EU Backtracks: What the Revised 2035 ICE Ban Means for Global EV Strategy

Is the EV revolution hitting a regulatory speed bump in Europe? After months of intense lobbying from legacy automakers, the European Union is reportedly proposing a significant relaxation of the rules that would have effectively banned the sale of new internal combustion engine (ICE) vehicles by 2035. For Western investors tracking the global transition away from petrol and diesel, this marks a critical ‘pragmatic’ pivot, signaling a multi-technology future for the continent’s auto sector.

H1: EU Reconsiders 2035 Mandate: The End of the Hard ICE Ban?

The European Commission is no longer holding a line for 100% zero tailpipe emissions for new cars starting in 2035. Instead, sources indicate the new proposal mandates only a 90% reduction in fleet-average CO2 emissions compared to 2021 levels. This seemingly small shift—from 100% to 90%—creates a crucial 10% margin, effectively allowing automakers to continue selling some ICE-powered models, including plug-in hybrids (PHEVs) and range-extended electric vehicles (EREVs) beyond the previous hard deadline.

This policy adjustment, expected to be formally announced on December 16th, is widely seen as a lifeline for major European manufacturers, particularly German and Italian giants, who have struggled with slower-than-anticipated EV adoption and intense competition from Chinese EV makers.

The New Compliance Game: Offsets and Technological Neutrality

The real complexity—and opportunity—lies in how manufacturers must cover the remaining 10% of tailpipe emissions. The proposal introduces a compensation mechanism that pushes the market toward ‘technological neutrality’ rather than pure electrification:

• Low-Carbon Steel: Automakers can offset emissions by utilizing low-carbon steel manufactured within the EU.
• E-Fuels & Biofuels: Compliance can also be met by ensuring vehicles are compatible with, or use, sustainable synthetic fuels (e-fuels) or non-food biofuels.

This flexibility offers a distinct advantage to established players with existing engine expertise, potentially slowing the outright dominance of Battery Electric Vehicles (BEVs) in the near term, though the EU still expects 90% of sales to be electric in practice.

H2: What This Means for Western Investors and the EV Race

For a Western audience focused on the massive capital shift into EV production, this news requires a strategic re-evaluation of the European timeline. The initial, aggressive 100% phase-out was a clear regulatory signal prioritizing BEVs. The new 90% target, driven by industrial lobbying and concerns over jobs and market competitiveness, signals that Brussels is now prioritizing the health of its domestic industry alongside climate goals.

Incentivizing Local Production Over Imports

The policy shift isn’t solely about loosening emission targets; it’s also about protecting European manufacturing capacity against the rising tide of affordable Chinese competition. The proposed rules include specific sweeteners:

• ‘Super Credits’: Incentives are being introduced for the sale of small, affordable electric cars produced locally in Europe.
• Exemptions: Small European-made EVs may receive a 10-year exemption from certain safety and emissions requirements, alongside dedicated parking and subsidies.

This combination of flexibility for ICE/Hybrid tech and subsidies for small local EVs shows the EU is navigating a complex industrial tightrope. See our analysis on the growing pressure of Sino-European auto trade tariffs.

The Counterpoint: Criticism from Climate Advocates

This pivot has drawn sharp criticism. Environmental groups argue that weakening the CO2 standards sends a confusing signal to consumers and risks delaying the necessary transition, potentially leaving European consumers reliant on more expensive, fossil-fuel-dependent vehicles for longer.

H2: Next Steps and Global Context

It is crucial to note that this proposal is not yet law. It requires formal approval from the European Parliament and EU member states, followed by potential tripartite negotiations. However, given the lobbying success that prompted the change, the framework is likely to pass.

This regulatory evolution in Europe contrasts with shifts elsewhere, such as the US recommitment to gas cars and Canada weighing its own targets. For Western automakers, the message is clear: diversify your powertrain investment beyond pure BEVs for the European market through at least 2035, and critically, secure your supply chain for low-carbon steel and e-fuels.