The Feasibility and Financial Implications of the EU's 2035 CO₂ Targets for Automakers

The European Union’s 2035 zero-emission vehicle mandate represents one of the most ambitious regulatory shifts in automotive history. Under Regulation (EU) 2019/631, automakers must achieve a 100% reduction in CO₂ emissions for new passenger cars and vans by 2035, effectively phasing out internal combustion engine (ICE) vehicles [1]. While this target aligns with the EU’s climate neutrality goals by 2050, its feasibility and financial implications for European automakers remain contentious. This analysis examines the strategic regulatory risks and sector resilience dynamics shaping European automotive equities in the context of these transformative rules.

Feasibility Challenges: Supply Chains, Infrastructure, and Industry Pushback

The EU’s 2035 targets hinge on rapid electrification, but critical challenges persist. First, the dominance of Asian supply chains in battery production—particularly in China—threatens Europe’s ability to scale EV manufacturing cost-effectively [3]. Second, inadequate charging infrastructure remains a bottleneck. As of 2025, the EU has only 1.2 million public EV chargers, far below the 10 million needed by 2030 to meet demand [1]. Third, automakers like Mercedes-Benz face acute compliance risks. According to Transport & Environment, Mercedes is the only major European automaker not on track to meet 2025–2027 CO₂ targets, necessitating costly credit pooling with competitors like Volvo and Polestar to avoid fines [1].

Industry leaders have also raised concerns about the practicality of the 2035 deadline. Ola Källenius, CEO of Mercedes-Benz, has publicly questioned whether a 100% emissions reduction is achievable given current market conditions, including U.S. tariffs on EVs and volatile raw material prices [2]. In response, the European Commission has initiated a public consultation to explore flexibility, such as allowing e-fuels and biofuels to count toward compliance [2]. However, this review has sparked fears of regulatory fragmentation, with some stakeholders warning that delays could erode Europe’s global EV competitiveness [3].

Financial Implications: Penalties, Market Volatility, and Investment Shifts

The financial stakes for automakers are immense. Non-compliance penalties of €95 per gram of CO₂ per kilometer exceedance could impose significant costs on underperforming firms [1]. For example, if Mercedes fails to meet 2025–2027 targets, it could face fines exceeding €1 billion annually, based on projected emissions gaps. Meanwhile, the three-year averaging rule introduced in May 2025 has led to a strategic recalibration: carmakers have reduced planned EV production by 2 million units between 2025 and 2027, citing the extended compliance window [1].

Market dynamics further complicate the financial outlook. The price premium for EVs over ICE vehicles has risen from 30% in early 2025 to 40% in June 2025, potentially slowing consumer adoption [1]. This trend is exacerbated by shifting consumer preferences. The 2025 Global Automotive Consumer Study reveals growing interest in ICE and hybrid vehicles, with 42% of European consumers expressing reluctance to switch to all-electric models [1]. Such trends could force automakers to reallocate capital toward hybrid technologies, diluting investments in pure EV innovation.

Sector Resilience: Policy Support and Strategic Adaptation

Despite these challenges, the EU’s automotive sector is not without resilience. The European Commission’s 2025 Industrial Action Plan allocates €1.8 billion for battery manufacturing and €1 billion for AI-powered connected vehicles, aiming to secure supply chains and reduce reliance on Asian suppliers [1]. Additionally, the three-year averaging rule provides temporary flexibility, allowing automakers to balance short-term costs with long-term decarbonization goals [5].

Regulatory certainty remains a critical factor. Over 150 EV industry executives, including leaders from Volvo and Polestar, have urged the EU to maintain the 2035 target, arguing that delays would stall infrastructure investment and weaken Europe’s global position [3]. Their advocacy underscores the dual-edged nature of the transition: while stringent targets pose immediate financial risks, they also incentivize innovation and infrastructure development. For instance, McKinsey estimates that effective electrification could generate €300 billion in added value for Europe’s automotive sector by 2035, compared to a potential €400 billion loss if managed poorly [4].

Investor Considerations: Balancing Risk and Opportunity

For investors, the EU’s 2035 targets present a complex landscape of risks and opportunities. On one hand, automakers with robust EV portfolios and access to low-cost battery supplies—such as Stellantis and BMW—may outperform peers. On the other, firms reliant on ICE technology, like Daimler Truck, face existential threats. Regulatory shifts, such as the potential inclusion of e-fuels, could also create valuation volatility.

A key risk lies in policy inconsistency. If the EU softens its 2035 targets, as some industry groups advocate, it could undermine investor confidence in long-term EV infrastructure projects. Conversely, maintaining the deadline could accelerate market consolidation, favoring firms with strong R&D capabilities and supply chain diversification.

Conclusion

The EU’s 2035 CO₂ targets represent a high-stakes gamble for European automakers. While the regulatory framework is designed to drive decarbonization, its success depends on overcoming supply chain vulnerabilities, infrastructure gaps, and shifting consumer preferences. For investors, the path forward requires careful monitoring of policy developments, technological advancements, and sector-specific financial metrics. As the European Commission navigates the tension between environmental ambition and industrial viability, the resilience of European automotive equities will ultimately hinge on their ability to adapt to a rapidly evolving landscape.

Source:
[1] Light-duty vehicles - European Commission - EU Climate Action [https://climate.ec.europa.eu/eu-action/transport-decarbonisation/road-transport/light-duty-vehicles_en]
[2] EU Reconsiders 2035 ICE Ban—CO₂ Rules Under Review [https://natlawreview.com/article/eu-launches-call-evidence-revision-combustion-engine-and-vehicle-emissions]
[3] Europe's automotive industry at a crossroads [https://www.transportenvironment.org/articles/europes-automotive-industry-at-a-crossroads]
[4] Europe's economic potential in the shift to electric vehicles [https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/europes-economic-potential-in-the-shift-to-electric-vehicles]
[5] EU Council Endorses 3-Year Averaging Rule for Car CO₂ Targets [https://ecoactivetech.com/eu-council-endorses-3-year-averaging-rule-for-car-co%E2%82%82-targets/]