Penalty relief for 2025 for cars and vans: why it matters and what’s at stake

Penalty relief for 2025 for cars and vans: why it matters and what’s at stake

ACEA — 2025-02-24

Automotive Industry

The EU auto industry needs an urgent solution to address the disproportionate costs of the risk of non-compliance with the CO2 2025 targets for cars and vans due to sluggish demand in zero-emission vehicles (ZEVs) in the EU. Without such solution, the compliance strategies following the current regulation provisions will have a detrimental impact on the competitiveness of the EU automotive industry and its ability to sustain jobs at a time when it needs to undergo a costly transition whilst facing fierce competition from Chinese and US automakers.

More specifically, the current mechanisms would have the industry do or combine one of the following:

• Pay penalties estimated at around €16 bn industry-wide. This money could have been reinvested into manufacturing/jobs. Even though the penalties are due to be after 2025 (after calculation and verification by the European Environment Agency and European Commission in 2026), companies would still need to make financial settlements, meaning this money can’t be used for re-investment.
• Limit production and sales of internal combustion engine (ICE) cars and vans, possibly leading to factory closures and unemployment, in order to average out the lower number of ZEVs placed on the market and thus meet the OEM-specific CO2-reduction targets
• Pool with other manufacturers leading to payments to competitors, including non-EU manufacturers, hence resulting in a loss for the European industry.
• Sell ZEVs below market price to support overall production volumes, which will a) distort the second-hand market for ZEVs, which already have a low resale value; b) undermine manufacturers’ profitability, further weakening their global competitiveness.

As the European Commission’s investigation confirmed manufacturers had been selling battery electric vehicles at a loss so further price suppression would put the ability of the industry to finance transition at risk.

In short, without a reality check accounting for the fundamentally different market conditions, the current compliance mechanisms have a considerable economic cost and are forcing OEMs to divert necessary resources away from investing into further decarbonisation efforts. What the industry is asking the policy makers to consider two options: a phase-in of 90% for 2025 and 95% phase-in for 2026 or introduction of an average compliance mechanism for years 2025-2029.  We understand there may be concerns about whether these proposals would “lower the GHG savings ambition” and would like to clarify them:

1) Viewpoints that the flexibilities would “kill the CO2 targets” miss the most important element: the recognition that we have a demand problem for zero-emission vehicles (ZEV) in the EU. This opinion assumes that it is only the supply that drives consumer demand for ZEVs. In fact, consumer demand is influenced by multiple factors, not only supply. There are other important factors that influence consumer demand: lack of charging infrastructure, convenience of use, total cost of ownership (TCO) and affordability, which are frequently cited as barriers for consumers. No progress on these enabling conditions leads to market stagnation, which puts manufacturers in a precarious position as they are the only party facing disproportionate compliance costs.

There are also 370 BEV models available on the EU market now, including 16 models that are priced less than 30,000 EUR. Vast selection of low mileage used vehicles is available with discounts of 30-50% compared to new vehicle prices but there is still limited demand for this segment as well. Despite the offer, the market share for BEVs in 2024 was below 14%. Even if we look at the previous years, we can see that demand over 2023-2024 remained stable, with no ‘hockey stick’ growth curve that was expected. In fact, the market share for BEVs over the past years has remained largely stable and failed to reach the 25-30% market share forecasted several years ago.

2) The assumption that, for every missing BEV, vehicle manufacturers would produce a new ICE vehicle is flawed as it ignores the market realities. Manufacturers produce to meet the existing and projected market demand and not per “quotas” for each technology.

• The opposite is actually true: if OEMs were to produce and sell more ICE vehicles, they would need to produce even more ZEVs to offset emissions and meet the targets. Besides, the current data shows that the share of petrol/diesel cars has been consistently declining since 2023 even in the absence of the 2025 targets, which puts into question an assumption that introducing flexibilities would suddenly lead to the production of “additional ICE vehicles”.

3) Manufacturers have a direct interest in selling ZEVs exponentially to be ready for -55% target in 2030 rather than keep sales of ZEVs stable. It is impossible to go from -15 to -55% target in only one year.  The BEV market growth must be significantly higher in order to reach foreseen 2030 targets. This means that industry expects much more BEVs to be sold in the years 2027-2029, significantly more than the required -15% target.

4) With respect to the multi-year compliance, there will be no adverse environmental impact as any “mis-compliance” must be offset. Such a system provides an ability to react to short-term market fluctuations, allowing carmakers to meet CO₂ reduction goals steadily rather than through abrupt, compliance-driven measures. Multi-year compliance aligns investments with a more organic growth and allows the market to respond positively to potential demand measures at pan-EU or national level.

5) With regard to phase-in, this is a further, tried & tested measure to avoid disproportionate costs of compliance for manufacturers at a time when they need to re-invest into the transition. The industry stripped of its ability to innovate and invest is neither good for the environment nor for industrial policy in the long run. Weakening the industry now with undue compliance costs will undermine its ability to meet more stringent 2030 and 2035 targets.

Without flexibility, 2025-2026 could become a regulatory cliff-edge, forcing carmakers into extreme short-term actions—steep price cuts, excessive EV supply surges just to meet a one-year target. This could destabilize pricing, create unsustainable discounting strategies, and undermine financial stability, which would have a negative impact in the overall automotive industry.

We agree that the EU should ramp up measures to support demand for zero emission vehicles, but these measures will not be taken immediately. Nor will they boost the market overnight to alleviate the disproportionate costs of compliance for manufacturers in 2025. On the contrary, decisions on whether to pay penalties or pooling with foreign manufacturers, production cuts or sell vehicles at a loss need to be taken now, the law does not allow manufacturers to wait until measures to boost demand are there.