The Viability of EU Auto Sector Investments Amid the Combustion Engine Ban Debate

The European Union's automotive sector stands at a crossroads. By 2035, the bloc aims to eliminate new internal combustion engine (ICE) vehicles, a target enshrined in Regulation (EU) 2023/851. Yet, as 2025 unfolds, the regulatory landscape remains fluid. Political pressures, supply-chain vulnerabilities, and technological uncertainties are reshaping the calculus for investors. The question is no longer whether the EU will transition to electric vehicles (EVs), but how it will navigate the risks and opportunities of this transformation.

Regulatory Uncertainty and the 2035 Deadline

The EU's 2035 ICE ban is legally binding but increasingly contested. A three-year compliance averaging period (2025–2027) has been introduced to ease the transition, allowing automakers to average emissions across years rather than meeting annual targets. This flexibility is a temporary reprieve, but it underscores the fragility of the regulatory framework. The European Commission's Strategic Dialogue on the Automotive Industry, launched in January 2025, has opened the door to potential revisions, including delays to the 2035 deadline or exceptions for e-fuel-powered vehicles.

Political divisions among member states further complicate the outlook. Germany, France, and Italy have lobbied for a phased approach, while smaller nations with strong ICE manufacturing bases fear job losses. The European Parliament's upcoming debate on the EPP's proposal could tip the balance. For investors, this uncertainty creates a dual risk: overcommitting to EV infrastructure if the ban is delayed, or missing growth opportunities if the transition accelerates.

Geopolitical and Supply-Chain Risks

The EU's green transition hinges on securing raw materials for EV batteries, yet the bloc remains heavily dependent on imports. Lithium, cobalt, and nickel—critical for battery production—are sourced from China, which dominates 85% of global refining capacity. The EU's Critical Raw Materials Act (CRMA) aims to reduce this reliance by boosting domestic mining and recycling, but progress is slow. By 2025, the EU is projected to produce enough battery cells for its needs, yet it will still import 90% of its lithium and 80% of its cobalt.

Trade tensions with China have exacerbated these vulnerabilities. Beijing's control over rare earth elements (REEs)—used in electric motors and wind turbines—has led to price volatility and supply disruptions. The EU's 98% reliance on Chinese REE imports has prompted urgent calls for diversification, with Australia, Canada, and the U.S. emerging as alternative suppliers. However, new mines and processing facilities take 7–10 years to become operational, leaving the EU exposed in the short term.

Green Transition Opportunities

Despite these challenges, the EU's EV market is gaining momentum. BloombergNEF projects that one in four cars sold in 2025 will be electric, driven by tightening CO₂ regulations and consumer demand. The bloc's automotive industry, which contributed €1.9 trillion in gross value added (GVA) in 2023, could see an additional €240–300 billion in GVA by 2035 from EV after-sales services if it adapts strategically.

Government incentives remain a key driver. While direct purchase subsidies in countries like Germany and Italy have been phased out, tax breaks for electric company cars and charging infrastructure remain in place. The EU's Recovery and Resilience Facility (RRF) has allocated €55 billion for green investments, including EV manufacturing and grid upgrades. Meanwhile, the EU Emissions Trading System (ETS2), set to expand to transport in 2027, will further incentivize decarbonization.

Emerging technologies also present opportunities. E-fuels, which could allow ICEs to meet 2035 targets, are gaining traction in Germany and Sweden. Battery recycling, mandated by the EU's 2023/1542 regulation, is expected to supply 50% of cobalt and 40% of nickel demand by 2040. Companies investing in recycling infrastructure, such as Umicore and Northvolt, are well-positioned to benefit.

Investment Implications

For investors, the EU auto sector offers a mix of risk and reward. The key is to balance exposure to short-term uncertainties with long-term growth drivers.

1. Battery and Recycling Firms: Companies like Northvolt and Accurec, which are scaling domestic battery production and recycling, are critical to the EU's supply-chain resilience.
2. EV Infrastructure Providers: Firms specializing in charging networks (e.g., IONITY) and smart grid technologies will benefit from EU funding and regulatory mandates.
3. Automakers with Diversified Portfolios: Traditional automakers like Volkswagen and Stellantis, which are pivoting to EVs while exploring e-fuel partnerships, may outperform peers with rigid ICE strategies.
4. Critical Minerals and Mining: Investments in lithium and cobalt projects in Europe (e.g., Portugal's lithium deposits) and strategic partnerships with suppliers in Australia or Canada could mitigate supply risks.

However, caution is warranted. The EU's fragmented policy landscape and reliance on Chinese processing capacity mean that over-optimism could lead to stranded assets. Investors should prioritize companies with strong regulatory ties, diversified supply chains, and clear ESG strategies.

Conclusion

The EU's combustion engine ban is a catalyst for transformation, not a binary event. While geopolitical and supply-chain risks remain acute, the green transition is creating fertile ground for innovation and investment. For those willing to navigate the uncertainties, the EU's automotive sector offers a compelling blend of policy-driven growth and technological disruption. The challenge lies in aligning short-term resilience with long-term vision—a task that will define the next decade of European industry.