The European automotive industry is at a critical juncture as a result of high production costs, loss of competitiveness to Chinese brands and controversial EU legislative requirements. The new European anti-emissions regulation, which comes into force in January 2025 aims to revive stagnant sales of electric cars and will be accompanied by multimillion-dollar fines that could end up sinking one of the pillars of the European industry.

The European Union will open 2025 with the implementation of the CAFE (Clean Air for Europe) regulation, which requires average CO₂ emissions in each manufacturer’s vehicles to be reduced by 15% compared to 2021. Between 2030 and 2034, a 55% reduction in emissions will be required for new passenger cars and 50% for vans.

The CAFE regulation was adopted in 2019 as a plan to gradually reduce emissions from new vehicles marketed in the European Union, with the aim to ban sales of petrol, diesel, and hybrid combustion vehicles from 2035.

Until now, this cap was 115.1 g/km and from January 2025 it will be reduced to 93.6 g/km. In addition, car manufacturers will face a fine of 95 euros for each gram of CO2 per kilometre above this limit, multiplied by the number of cars sold.

The European car industry, between a rock and a hard place

The European Automobile Manufacturers Association (ACEA) has long warned that the European car industry is unlikely to be able to comply with the regulation and could pay up to 16 billion euros in fines, a figure that would threaten the viability of the entire European car industry.

According to statements made by the employers’ organisation to Europa Press, electric vehicle sales in Europe are stuck at around 13% market share, 10 percentage points below where they should be: “A gap too big to close in time”.

Car manufacturers warn that the mass adoption of electric vehicles, which is necessary to meet these regulations, is not progressing at the expected pace. This is due to factors such as the high price of electric vehicles, the lack of adequate charging infrastructure and consumer reluctance.

In this context, a paradox is created, whereby manufacturers may be forced to stop production and sales of ICE vehicles to compensate for the lack of electric car sales to avoid multi-billion dollar fines. Even so, further affecting brands’ poor profitability and exacerbating job cuts and factory closures.

Europe’s major brands are talking about ‘potentially irreversible damage’ if environmental requirements are not reduced and have been announcing production cuts, factory closures and a rethink of their goal of becoming pure electric vehicle manufacturers by the end of the decade.

China’s challenge and risk to competitiveness

Competition from China’s automotive sector is eroding the European car industry’s market share. Production costs in Europe, including high wages and skyrocketing energy prices thanks to the own-goal sanctions against Russia, put European manufacturers at a disadvantage compared to their Chinese competitors. The latter, supported by a more efficient supply chain and substantial government subsidies, are rapidly expanding their presence in the global market.

The European Union (EU) has recognised this challenge and is attempting to respond with policies of economic protectionism, but on the rebound, it is also punishing European carmakers that have offshored production to China.

For their part, some European countries such as France, Italy, and Romania have tried unsuccessfully to put pressure on Brussels to delay the implementation of the regulation or the fines. However, considering that the automotive sector represents 7% of the EU GDP and 6.1% of employment, with 13.8 million direct or indirect jobs, it cannot be ruled out that the European Commission will propose possible changes to this regulation to the European Parliament after drafting its report assessing the implementation of the new regulation.

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