Published by Global Banking and Finance Review
Posted on December 16, 2025
3 min readLast updated: January 20, 2026
The EU revises its 2035 combustion engine ban, allowing hybrids and CO2-neutral fuels, with new targets for corporate fleets and small EVs.
Dec 16 (Reuters) - The European Commission on Tuesday made public proposals that reverse an effective ban on sales of new internal combustion engine cars from 2035, bowing to pressure from Germany, Italy and major automakers.
The delayed package follows fierce lobbying to allow transitional technologies such as plug-in hybrids and CO2-neutral fuels, while climate campaigners and EV-focused companies had pushed to keep the original target.
The revised package cuts the planned 2035 goal to a 90% reduction in tailpipe emissions compared with 2021, and also introduces measures to accelerate the shift to electric vehicles while giving manufacturers more flexibility.
Here are the main changes:
CO2 REVISIONS
Under the plan, automakers will still be able to sell plug-in hybrids and range extenders beyond 2035. Those not hitting the 100% CO2 emission reduction need to make up the shortfall.
CO2-neutral fuels, including advanced biofuels made from waste, such as used cooking oil and low-carbon steel will also be factored into emissions calculations, meaning automakers who produce cars with this lower carbon "green steel" made in the EU can help cut emissions figures further.
Automakers using these 'flexibilities' cannot then pool their emissions with those of EV-only brands such as Tesla and Polestar to hit the targets.
CORPORATE FLEET
Corporate fleets, which account for about 60% of new car sales in Europe, will face binding electrification targets based on member states' GDP per capita, although small and medium-sized enterprises with less than 250 employees and below 50 million euros of turnover will be exempt.
Member states will only provide financial support for clean vehicles made in the EU, a win for France, which pushed for local production incentives.
Electrifying fleets could help build a second-hand EV market, as rental firms typically keep cars for a year and leasing companies for about three years.
National market share targets are set to range 32% of zero-emission cars in 2035 for Bulgaria to 100% for many richer countries.
'SUPER CREDITS' FOR NEW SMALL EV CATEGORY
The Commission will create a new category for small electric cars under 4.2 metres in length, similar to Japan's "kei cars."
These vehicles will qualify for "super-credits" in emissions targets up to 2034, with each sale counting 1.3 times, meaning 10 small EVs would be credited as 13.
This category could also be used for other targeted simplification measures from the member states as well as on the EU level.
Renault and Stellantis have been lobbying the EU for a new class of small cars, arguing that it would cut costs and make EVs more affordable.
VANS
By 2030, commercial vehicles such as vans will face a 40% emissions reduction target, down from the previous 50%.
Automakers will also be allowed to average compliance over a three-year period from 2030 to 2032, giving them more flexibility.
BATTERY BOOSTER PACK
The package also includes a new battery booster pack, which will have financial support as Europe races to scale gigafactories and compete with China. The Commission will inject 1.8 billion euros to accelerate Europe's battery value chain, including 1.5 billion euros in interest-free loans for battery cell producers.
The upcoming Industrial Accelerator Act, due in January, is seen as key to the battery booster as it will include details around prioritising local content.
(Reporting by Marie Mannes, Mathias de Rozario and Philip Blenkinsop, Editing by Louise Heavens)
CO2 emission reduction refers to the strategies and regulations aimed at decreasing the amount of carbon dioxide released into the atmosphere, particularly from vehicles and industrial sources.
Plug-in hybrids are vehicles that combine a conventional internal combustion engine with an electric motor, allowing them to run on both gasoline and electricity, which can be charged from an external source.
Super credits are incentives that allow manufacturers to count certain vehicles, like small electric cars, as more than one unit towards emissions targets, helping them meet regulatory requirements more easily.
Corporate fleets, which consist of vehicles owned or leased by businesses, play a significant role in vehicle sales, accounting for a large percentage of new car purchases in many markets.
CO2-neutral fuels are energy sources that do not increase the net amount of carbon dioxide in the atmosphere when burned, often derived from renewable resources or waste materials.
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