The European Commission (Commission) presented a proposal for an amendment to Regulation (EU) 2019/631 regarding stricter CO2 emissions standards for new passenger cars1 and light motor vehicles (vans)2 (the amended Regulation) in July 2021, together with 13 other legislative proposals under the Fit for 55 banner, with the intention of aligning current European Union (EU) laws with its 2030 target of cutting greenhouse gas emissions by at least 55 percent in 2030 compared with 1990 levels and its 2050 ambition. On 27 October 2022, the Council of the European Union (Council) and the European Parliament (Parliament) reached a provisional political agreement on the amended Regulation, effectively banning the sale of new petrol and diesel cars and vans from 2035. Parliament and the Council formally adopted the provisional agreement reached on 14 February and 28 March 2023, respectively, making the amended Regulation one of only three Fit for 55 legislative proposals that have reached the last step of the decision-making procedure. The amended Regulation will now be published in the EU’s Official Journal and enter into force on the 20th day following its publication.

Fit for 55 Package

Fit for 55 Package

Destination: Zero emissions

Although mandatory CO2 emissions standards for all new passenger cars were already introduced in the EU in 2009, the objective of the amended Regulation is to move the EU to zero-emissions mobility, requiring 100 percent emissions reduction fleet-wide for new cars and vans by 2035. This means that all new cars or vans placed on the market in the EU from 2035, whether manufactured in the EU or imported, must be zero-emission vehicles.The amended Regulation does, however, refer to e-fuels, whereby the Commission will make a proposal for allowing the registration of vehicles running exclusively on CO2-neutral fuels (e.g. vehicles with power combusting engines may be placed on the market as long as they are using e-fuels) after 2035, in conformity with EU law.

The formal adoption of the amended Regulation results in the legislation of the following targets:

  • A 55 percent reduction in CO2 emissions for new cars and a 50 percent reduction for new vans by 2030, compared to 2021 levels; and
  • A 100 percent reduction in CO2 emissions for both new cars and vans by 2035.

A secondary objective of the amended Regulation is the reduction in ownership costs to consumers that accompanies an increased supply of zero-emission vehicle models. The third objective is the stimulation of innovation in zero-emissions technologies, driving the EU automotive supply chain to become a technological leader in the global transition towards zero-emission mobility. It is expected that these measures will have the added benefits of increased energy efficiency and energy security. 

The road ahead, with checkpoints

The Commission will develop a common EU methodology for assessing both the full life cycle of CO2 emissions of new cars and vans, as well as the fuels and energy consumed by these vehicles, by 2025. Manufacturers may, based on this methodology, voluntarily report on the life cycle emissions of the new vehicles that they place on the market to the Commission.4

In 2026, the progress made towards the 2035 target of a 100 percent emissions reduction will be reviewed and assessed by the Commission, which includes determining whether the set targets need to be revised, taking into account technological developments and the need for a socially equitable transition towards zero emissions.

Currently, an incentive mechanism is in place for zero- and low-emission vehicles, whereby if a manufacturer meets certain benchmarks for the sale of these vehicles post-2025, the manufacturer’s specific CO2 targets may be relaxed. The amended Regulation will, however, see the abolishment of the incentive for zero- and low-emission vehicles from 2030.

Additionally, while manufacturers can receive emissions credits towards emissions targets for eco-innovations5 that verifiably reduce CO2 emissions on the road, the cap on these credits will be reduced from the current 7g/km per year, to 4g/km per year from 2030 until 2034.

To avoid potential distorting market effects, manufacturers in the EU responsible for small production volumes6 may be granted a derogation from their specific emissions targets until the end of 2035, while manufacturers responsible for less than 1,000 new vehicle registrations in a calendar year will continue to be exempt.

Adequate funding for a green just transition

The Fit for 55 package is a pathway towards the EU achieving its net-zero climate ambitions under the European Green Deal. To ensure that EU Member States are transformed from a high- to low-carbon economy without reducing prosperity, a number of funding mechanisms totaling over EUR1 trillion are in place to facilitate and finance the EU Green Deal and ensure a just and inclusive transition.

There is no exception when it comes to the application of this principle to the automotive sector. While the final, signed text is yet to be made available at the time of writing, the provisional agreement compromise text states that "Where appropriate, financial support should be considered at the level of the EU and Member States to crowd in private investment, including via the European Social Fund Plus, the Just Transition Fund, the Innovation Fund, the Recovery and Resilience Facility and other instruments of the Multiannual Financial Framework and the Next Generation EU, in line with State aid rules."7 This proposed framework is supported by a press statement released by the European Parliament, whereby "existing EU funding should be channeled not only towards zero-emission vehicles and related technologies, but also towards SMEs along the automotive supply chain and vulnerable regions and communities." 8

Complementary electromobility regulatory frameworks

To achieve the objectives set out by the amended Regulation, it is not enough to only legislate the supply of zero-emission vehicles by 2035. While funding mechanisms may ensure a just transition to a new status quo, supporting infrastructure to support the amended Regulation is also required. As such, complementary Fit for 55 package mechanisms have been proposed by the Commission, which include, among others:

  • The Alternative Fuels Infrastructure Regulation (AFIR), which would ensure the right public infrastructure is in place to charge the zero-emission vehicles by mandating the rollout of recharging and refueling infrastructure;9
  • The revision of the Energy Performance of Building Directive, which supports the deployment of electric vehicles and complements the AFIR, introduces requirements for recharging infrastructure in private buildings, at home or at the workplace;
  • The revised EU Emissions Trading System (ETS), which would see the creation of a new, standalone ETS10 for the road transport sector that concerns the emissions from fuel use in entire vehicle fleets;
  • The revised Renewable Energy Directive,11 which sets increased renewable energy targets for the EU in the transport sector;
  • The revised Effort Sharing Regulation, which sets national targets for Member States for emission reductions from road transport;
  • The recast of the Energy Efficiency Directive,10 which requires all EU Member States to use energy more efficiently at all stages of the energy chain, allows for improvement measures in transport (except policy measures regarding the use of direct fossil fuel combustion) to be taken into account for achieving binding end-use energy savings obligations; and
  • The revised Energy Taxation Directive, which lays down the minimum excise duty rates for the taxation of energy products used (such as electricity, motor fuels and most heating fuels) and introduces an equal taxation for motor and heating fuels based on their energy content and their environmental footprint.12 For electricity, green hydrogen and advanced biofuels, the lowest tax rates shall be applied for incentivizing the green transformation.

To accelerate the green energy transition and in response to the ongoing energy price crisis, the EU published its REPowerEU plan on 22 March 2022.13 REPowerEU is intended to build on and boost the Fit for 55 package proposals regarding earlier and more ambitious targets for renewable energy and energy efficiency. Specific to the automotive industry, apart from strengthening and accelerating the proposed targets under the Fit for 55 package, REPowerEU encourages Member States to consider additional tax measures such as reductions and exemptions from vehicle taxation for both the purchase and use of electric and hydrogen vehicles.

The requirement for greater grid capabilities in response to the growing electric vehicle charging network, which comprises both private and public charging stations, is addressed through the recast of the Electricity Market Design Directive, which is part of the EU’s Clean Energy for All Europeans legislative package. The market rules set out within this Directive contribute to creating favorable conditions for electric vehicles, ensuring, in particular, the effective deployment of publicly accessible and private recharging points for electric vehicles and the efficient integration of vehicle charging into the electricity grid.14

The interplay of these proposals, plans and Directives strengthens the standalone objectives of each proposal, working together to ensure that businesses and Member States are pulling in the same direction and consistently working towards a common goal across all factors that affect the road transport sector.

Impacts: The automotive industry and beyond

One of the most obvious direct impacts will be felt by EU vehicle manufacturers and importers in that, from 2035, all new cars or vans placed on the market in the EU must be zero-emission vehicles. For manufacturers and component suppliers, this may mean a complete overhaul of existing production lines, restructuring of supply chains and investment in new technologies and research and development (R&D). For EU importers, it may necessitate sourcing new vehicle and/or component suppliers. This can all culminate in increased costs — whether it be entering into new procurement agreements, exiting from existing contracts, reskilling employees, deploying additional technologies, undertaking extensive R&D, or investing in new plant and machinery.

Further afield, it is expected that companies in third countries and territories supplying vehicles or components into the EU will be impacted, as they will likely lose entire shares of the market if they do not adapt their vehicle or component supplies to match the zero-emission demand. If they are unable to adapt to this demand change, they will likely have to look to other markets to absorb the over-supply.

Additionally, other direct impacts can include the necessity for businesses to ensure that they have sufficient charging infrastructure for employees as the automotive market for consumers shifts. There also exists the opportunity for new market entrants to gain a strong competitive advantage as first-movers.

Aside from the road transport sector, the removal of fossil fuels from the equation can open up extensive market opportunities for the renewable energy industry. As the demand for green power escalates outside of the amended Regulation, which targets “well-to-wheel” emissions, zero-emissions mobility is only achieved if both vehicles and energy are carbon neutral. This entails not only looking to renewable energy sources to power electric vehicles (EVs), but also includes the manufacturing process. When it comes to manufacturing lithium-ion cells, around half of the life cycle emissions arise from the manufacturing process alone. Manufacturing plants powered by renewable energy can, therefore, result in a substantial decrease in emissions. Growth in demand for energy from private consumers, businesses, charge point operators and EV manufacturers creates the possibility for EVs to be one of the biggest buyers of renewable electricity.

It’s anticipated the mining industry will also be impacted. By phasing out and eventually removing internal combustion engines (ICE), the demand for raw materials, such as nickel for hybrid vehicles and lithium for electric vehicles,15 is expected to increase.

Next steps

To help future-proof operations, businesses should already be putting clear and implementable transition strategies in place to prepare for and adapt to these upcoming changes that seek to achieve the long-term ambition of net-zero emissions. While the stricter CO2 emissions standards for new passenger cars and light motor vehicles represent a clear shake-up for the EU road transport sector, it also has strong implications for the non-EU vehicle industry supplying into the EU. It should, therefore, by no means be viewed as "just a European thing".

As an immediate step, organizations both within and outside the EU should first assess whether, and how, these new standards impact them and, if necessary, start preparing for the significant changes that are occurring as global climate actions continue to intensify. This may include analyzing existing supply chains, entering into new partnership agreements, investigating available grants and incentives, and determining future funding requirements.

Specifically for vehicle manufacturers, as soon as the final text is formally approved and published, it is important to review the amended Regulation (EU) 2019/631 in its entirety, analyze the impacts to their specific circumstances and enter into necessary strategic and/or contractual arrangements, such as pooling arrangements.

To help alleviate the cost of transition, it can also be valuable to explore the broad range of funding mechanisms that are available either at an EU or Member State level.

The significance of the formal approval by Council and Parliament cannot be overstated. The implications are far reaching, impacting individual consumers, renewable and fossil fuel energy providers, global component and vehicle manufacturers, and refueling and charging infrastructures. We believe the very core of the automotive industry is being disrupted. The first automobile powered by an ICE was invented in 1885. After 137 years, we are seeing the beginnings of the end of ICE vehicles. In our view, both the opportunities and risks that are presented are game-changing and cannot (and should not) be ignored.

How KPMG professionals can help

KPMG has developed a leading global Climate Change and Decarbonization practice. Working alongside the KPMG ESG Tax and Legal team, KPMG professionals can deliver leading approaches by working collaboratively with clients on the journey to a low-carbon future.

KPMG ESG professionals can assist you with a climate risk and decarbonization strategy that includes helping you gain strategic foresight and operational value in your decarbonization journey, from emissions measurement to implementation, monitoring and reporting. All of this is supported by an array of options, such as renewable energy procurement, energy efficiency, circular economy and supply chain management, and includes assessing and understanding the underlying tax and legal impacts.

Through the Climate Risk Advisory services, KPMG professionals can help you measure, quantify and assess risks and opportunities across supply chains under a wide range of scenarios and understand the impact on business performance.

KPMG professionals also advise clients on the financing and investment aspects of the low-carbon agenda, including fundraising and identifying investment partners and merger and acquisition opportunities, both from a debt and equity perspective.

For more information, please contact one of our KPMG professionals.

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