EU Commission weakens CO₂ targets – a little bit

Something was different this Tuesday. When the EU Commission prepares to present proposals for politically significant initiatives, more or less complete drafts of the legislative package usually circulate in relevant circles days or even hours before the announcement. However, this was not the case for the “Auto Package”. Ever since EPP politician Manfred Weber pushed last week for a reduction in CO₂ emissions of only 90 percent instead of 100 percent by 2035, Brussels has been unusually quiet. Strikingly quiet.

There is a simple reason for this: apparently, there was no final draft until the very last minute that could have been circulated. Negotiations behind closed doors continued until the end, with even the Commission itself lacking genuine agreement on many details. While it had already become clear that the Commission’s original CO₂ target for 2035 would be softened, the extent, measures, and restrictions remained uncertain until the very end.

What the EU Commission ultimately presented in Strasbourg at the seat of the EU Parliament broadly aligns with what Weber announced last week: for 2035, a CO₂ reduction target of 90 percent compared to 2021 has been set, which de facto corresponds to a fleet CO₂ emission of eleven grammes per kilometre—instead of zero grammes. The Commission also does not specify a date for the 100 percent target, as Weber had similarly suggested. The EU Commission estimates that this will result in 27 to 29 percent of new registrations still featuring an internal combustion engine after 2035.

Pyrrhic Victory for Combustion Engine Supporters?

Not only will plug-in hybrids and vehicles with range extenders remain permitted after 2035, but so will mild hybrids and pure combustion engines—this appears to be a clear victory for conservative forces like Weber and Chancellor Friedrich Merz. However, there is a significant caveat: the conditions, which Weber did not mention, could—and likely will—severely limit this “victory” in practice.

The CO₂ emissions that new combustion engines will still produce after 2035 must be offset. A credit system is planned, requiring manufacturers to compensate for combustion engines, plug-in hybrids, and range extenders sold after 2035. This can be achieved through measures such as using green steel from the European Union in their vehicles or climate-neutral fuels like biofuels or the controversial e-fuels. Up to three percent of the 2021 reference target (or, in other words, 30 percent of the remaining permitted emissions) can be credited through clean fuels, while green steel accounts for seven percent of the reference target or 70 percent of the remaining permitted emissions.

However, it remains unclear how stringent these requirements will be in practice. Whether a car manufacturer can actually use green steel in their vehicles and power them with e-fuels by 2035 will depend heavily on the availability of green steel and such clean fuels at that time—and on their costs. Consequently, this will determine who can afford such vehicles after 2035.

Small EVs to Receive Preferential Treatment

Other aspects, however, are more concrete: so-called “super credits” are intended to promote small and affordable electric vehicles (EVs). EVs shorter than 4.20 metres will be weighted more heavily in a manufacturer’s fleet emissions calculations. In practical terms: a sold ID. Polo would not count as one vehicle in Volkswagen’s fleet emissions calculation but as 1.3 vehicles. “This will create incentives for the market introduction of more small electric vehicle models,” the Commission states. This proposal is likely to originate from Spain and France. Both countries had already advocated in autumn for maintaining the 2035 CO₂ target with only slight additional flexibility, preferring to promote EVs through measures like super credits.

As with the CO₂ regulations from 2025 onwards, the path to the adjusted 2035 target will also be made somewhat more flexible. Specifically, the previously fixed interim target for 2030 may be extended analogously to the current regulation from 2025 to 2027. Instead of meeting fixed annual targets, manufacturers will be required to achieve the interim targets over the period from 2030 to 2032. If they exceed the target in 2030, this will not immediately result in penalties. There will still be an opportunity to offset the shortfall through greater savings in subsequent years. “Additional flexibility will be granted for the van segment, where the adoption of electric vehicles has been structurally more challenging, with the CO₂ target for 2030 reduced from 50 percent to 40 percent,” the Commission states.

Additionally, the EU Commission plans to introduce specific targets for the electrification of company cars for member states from 2030 onwards—with varying requirements for each country. “To support the adoption of zero- and low-emission vehicles by large companies,” as officially stated. Large companies are defined in accordance with Directive 2013/34/EU. However, how EU countries implement these targets will be left to the member states. The successful company car taxation model in Belgium, which has led to a significant increase in electric vehicle sales, is seen as a blueprint. How Germany will implement this remains to be seen, but company car privileges for EVs are likely to increase.

“More zero- and low-emission vehicles on the market, for both new and used cars, will benefit all customers. Since company cars cover higher annual mileages, this will also lead to greater emissions reductions. Furthermore, zero- or low-emission vehicles and ‘Made in the EU’ will become a precondition for vehicles receiving financial support from public funds,” the Commission states. Sixty percent of new cars and 90 percent of new vans are registered by companies—so the leverage is significant.

According to Bild newspaper, a list from the Commission reportedly sets a 100 percent EV quota for large customers in Germany by 2035—similarly for France, Finland, Austria, Sweden, Belgium, Denmark, Ireland, Luxembourg, and the Netherlands. For Spain, the quota is set at 66 percent, while for Bulgaria, it is around 32 percent. According to Handelsblatt, the quotas are based on economic strength and the current share of electric vehicles.

A 100 percent quota here would mean that large customers (including major corporations and car rental companies) would only be allowed to procure and register new battery-electric vehicles. Initially, a 100 percent quota for corporate customers was discussed as early as 2030. However, this has now been pushed back by five years and applies only to large customers. The fleet customer target for 2030 in Germany is reportedly set at 54 percent. Fleets of small and medium-sized enterprises are exempt.

New CO₂ Regulations for Electric Trucks Too

Furthermore, the EU Commission plans to allocate 1.8 billion euros for a “Battery Booster” to accelerate a “fully EU-based battery value chain.” This includes interest-free loans for battery cell manufacturers and supportive political measures. “These measures will improve the cost competitiveness of the sector, secure upstream supply chains, and support sustainable and resilient production in the EU, contributing to a shift away from dominant global market players,” the Commission states.

Not only in the battery sector but for the entire automotive industry, bureaucratic requirements are set to be adjusted. This aims to reduce the administrative burden on companies, with the Commission estimating annual savings of 706 million euros. Among other things, it is proposed to reduce the number of secondary regulations to be adopted in the coming years and to streamline testing for new passenger cars and heavy-duty vehicles.

The Commission also proposes a targeted amendment to the CO₂ emission standards for heavy-duty vehicles to make compliance with the 2030 targets more flexible—though no specific figures have been provided yet. “The targeted amendment will allow manufacturers to accumulate more emission credits in the years leading up to 2030 than under the current regulation. While the regulation currently only permits manufacturers to earn credits if their CO₂ emissions fall below a linear CO₂ emission reduction path, the proposal would allow them to generate credits as soon as their CO₂ emissions fall below their annual CO₂ emission target,” the Commission explains.

“The Future Is Electric”

The rationale behind all these adjustments and regulations is clear: the European automotive industry is not only facing a major technological transformation but also fierce competition—”of unprecedented speed and scale,” as the EU puts it. “It is therefore extremely important to ensure the competitiveness of the industry and support it in transitioning to clean mobility and decarbonising road transport.” This year’s EU strategic dialogue with the automotive sector has given companies the opportunity to clearly communicate their positions and needs in Brussels. The Commission has therefore brought forward the previously agreed review of the regulations by one year and is offering the industry slightly more flexibility. In doing so, the Commission is deviating from its previous course—but only slightly.

The Commission describes the package of measures as “the first industrial strategy for the automotive industry.” “It ensures climate, industry, and economic coherence. It includes elements and prerequisites for a future-proof, clean, and competitive automotive sector and encourages manufacturers to continue investing in zero-emission vehicles,” states a Q&A on the “Auto Package.” “It provides more flexibility and technology neutrality in the CO₂ standards for passenger cars and light commercial vehicles, as well as targeted flexibility for heavy-duty vehicles, to achieve our climate goals, and supports the adoption of zero- and low-emission vehicles in corporate fleets. The future is electric.”

What Happens Next

The crucial point, however, is this: all the changes mentioned here are currently only proposals from the EU Commission and not yet final regulations or laws. To push the “Auto Package” through, the EU Parliament must first approve it (where Weber’s EPP is the largest group), and the member states must then give their green light in the EU Council.

The latter is far from certain: the Commission has likely framed the “Auto Package” so broadly to offer something to as many countries as possible. Alongside Germany, six other EU countries (all with relatively low shares of electric vehicles in their new registrations) had pushed for a weakening of CO₂ targets and in favour of combustion engines. Other countries, such as Spain, France, Denmark, and Belgium, are pursuing a significantly more ambitious electric course.

A simple majority is sufficient in the EU Parliament, but a so-called “qualified majority” is required in the EU Council. This means the approval of at least 15 countries, representing at least 65 percent of the EU population, is needed.

This is far from guaranteed. Changes to the “Auto Package” are therefore possible, as is complete failure. And in that case, the target agreed in 2023 would still apply: zero grammes of CO₂ from 2035!

ec.europa.eu (Press Release), ec.europa.eu (Q&A), ec.europa.eu (Factsheet), handelsblatt.com, bild.de (both in German)