Should the phase-out of the combustion engine be postponed or cancelled? A strategy paper co-authored by economists Jörn Hoppmann and Hauke Lütkehaus looks at the consequences of the "combustion engine phase-out" for the automotive industry.
Mr Hoppmann, Mr Lütkehaus, various parties called during the German parliamentary election campaign for the so-called "combustion engine phase-out", i.e. an EU regulation according to which cars will nolonger be allowed to emitCO2 from 2035. The CDU, for example, said that withdrawing this regulation would "secure good jobs and prosperity". Is that consistent with the results of your strategy paper?
Hoppmann: On the contrary, phasing out combustion engines is important in order to support the transformation of the automotive industry towards electromobility. We can show that the effect of this measure is much more positive than is generally assumed. If combustion engine technology is retained, some automotive companies could save on investments in the short term and continue to operate their old business model for longer. In our view, however, this is very short-term thinking. Because the question is not: Will the transformation to e-mobility happen? It is simply: How will companies deal with it? Can they transform successfully? They need to be given the best possible support.
What arguments are put forward in favour of retaining combustion technology for longer?
Hoppmann: The most important argument is that German industry has a great deal of core competence in the field of combustion engines. Cars with combustion engines are still being sold very profitably at the moment. Of course you can argue that: Giving all that up is not good because you have a very good command of this technology and a good competitive position.
In your study, you draw different conclusions. How did you proceed?
Hoppmann: We tried to understand the situation: How do the companies see the end of the combustion engine, how do they feel about it? After all, these are the players who will ultimately have to implement it. A large part of the results of the strategy paper come from Hauke Lütkehaus' dissertation.
Lütkehaus: We conducted a total of thirty interviews with industry experts and representatives from ten different car manufacturers. The company representatives included people who sit on the boardroom floor, such as the car manufacturers' heads of strategy. We have diversified our findings as much as possible.
According to your findings, would it be helpful to postpone the date for the end of the combustion engine?
Hoppmann: That would not be a good idea. Because there is enormous pressure to transform from various directions. Firstly, from a climate perspective: CO₂ emissions in the mobility sector need to come down, there are major deficits here. But regardless of this, it doesn't make sense to stick with the status quo because the transformation to electromobility is happening anyway.
How fast is this development happening?
Hoppmann: An exponential trend can be observed worldwide, despite slight setbacks at regional level. We are seeing enormous momentum in the USA and China. The Chinese have left the German car manufacturers behind in terms of electric car development. Hoping that the whole thing will go back to the combustion engine at some point is completely unrealistic. The direction is very clear. Our industry can only remain competitive in the long term if it manages the transformation, and does so relatively quickly.
To what extent can the end of the combustion engine in 2035 have an impact?
Lütkehaus: We have identified four reasons in our strategy paper. Firstly, this measure draws a lot of attention to the need for transformation. Of course, many companies were already aware that a transformation was taking place before the EU decision, but some were not. The regulation has ensured that management in all companies has started to think strategically and invest the appropriate resources in the development of electromobility.
And the other effects?
Lütkehaus: The second effect relates to the planning processes. The moment car manufacturers know that they will have to phase out electric vehicles in 2035, they can strategically align their model range, production and personnel capacities to this date. The third is that the fixed date helps to overcome so-called inertia in companies. People hold on to old technologies for irrational reasons, such as short-term profit interests or because they identify strongly with combustion engines. A clear policy helps to greatly reduce these effects. Then we only talk about "How do we implement this?" instead of "Do we want to tackle this at all?
Does the fixed date also have an impact on the car industry as a whole?
Hoppmann: That is the last point we are making: It's important that all companies pull together and know which direction to take. After all, an entire industry has to transform itself. Suppliers of all different sizes in different regions are involved. At the same time, the charging infrastructure needs to be built up and perhaps the petrol station infrastructure needs to be dismantled. We have an entire education system behind it - in other words, a huge ecosystem of different players. Of course, it helps with coordination if you have a common goal.
Assuming that the date for the final phase-out of combustion engines is pushed back further - what consequences would that have?
Lütkehaus: What we have realised in our work is that credibility plays a major role. The moment politicians start to postpone or weaken the target, some of this credibility is lost and many of the mechanisms we have described lose their power. Planning certainty is lost. There is a lack of clarity, which helps companies to pursue the transformation path as purposefully as possible. Companies then say to themselves: "There are many scenarios that we have to take into account. So there are many more risks of miscalculating. What is also very important from our point of view is that the fixed end point gives companies the opportunity to show their employees a clear perspective. After all, it's not just about whether we keep the combustion engine or not, but also about creating new jobs in the companies. Employees need to be trained for this at an early stage.
In our view, the benefits generated by a shift are minimal. You may generate a little more profit in the short term, but at the same time the damage is great.
Jörn Hoppmann
Hoppmann: The other effects are also no longer effective if the phase-out of combustion engines is cancelled. For example, internal inertia is more likely to be fuelled if you start to raise doubts about the target. It is similar with the coordination of the entire industry or with the attention that the topic receives. In this respect, we believe that the benefits generated by postponing are minimal. You may generate a little more profit in the short term, but at the same time the damage is great. In addition, those companies that transform strategically and proactively, for example by building large plants for electromobility, are left out in the cold.
It is often said that e-fuels could save the combustion engine. Do you have any insights into this?
Lütkehaus: The topic of e-fuels is not seen as particularly promising by car manufacturers. This is mainly due to the fact that only very small quantities of these synthetic, CO₂-neutral fuels are produced and that the costs are very high. According to forecasts, a price level acceptable to customers will not be reached in the medium term. Car manufacturers have told us that e-fuels won't play a role for us in the medium term - simply because in the end nobody wants to fill up at four euros per litre.
Hoppmann: You could also say that the debate about e-fuels is a sham. From a technological and economic point of view, this technology has hardly any potential. At the same time, we are currently seeing a huge improvement in battery electric vehicles, for example in terms of battery technologies and cost development.
What do you recommend to politicians?
Hopmann: The first recommendation is to stick to the phase-out of the combustion engine and the time horizon for this. Anything you change will do more harm than good. Nevertheless, we can see that it is not enough just to set this date. Typically, you need a policy mix to cushion social hardship, for example.
What exactly does this policy mix look like?
Hoppmann: One concern often expressed by companies is that demand will not increase fast enough, that we may not sell enough cars in 2035 to compensate for what we are losing due to combustion engines. Politicians should counter this by actively promoting demand. This was already in place until the end of 2023, but it was abruptly discontinued following the Federal Constitutional Court's budget judgement, resulting in a sharp drop in sales in Germany in 2024. In our view, it makes sense to strengthen the demand side again. This will get us out of the vicious circle of electric cars not selling well because they are too expensive and they are too expensive because too few of them are being sold.
We are at the threshold where the trend is tipping in favour of electric mobility for economic reasons too.
Hauke Lütkehaus
According to surveys, public acceptance of electric cars is not yet very high. How can that be changed?
Lütkehaus: Fortunately, this problem will resolve itself to a certain extent, firstly because the technology is constantly improving, simply because it is selling more and becoming cheaper. Secondly, studies show that the vast majority of those who have bought an electric car would not switch back. This suggests that the technology can't be that bad. In order to further increase acceptance, certain points can be addressed where there are still problems. Options include specifically promoting the charging infrastructure or introducing a stronger social component. France, for example, does not promote demand through purchase prices, but through leasing offers. This gives people who may not be able to afford the purchase price the opportunity to drive electric cars.
Is ten years a good period of time to achieve the goal?
Lütkehaus: Definitely. After all, we are no longer at the point where electromobility is a new and unproven technology. The transformation has been underway for around 15 years. Now we need to take it to the next level. We are now at the threshold where the trend is tipping in favour of electromobility for economic reasons as well; we are seeing efficiency gains and cost reductions. In the end, everything will suddenly happen very quickly.
Interview: Ute Kehse
