A foot on the brake for Europe's EV transition

Economics, politics and the environment: a balancing act

A range of factors – perhaps best summarised as a blend of environmental goals, raw economics and hard politics – are influencing the trajectory of Europe's EV transition. Policy - in the form of the EU's 2035 ICE ban - has been the most influential driver to date. However, whilst the desired destination was clear, the journey has been littered with obstacles, including:  

• Patchy Consumer demand: Tougher economic conditions has seen spending by European consumers constrained making EV affordability a key challenge, with the upfront costs of BEVs greater than ICE equivalents. This impact is compounded by the lack of - or withdrawal of – EV subsides and further exacerbated by the absence of a domestic EU EV ecosystem (particularly in battery cell manufacture) further impacting costs.  
• Pressurised business environment: European OEMs have faced a tough business environment with geopolitical turbulence (notably US tariffs) and lacklustre consumer demand creating uncertainty and impacting their financials. This has resulted in cost cutting measures the EU would rather avoid, including factory closures, workforce restructurings and (partly in response to stalling EV demand) the rephasing of development programmes and alteration of product mixes. 
• Increasing competition: Despite tariffs, Chinese OEMs have been increasingly penetrating the global market as they divert vehicles, especially EVs, from their oversupplied domestic car market abroad and increasingly to Europe. Whilst good news for Europe's EV transition - with more affordable EV models tempting consumers - the impact of this increasingly competitive landscape on European OEMs has added complexity and weighed on the minds of policy makers. 

Ultimately, these forces have culminated in the Automotive Package with the policy changes outlined below an attempt by the EC to support Europe's automotive industry at this time of disruption and transition.  

Key elements of the Automotive Package

The Automotive Package is not final and must go through the next stages of the legislative process and is therefore subject to change. However, a summary of the key elements, as proposed by the EC, are set out below. 

Emissions targets

• The Automotive Package rows back from a full 2035 ICE ban, instead lowering the EU fleet-wide 2035 CO₂ emission target for cars and vans from a 100% reduction to a 90% reduction in tailpipe CO₂ emissions against 2021 reference targets. 
• The remaining 10% CO₂ emissions will need to be offset and two compensation mechanisms are proposed with credits available for:
  • the use of EU-made low-carbon steel (up to 7% of the 2021 reference targets); and 
  • actual emissions savings from e-fuels and biofuels (up to 3% of the 2021 reference targets).
• Between 2030-2032, a "banking and borrowing" scheme will be available to provide manufacturers with more flexibility in meeting 2030 targets for cars and vans. 
• The Automotive Package also relaxes the interim 2030 CO₂ emissions targets for vans, from 50% to 40%. 
• For HDVs amendments aimed at giving additional flexibility to HDV manufacturers in achieving compliance with their 2030 emission targets permit those OEMs to collect more emission credits between 2025 to 2029 if they meet the 2025 target. 
• With the aim of incentivising the production of small EVs in the EU, super-credits will also be available taking into account the number of small (up to 4.2m), affordable EU-made EVs.

Corporate Fleets

• Seeking to support the uptake of zero and low emission vehicles in corporate fleets (which represent 60% of the new car market and 90% of the new van market), the Automotive Package proposes the introduction from 2030 of mandatory targets on Member States (with tailored targets reflecting the Member States' market maturity and circumstances) in relation to the share of zero or low emission vehicles in new corporate cars and vans registered by large companies. 
• Member States will also be prohibited from providing any financial incentives for the purchase, lease, rental, hire-purchase of operation of corporate vehicles, other than for low or zero emission vehicles which are made in the EU. 

Battery Booster investment 

• With a view to supporting the development of a fully EU-made battery value chain, the Automotive Package includes previous proposals for a €1.8 billion 'battery booster', which will include €1.5 billion of interest-free loans to support European battery cell producers.

Regulatory Simplification

• While the EU remains a global leader in sustainability regulation, elements of the regulatory framework are highly technical, and many organisations have struggled with implementation. As such, steps have already been taken to simplify the EU's sustainability regulatory framework – including the two-year delay of the due diligence requirements under the EU Battery Regulation (for more information, see our article here). 
• The Automotive Package looks to continue the easing of regulatory burden for the automotive industry through a series of targeted amendments to existing regulations (referred to as the Automotive Omnibus) and seeks to streamline testing for new cars and vans, reduce the volume of secondary legislation over the forthcoming years and put EV vans on an equal footing to ICE vans in terms of drivers' rest times and rules.

In response to the EU proposals, the UK, which has an ICE car ban from 2030 and a hybrid and ICE van ban from 2035, had said that it will bring forward the review of its ZEV Mandate to 2026.