half of the budget for many green initiatives. These subsidy programs—aimed at bolstering its green industries—have already reshaped the market, giving European companies an undeniable edge. Rather than hastily imposing punitive tariffs on China, the EU should instead foster a global, cooperative effort to advance green technologies, ensuring a fair, competitive, and sustainable EV market for all.

This first appeared on FPIF.

Imran Khalid is a geostrategic analyst and columnist on international affairs. His work has been widely published by prestigious international news organizations and publications.

Climate Change and the Insurability Crisis

Andrew J. Hoffman

 November 21, 2024
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Storm-ravaged house, Knappa, Oregon. Photo: Jeffrey St. Clair.

Home insurance rates are rising in the United States, not only in Florida, which saw tens of billions of dollars in losses from hurricanes Helene and Milton, but across the country.

According to S&P Global Market Intelligence, homeowners insurance increased an average of 11.3% nationwide in 2023, with some states, including Texas, Arizona and Utah, seeing nearly double that increase. Some analysts predict an average increase of about 6% in 2024.

These increases are driven by a potent mix of rising insurance payouts coupled with rising costs of construction as people build increasingly expensive homes and other assets in harm’s way.

When home insurance averages $2,377 a year nationally, and $11,000 per year in Florida, this is a blow to many people. Despite these rising rates, Jacques de Vaucleroy, chairman of the board of reinsurance giant Swiss Re, believes U.S. insurance is still priced too low to fully cover the risks.

It isn’t just that premiums are changing. Insurers now often reduce coverage limits, cap payouts, increase deductibles and impose new conditions or even exclusions on some common perils, such as protection for wind, hail or water damage. Some require certain preventive measures or apply risk-based pricing – charging more for homes in flood plains, wildfire-prone zones, or coastal areas at risk of hurricanes.

Homeowners watching their prices rise faster than inflation might think something sinister is at play. Insurance companies are facing rapidly evolving risks, however, and trying to price their policies low enough to remain competitive but high enough to cover future payouts and remain solvent in a stormier climate. This is not an easy task. In 2021 and 2022, seven property insurers filed for bankruptcy in Florida alone. In 2023, insurers lost money on homeowners coverage in 18 states.

But these changes are raising alarm bells. Some industry insiders worry that insurance may be losing its relevance and value – real or perceived – for policyholders as coverage shrinks, premiums rise and exclusions increase.

How insurers assess risk

Insurance companies use complex models to estimate the likelihood of current risks based on past events. They aggregate historical data – such as event frequency, scale, losses and contributing factors – to calculate price and coverage.

However, the increase in disasters makes the past an unreliable measure. What was once considered a 100-year event may now be better understood as a 30- or 50-year event in some locations.

What many people do not realize is that the rise of so-called “secondary perils” – an insurance industry term for floods, hailstorms, strong winds, lightning strikes, tornadoes and wildfires that generate small to mid-size damage – is becoming the main driver of the insurability challenge, particularly as these events become more intense, frequent and cumulative, eroding insurers’ profitability over time.

Climate change plays a role in these rising risks. As the climate warms, air can hold more moisture – about 7% more with every degree Celsius of warming. That leads to stronger downpours, more thunderstorms, larger hail events and a higher risk of flooding in some regions. The U.S. was on average 1.5 degrees Celsius (2.6 degrees Fahrenheit) warmer in 2022 than in 1970.

Insurance companies are revising their models to keep up with these changes, much as they did when smoking-related illnesses became a significant cost burden in life and health insurance. Some companies use climate modeling to augment their standard actuarial risk modeling. But some states have been hesitant to allow climate modeling, which can leave companies systematically underrepresenting the risks they face.

Each company develops its own assessment and geographic strategy to reach a different conclusion. For example, Progressive Insurance has raised its homeowner rates by 55% between 2018 and 2023, while State Farm has raised them only 13.7%.

While a homeowner who chooses to make home improvements, such as installing a luxury kitchen, can expect an increase in premiums to account for the added replacement value, this effect is typically small and predictable. Generally, the more substantial premium hikes are due to the ever-increasing risk of severe weather and natural disasters.

Insurance for insurers

When risks become too unpredictable or volatile, insurers can turn to reinsurance for help.

Reinsurance companies are essentially insurance companies that insure insurance companies. But in recent years, reinsurers have recognized that their risk models are also no longer accurate and have raised their rates accordingly. Property reinsurance alone increased by 35% in 2023.

Reinsurance is also not very well suited to covering secondary perils. The traditional reinsurance model is focused on large, rare catastrophes, such as devastating hurricanes and earthquakes.

Maps illustrate the average loss from flooding alone and expected increases by mid-century. About 90% of catastrophes in the U.S. involve flooding, but just 6% of U.S. homeowners have flood insurance.
Fifth National Climate Assessment

As an alternative, some insurers are moving toward parametric insurance, which provides a predefined payment if an event meets or exceeds a predefined intensity threshold. These policies are less expensive for consumers because the payouts are capped and cover events such as a magnitude 7 earthquake, excessive rain within a 24-hour period or a Category 3 hurricane in a defined geographical area. The limits allow insurers to provide a less expensive form of insurance that is less likely to severely disrupt their finances.

Protecting the consumer

Of course, insurers don’t operate in an entirely free market. State insurance regulators evaluate insurance companies’ proposals to raise rates and either approve or deny them.

The insurance industry in North Carolina, for example, where Hurricane Helene caused catastrophic damage, is arguing for a homeowner premium increase of more than 42% on average, ranging from 4% in parts of the mountains to 99% in some waterfront areas.

If a rate increase is denied, it could force an insurer to simply withdraw from certain market sectors, cancel existing policies or refuse to write new ones when their “loss ratio” – the ratio of claims paid to premiums collected – becomes too high for too long.

Since 2022, seven of the top 12 insurance carriers have either cut existing homeowners policies or stopped selling new ones in the wildfire-prone California homeowner market, and an equal number have pulled back from the Florida market due to the increasing cost of hurricanes.

To stem this tide, California is reforming its regulations to speed up the rate increase approval process and allow insurers to make their case using climate models to judge wildfire risk more accurately.

Florida has instituted regulatory reforms that have reduced litigation and associated costs and has removed 400,000 policies from the state-run insurance program. As a result, eight insurance carriers have entered the market there since 2022.

Looking ahead

Solutions to the mounting insurance crisis also involve how and where people build. Building codes can require more resilient homes, akin to how fire safety standards increased the effectiveness of insurance many decades ago.

By one estimate, investing $3.5 billion in making the two-thirds of U.S. homes not currently up to code more resilient to storms could save insurers as much as $37 billion by 2030.

In the end, if affordability and relevance of insurance continue to degrade, real estate prices will start to decline in exposed locations. This will be the most tangible sign that climate change is driving an insurability crisis that disrupts wider financial stability.

Justin D’Atri, Climate Coach at the education platform Adaptify U and Sustainability Transformation Lead at Zurich Insurance Group, contributed to this article.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Andrew J. Hoffman is Holcim (US) Professor of Sustainable Enterprise, Ross School of Business, School for Environment & Sustainability at the University of Michigan.