The EU Automotive Package – an impact analysis

In December 2025, the European Commission published the ‘Automotive Package’ – a proposal to support the struggling EU automotive sector. The proposal seeks to strike a balance between galvanising industry competitiveness without counteracting progress on decarbonisation and undermining targets to achieve climate neutrality by 2050. 

CMS industry experts have assessed the key measures highlighting secondary or tertiary consequences that may have a distortive impact – factors stakeholders interested in the sector should carefully consider.

As a reminder, the key principles captured in the Automotive Package include:

• 2035 internal combustion engine (ICE) ban to be substituted for a 90% reduction in tailpipe CO₂ emissions v 2021 levels; 
• Relaxation of the interim 2030 CO₂ emissions targets for vans from 50% to 40%; 
• Mandatory targets for EU member states for the share of zero or low emission vehicles in new corporate fleet cars and vans registered by large companies; 
• New small, affordable, ‘made-in EU’ EV car category; 
• EUR 1.8 billion 'battery booster', including EUR 1.5 billion of interest-free loans to support European battery cell producers;
• Targeted amendments to existing regulations to ease the regulatory burden on the industry; 
• Measures for updating and harmonising car labelling rules.

The Automotive Package sets out a policy framework including the proposal of relaxing vehicle CO2 emissions targets to help its auto industry compete with East Asian electric vehicle (EV) rivals. This plan aims to soften the 2035 CO2 reduction target from 100% to 90%, allowing up to 10% of residual emissions if offset by EU-made green steel or sustainable e-fuels/bio-fuels. The proposals will allow for some plug-in hybrid or combustion models to remain on sale beyond 2035 as long as their emissions are fully offset.

The Automotive Package also adds incentives for electrification by introducing “super-credits” for small affordable EVs built in Europe, setting EV mandates for corporate fleets with only EU-made cars eligible for public incentives, and earmarking EUR 1.8 billion to boost domestic battery production.

These measures aim to give European manufacturers breathing room to adapt, but their effectiveness against Chinese competition is uncertain. Chinese brands have already captured about 10% of Europe’s EV market. They hold a cost edge – often pricing EVs roughly 10% below comparable European models – thanks to high volume production, local battery production facilities and in some cases state support. 

The EU’s flexible rules could help legacy carmakers avoid fines and keep up their combustion engine production in the EU and invest in engine innovation with a focus on synthetic fuels and hydrogen. This alternative drivetrain may help manage critical dependencies on Chinese batteries and aid competitiveness.

Easing deadlines may also slow the shift of some European brands to EVs even as Chinese rivals forge ahead. The new measures will give Europe’s auto industry some relief and time to adjust, but competing with China’s cost-competitive EV sector will remain a major challenge.

The Automotive Package’s offsetting mechanism is expected to have an impact beyond automotive manufacturing. Specifically, by permitting carmakers to compensate for up to 10% of tailpipe emissions through the use of low-carbon steel (capped at 7%) and renewable fuels such as e-fuels and biofuels (capped at 3%), the Commission has effectively created a stimulus for these other markets and for green hydrogen-derived products.

This is key for the European steel industry, which has committed billions of dollars to make the transition from coal-based blast furnaces to hydrogen-based Direct Reduced Iron (DRI) technologies. Without demand signals, these investments have been challenging, especially as green steel costs remain substantially above conventional alternatives. The Automotive Package is, therefore, welcome for providing this demand signal and a buyer base among carmakers. These carmakers will need European-produced green steel to meet their compliance obligations under both the Emissions Trading System and the Carbon Border Adjustment Mechanism.

Although some in the industry would say that the 3% cap on renewable fuel credits is too low to stimulate meaningful market development, this is a much-needed starting point. These demand signals must also be balanced against the increased cost for carmakers and automotive customers so as not to overburden European industries and customers, as compared to those in areas unimpacted by these obligations. Although in the near term, the green steel component and offset costs will filter through to vehicle production costs, there may also be several mitigating measures. In particular, as DRI capacity expands, the costs of green steel production should decrease. The additional costs would also be counterbalanced against the penalties for non-compliance, including regulatory fines or purchasing credits from competitors. For investors, the key question is whether carmakers will absorb these costs, pass them to consumers or achieve offsetting efficiencies elsewhere in their supply chains.

With corporate fleets representing c.60% of all car registrations in the EU (and 90% of all van registrations), the Commission’s proposals in the Automotive Package recognise that EU automotive competitiveness (and demand for zero and low emission vehicles) largely sits in the hands of fleet operators. 

Fleets not only dominate new car demand, but they also have higher mileage. Hence, decarbonisation has overall a far greater impact on CO2 emissions than the consumer segment. Fleets also feed the second-hand market far more quickly, thus improving affordability for all and having a broader impact on CO2 emissions. The Commission proposes a multi-pronged approach to fleets that combine the following: a supply-side push via the softening of CO2 emission standards; a demand-side pull via binding national targets (tailored to the market maturity in each member state); and a prohibition on member states offering incentives towards vehicles that are not “Made in the EU”.

While the intention is to accelerate decarbonisation and galvanise investment into supporting infrastructure, secondary and tertiary consequences of the approach could undermine or present challenges to progress. These include the following considerations:

• Technology neutrality complicates (and delays) fleet decarbonisation strategy decisions and slows investment given the uncertainty of having a variety of powertrains deployed. This introduces financial and operational complexity around depreciation tracking, fragmented operations, maintenance services and costs, and obsolescence risk affecting residual values that hang on the direction of future policy decisions. 
• The combination of softening CO2 emission standards together with defensive “Made in EU” requirements may not drive the competitiveness, technological and manufacturing advancements that are required if European carmakers are going to catch up with their global competitors. If EVs ultimately prove to be the dominant powertrain choice for mainstream transport, then the EU Automotive Package may only widen the gap between European heritage brands and their East Asian counterparts, which could prove catastrophic.
• Added flexibility around CO2 emission standards, technology neutrality and implementation discretion creates complexity around measuring, reporting and enforcement compliance. An uneven playing field and added bureaucracy is likely to create further debate, opportunities for challenge and ultimately delay at a moment when critically time is not on the side of the EU automotive industry.

The roots of the Automotive Package trace back to the EU’s Fit For 55 Package introduced in 2023, along with the EU Carbon Border Adjustment Mechanism (CBAM) and the Emissions Trading Scheme 2 (ETS2) – key EU climate policies that drive industrial decarbonisation. 

CBAM (transitionally in force since 2023 and definitively since January) targets high-emissions imports including iron, steel and aluminium in order to prevent carbon leakage (i.e. avoidance by moving production of ETS goods outside of Europe). CBAM’s scope has been widened in recent proposals to include specific carbon intensive downstream products such as car parts from 2028. ETS2 has also expanded the original ETS carbon pricing mechanism to include fuels used in road transport, which was designed to incentivise low-emission alternatives and will go into force in 2027. 

Although offering synergy with CBAM and ETS objectives, the Automotive Package supports the EV transition, and abandons a full-scale internal combustion engine (ICE) ban. 

This development has been welcomed by some for its support of the EU auto industry. However, the objectives of both CBAM and ETS2 and the conditions for the continuation of ICE vehicles on European roads appear to be directly at odds with the ICE extension – given the increases in prices and costs for ICE vehicles as a direct result of the combination of CBAM/ETS2/green steel and e/bio-fuels. Consequently, these proposals may meet more opposition in practice than expected.

The Battery Booster Package (BBP) is aimed at strengthening Europe’s battery manufacturing capacity, with batteries still accounting for a large share of EV total cost. Key elements include EUR 1.8 billon in targeted support and accelerating the development of a fully European battery value chain. 

The EU’s commitment to anchoring battery manufacturing in Europe is evident from the substantial financing measures aimed at solving one of the bloc’s biggest battery headaches – transition from initial investment to large-scale production. This represents a EUR 1.5 billion allocation (out of the total BBP pot) to European manufacturers via performance-based interest-free loans. It is hoped that by improving investment conditions and demand for EU-made batteries, the BPP initiative will reinforce the case for domestic production.

However, the BBP must be seen in the context of intense global competition with a strong (and long-subsidised) Chinese battery offering that continues to outperform and outpace Europe. This puts a serious question mark on the real viability of an EU-based full value chain model, and on whether EU operators should set their ambitions on related markets for EV and battery tech and software.

Upcoming related EU initiatives may well boost protection for the EU battery industry. These include the Industrial Accelerator Act, which will propose EU content requirements for batteries and their components where public support is provided. Additional conditions are also being considered for foreign direct investment in the EU battery value chain. In combination with the BBP, these may well secure the necessary protection and growth the EU battery industry needs.

Intervention is needed to galvanise a European automotive industry weakened by the COVID pandemic and subsequent macro-economic and geo-political events. In the last decade, the leading position of the EU heritage auto-brands has been challenged in the BEV segment by Chinese counterparts that have ‘bet the house’ on a clear electrification strategy recognising their position of control in global supply chains. EU policy makers must act fast to set clear and durable objectives and focus on permanent outcomes that industry and investment will respond to in a timely and confident way. 

The proposals contained in the Automotive Package are ambitious but lack clarity in their direction. While the automotive industry waits for the EU legislative process to unfold over the coming months and for the Automotive Package to take final shape, CMS automotive industry experts will continue to share their insights and experience on the policy support needed by this industry at a critical and perhaps existential moment in time.

Stay tuned for our upcoming article series, which will examine each component of the EU Automotive Package in greater depth over the coming weeks.