Ever wondered why European automakers are so invested in hybrids and electric vehicles? While part of the motivation is to protect the environment by reducing emissions, the financial stakes are also incredibly high if they fail to decrease the number of gas-guzzling cars. For each gram of CO2 emissions that exceeds the fleet targets set by the EU, automakers are hit with a €95 ($105) fine.
This may not seem like much for industry giants like the Volkswagen Group or Stellantis, but the costs can quickly escalate since these fines are applied to every car sold. Without enough hybrid and EV sales to balance out their internal combustion engine (ICE) vehicles, these penalties can accumulate into hundreds of millions of euros.
This financial burden is a major factor behind the ongoing trend of engine downsizing, with three-cylinder engines becoming the norm rather than the exception in Europe. The widespread adoption of smaller, electrified engines has a global impact, as Europe is a critical market for the automotive industry. European automakers are forced to adapt to stringent EU regulations, which directly influence the development of new vehicles and engines.
Currently, the average fleet emissions target is set at 115.1 g/km (based on the WLTP cycle), but by 2025, this target will decrease by about 19% to 93.6 g/km, creating significant challenges for many manufacturers. Research conducted by analyst firm Dataforce highlights a troubling future for many companies selling cars in Europe. As of June 2024, only Tesla and Geely were already below the upcoming 2025 emissions targets.
According to the European Commission, each automaker has a specific emissions target, calculated based on the average weight of its fleet. This means that companies with a higher proportion of SUVs have higher emissions targets than those with smaller cars. In 2020, European automakers collectively paid around €510 million in fines for missing their CO2 reduction targets, which were less stringent at the time.
European automakers are now at a crossroads: should they continue to produce ICE vehicles, or should they fully commit to electric vehicles? While the shift toward EVs is tempting, the reduction or complete removal of government subsidies across Europe has dampened consumer demand. In the first half of the year, fully electric vehicles accounted for just 12.5% of the EU market, a slight decrease from 12.9% in the first half of 2023, according to the European Automobile Manufacturers’ Association (ACEA).
A similar trend is seen with plug-in hybrids, whose market share fell from 7.4% to 6.9%. On the other hand, conventional hybrids saw an increase in market share, rising from 25% to 29.2%, according to ACEA. While Dataforce’s analysis shows slightly different figures, the overall conclusion remains the same: gasoline-powered vehicles continue to dominate the European market.
ACEA’s data also reveals that diesel vehicles, despite their negative reputation for emissions, still outsell electric vehicles, with a market share of 12.9% compared to 12.5% for EVs. However, diesel’s market share has decreased from 14.5% in the first half of 2023.
With the 2025 fleet emissions targets approaching, we can expect European automakers to ramp up the production of hybrids and EVs. The situation will become even more challenging by 2030 when the emissions limit is further reduced from 93.6 g/km to 49.5 g/km.
Automakers do have some flexibility, as they are allowed to collaborate to meet their emissions targets. However, the European Commission does not permit such collaborations between car and van manufacturers. A review by Automotive News Europe of EC records revealed no significant new agreements between companies for 2025.
Looking further ahead, the EU intends to effectively ban the sale of new cars with emissions by 2035, although synthetic fuels may provide a way to keep internal combustion engines alive.
