The European Union Will Ban All Polluting Cars from 2035. Who’s Ready for It?

In February the European Parliament gave approval to an amendment of Regulation 2019/631 that will require a 100% reduction in the average emissions of the new passenger car fleet from 2035 as part of the “Fit for 55” package. Formal sign off from the Council of the EU was expected in March, but is being held up by resistance from Germany. Previous EU fleet-wide emissions standards have allowed automakers to pool their fleets and let manufacturers which do not meet the standards remain compliant by partnering with those that exceed the requirements, or to raise their CO2 targets by producing more zero and low emission vehicles (ZLEVs), or receive a derogation if they are “niche manufacturers” with less than 300,000 sales per year. The new requirement for 2035 will have no such exemptions: every automaker that sells more than 1,000 cars annually will be bound by it and forbidden from selling any fossil fuel cars, or be penalized by paying an excess emissions premium of €95 per g/km for every vehicle sold.

This differs from targets in China and the United States, the only countries with more annual vehicle registrations than the EU. China’s goal is for 50% of cars sold in 2035 to be new energy vehicles, which includes plug-in hybrid electric vehicles (PHEVs) as well as battery electric vehicles (BEVs), and similarly President Biden’s aim for 50% of sales in 2030 to be electric vehicles includes PHEVs which contain a fossil fuel internal combustion engine (ICE). The EU goes well beyond this with its ambition to have all cars be fully zero-emissions in 2035. With the current meagre prospects for consumer hydrogen and e-fuel vehicles, this effectively means all cars will have to be BEVs, requiring a 1,300% increase in annual sales from current levels.

On a national level within the EU, countries differ on their plans and pledges to electrify road transport. Denmark, Greece, Ireland, the Netherlands, and Sweden all aim to end the sale of polluting cars in 2030; several others, including France and Spain, have already signed the COP26 ZEV declaration, committing them to work towards 100% zero emission vehicle sales by 2035. Outside of the EU, the United Kingdom has already approved a 2035 ICE ban, and in the EEA EFTA Norway and Iceland have done the same for 2025 and 2030 respectively. Despite its high EV penetration, Germany has been key in stalling the approval of the new legislation, particularly the Free Democratic Party (FDP) as part of the ruling coalition which has called for climate-neutral synthetic fuels to be allowed after 2035. These e-fuels are, however, extremely unlikely to play any significant role in the decarbonization of personal vehicles as they will be around five times more energy intensive and eight times more costly than equivalent BEVs, while still emitting toxic pollutants while driving. If they are to find a major role in the future it will be in shipping and aviation, not road transport.

Italy has been another leader in the pushback against the legislation: it has proposed a 90% cut in CO2 emissions from new cars in 2035 and 100% in 2040, with support for this amendment from Bulgaria, Portugal, Romania, and Slovakia. BEVs have a 4% market share in Italy, and Italian Transport Minister Matteo Salvini has come out against the ICE ban due to fears of weakening domestic industry and enriching China, which reigns supreme throughout much of the battery supply chain. By far the dominant force in the Italian automotive industry is Fiat’s owner Stellantis, so its own plans to make 100% of its sales in Europe BEVs by 2030 perhaps undermine the government’s objections.

Stellantis is not alone in this; most of Europe’s major OEMs, responsible for over 85% of annual car sales in the region, will stop producing ICEs before the EU requires them to: Renault Group, Mercedes-Benz Group, and Ford will sell their last ICEs in Europe in 2030, and Volkswagen Group in 2033. While EU oversight and other emissions regulations surely played a part in these targets, changing the exemptions in the 2035 legislation or reducing the magnitude to a 90% reduction is unlikely to deter them.  BMW and Hyundai are the largest OEMs that do not aim to move ahead of the EU’s timeline, but both already have several BEV models available in Europe and aim to launch new all-electric architectures in 2025, and appear prepared to decarbonize by 2035.

Some automakers are behind the pack and will need to move faster than others, most notably Toyota. The Toyota brand’s only BEV currently available is the bZ4X, release in 2022, but the marque aims to launch five more in the bZ series by 2026, built on a platform derived from the Toyota New Global Architecture (TNGA) first produced in 2015. Toyota’s new all-electric platform is not expected to be ready until 2027 or 2028, by which time BEVs are expected to constitute 45% of all car sales. See ABI Research’s MD-EV-101 for further information on projected electric vehicle market shares.

Japanese OEMs have developed somewhat of a reputation for dissenting with the rest of the automotive industry, putting a greater emphasis on hybrids. Mazda’s CEO has openly called the 2035 ICE ban a disgrace, as while Mazda offers an all-electric version of the MX-30 it has a clear preference for other technologies, particularly the use of its rotary engines as range extenders and for e-fuels. Honda, Mitsubishi, and Suzuki currently do not offer any all-electric cars in Europe, leaving Nissan as the only Japanese automaker that is currently performing well in the electrification space, thanks to the now-aging Leaf and the new Ariya. The slowness of these OEMs to electrify their lineup will cause them to heavily lose market share when consumer preferences shift towards BEVs in the coming years.

The 2035 mandate will firmly end the sale of ICEs, but the mass market demand for them will fall rapidly well before that. Total cost of ownership of BEVs is already lower than that of ICEs, and price parity is expected by 2028, while more OEMs will release BEVs across different segments making them more accessible to all. Electric driving range will continue to improve with next generation batteries such as CATL’s Qilin which increases energy density to 255 Wh/kg from 200 Wh/kg in the last generation, and volume utilization to 72% from 55%. The public charging experience will improve as the network expands, and the EU Alternative Fuels Infrastructure Directive (2014/94) that will be implemented by 2027 will require all charge points to be open to all customers, which will ease range anxiety and charging anxiety. This will eliminate the three biggest reasons why people are unwilling to buy electric cars, so for the typical consumer there will be no need to ban ICEs as they would simply be an unattractive purchase. OEMs and suppliers should be prepared for how quickly these changes will come, and expect most people to actively avoid buying petrol and diesel cars as early as 2030.

The OEMs which have been slower to move will have little room for error and will have to fight for sales in a market that will be not saturated but mature. By the time Toyota releases its all-electric platform Volkswagen may already be selling cars based on the Scalable Systems Platform, its next generation of architecture which will replace the MEB and PPE. The manufacturers which have been selling BEVs in large volumes for a long time will have more experience in the field, so they should look to consolidate their control of the EV market when mass adoption begins. A useful asset for this will be over-the-air (OTA) data collection, and OEMs that already have cars in the hands of consumers will have great quantities of data at their disposal. Suppliers such as HARMAN, Sonatus, and Airbiquity offer data management solutions which can help OEMs to take advantage of their data to improve upon existing models and deliver next generation BEVs that will be difficult for other automakers to compete with on their first attempts

All automakers have big changes to make, but perhaps none so much as those which rely on their engines and driving experience to sell cars. While ultra-exclusive sports car manufacturers will fall under the 1,000 sales per year limit, many exceed it including Ferrari and the performance divisions of OEMs like Mercedes-AMG, which have built a strong brand around fossil fuel engines. The Porsche Taycan has been hugely successful in this area, selling strongly with features like an 800-volt architecture, a two-speed transmission, and a specially designed sport sound experience. Sportier BEVs are a less explored area where there is a great opportunity for suppliers to help manufacturers define the market by delivering a high-performance feel and innovative features that may not be suitable for the mass market, but which will be key differentiators at the top end.

An interesting area to help high end cars to stand out is EV smart charging, not just by offering higher speeds but by making cars with different methods of charging. Wireless vehicle charging, a field lead by WiTricity, has been successfully trialed with taxis and buses but is unlikely to be adopted widely in consumer vehicles in the near term. For luxury vehicles, however, customers are more likely to have the off-road parking and funds needed to install a wireless charging pad. Another option could be robotic units that automatically plug in, with products from startups like EV Safe Charge and Volterio as well as in-house solutions being developed by OEMs like Ford and Volkswagen. These innovative charging methods could help to provide a unique and different charging experience for drivers, and harmonize well with automated driving systems such as Mercedes-Benz’s Automated Valet Parking.