Steering Toward 2035: EU’s Automotive Sector Gets a Package

The European Commission published an “Automotive package” on 16 December putting forward proposals in four areas: vehicle CO₂emissions, batteries, cutting red tape and corporate fleet decarbonization.

Key Takeaways

The package proposes more flexibility on the European Union’s (EU) 2035 zero emissions target for new passenger cars and light commercial vehicles (LCVs). The 2035 target for new cars and LCVs will come down from 100% to a 90% reduction in emissions compared to 2021, with the remaining 10% to be offset through capped credits for alternative driver trains, sustainable renewable fuels, and use of low-carbon steel made in Europe. The Commission proposes incentives for manufacturers to produce—in Europe—small electric vehicles (EVs) as another path to earn more CO₂allowances. Furthermore, there is increased differentiation and small easing of emissions targets for LCVs. For company fleets, the package proposes binding electrification targets and rules on incentives by individual member states. The proposal includes funds to boost battery production and development in the EU, simplification of vehicle testing, and an overhaul of vehicle labelling requirements to harmonise consumer information across the EU.

The definition of “made in the EU”—for the purposes of automotive package particularly on small affordable EVs and low-carbon steel—remains undefined. We anticipate that the Industrial Accelerator Act, a forthcoming policy designed to boost clean, competitive, and sustainable manufacturing in the EU, scheduled to be proposed on 28 January, will provide further clarity.

Background

Road transport remains a significant source of GHG emissions in the EU, accounting for about 30% of CO₂ output. Regulation (EU) 2019/631 set progressively stricter CO₂ standards for new cars and vans, with a 100% reduction target for 2035. However, industry stakeholders and some member states increasingly have vocalized concerns about the achievability of these targets, especially given the slower than expected uptake of zero-emission vehicles, still well below 20% of newly registered cars in the EU, and ongoing competitiveness challenges for the European automotive sector. In response, the Commission’s new proposal seeks to balance climate ambition with industrial competitiveness and technological neutrality.

Proposed Changes and Initiatives

2035 Target Softening: 90% Reduction

The 2035 fleet-wide CO₂ reduction target is lowered from 100% to 90% compared to 2021 levels. The remaining 10% of emissions may be offset through newly introduced credits for sustainable renewable fuels¹ and low-carbon steel.² Credits for sustainable renewable fuels are capped at 3% of the target, with a sub-cap of 1% for biofuels and biogas. Credits for EU-made low-carbon steel are capped at 7%. These credits may not be pooled or traded outside of corporate groups, ensuring these flexibilities remain tightly controlled.

Small EV Super-Credit: Incentivising Affordable, Local Electric Cars

A new super-credit is introduced for small zero-emission cars assembled in Europe: each qualifying vehicle will count as 1.3 vehicles for compliance purposes until 2034. The Commission proposes defining a small affordable EV as one up to 4.2 meters in length. This aims to boost the production of affordable, locally assembled electric vehicles.

LCVs: Eased 2030 Target and Broader Scope

The proposal eases the 2030 emissions reduction target for LCVs from a 50% to a 40% reduction versus 2021, reflecting the challenges in electrifying this segment. It clarifies the definition of LCVs to include zero-emission N1-category vehicles up to 2,840 kilograms (excluding battery mass), broadening the scope for compliance.

Company Fleets to Green

The Commission proposes binding targets for company fleets commencing in 2030 via the “Clean Corporate Vehicles Regulation,” linking individual EU member states targets to their respective economic performance. These rules are to apply also to car rental companies and manufacturer leasing. The proposal leaves it to member states to enact incentives and ensure compliance with the targets. Companies with less than 250 employees and less than EUR 50 million annual turnover would be exempt. The Commission seeks to prohibit member states from offering incentives for internal combustion engines in light duty vehicles.

Labelling Overhaul: Harmonised, Digital and Second-Hand Inclusive

The proposal repeals Directive 1999/94/EC and incorporates harmonised labelling requirements directly into Regulation 2019/631. Manufacturers and distributors must display standardised labels for new and second-hand vehicles, both at physical points of sale and online, and upload model data to a new EU-wide product database. Labels will include key environmental performance information and battery state-of-health data for used zero-emission vehicles, making consumer information more accessible and comparable.

Built-In Review: Regular Policy Check-Ins

The Commission commits to review the framework in 2035 and every five years thereafter. However, we expect the framework to be under scrutiny by stakeholders and member states also in the run up to 2035. The current revision process is a case in point of the possibility of adjustments in line with technological and market developments, ensuring the policy remains fit for purpose.

Boost to Batteries

The Commission allocates EUR 1.8 billion to accelerate the development of a fully EU-made battery value chain. For example, the “Battery Booster” initiative allows for interest-free loans or targeted policy measures to support such investments.

Open Questions

• The “assembled/made in the EU” definition for purposes of allocating credits and super-credits for low-carbon steel and small EVs, respectively, is expected to be outlined in the Industrial Accelerator Act (to be proposed 28 January). Stakeholders differ in positions as each manufacturer sources steel differently, and suppliers advocate maximising local content.
• The precise definition of “small EV” beyond the vehicle’s length—ahead of publication, other criteriums such as size of the battery pack or price have been raised.
• Proposal doesn’t include any new incentives or measure to assist with continued build-out of EV charging availability – home, work or public chargers.
• The effectiveness of the new labelling requirements and the EU-wide product database.
• While the package points to the necessity to ensure fair competition and a level playing field, it proposes to enact general measures and does not include targeted provisions against unfair competition from specific countries.

Next Steps

The package is a major step toward rebalancing the EU’s legislative framework on competitiveness and clean transition. Many of the proposals will require negotiation and ultimately an approval by the EU co-legislators – the European Parliament and the member states in the European Council. These negotiations will kick-start in early 2026 and will take several months.

We expect heavy lobbying from stakeholders and governments alike. First reactions from industry players suggest disappointment with the limited changes proposed. That said, together with environmental civil society organisations, disappointment is being voiced also by stakeholders who have invested significantly in decarbonization and see strict rules as an advantage.

Policymakers will be looking for a subtle balance between flexibility for the industry and a path towards decarbonization, together with enhanced predictability for the sector and its long-term investments. We expect the company fleet proposal to be a particularly difficult negotiation among member states as the levels of electrification link to countries’ economic performance and a restriction on incentives, fiscal or otherwise, is proposed.

Ultimately, we view this automotive package as a step forward in clarifying existing ambitious legislation. Therefore, we anticipate that the package or at least certain elements of it, ultimately will be adopted.

^{1 Fuel credits shall be calculated taking into account the quantity of such fuels placed on the Union market for road transport and their greenhouse gas emissions intensity, as calculated according to Article 29a and 31 of Directive (EU) 2018/2001 and as reported in the Union Database established pursuant to Article 31a of that Directive, the share of road transport fuel used in passenger cars and light commercial vehicles, the average lifetime mileage of the vehicles and the number of vehicles registered. The eligible fuels shall be renewable fuels of non-biological origin (RFNBOs) as defined in Article 2(36) of Directive (EU) 2018/2001 and fulfilling the criteria set out in Article 29a of that Directive, biofuels, as defined in Article 2(33) of that Directive, and biogas, as defined in Article 2(28) of that Directive, both produced from feedstock listed in Annex IX to that Directive and fulfilling the criteria set out in Article 29 of that Directive.}

^{2 Low-carbon steel credits shall be calculated taking into account the quantity and the CO2 emissions intensity of the low-carbon steel made in the EU used in the manufacturer’s new passenger cars or new light commercial vehicles registered in the Union in the calendar year, the number of vehicles registered in the calendar year and the lifetime mileage of the vehicles.}