The drive to 2025: Carmakers' progress towards their EU CO2 target in H1 2024

After years of stagnant EV sales due to the lack of new car CO₂ targets, carmakers will face stricter standards in 2025, following the last targets set in 2021. While some carmakers have been calling to weaken the regulation, T&E shows that all carmakers can meet their 2025 targets. T&E breaks down the strategies carmakers are expected to use to comply based on modelling of compliance scenarios relying on: sales data, carmakers' public plans, and analysis of data from market research company GlobalData. The compliance options include increasing sales of full electric cars (BEVs), mild and full hybrids (HEVs) and plug-in hybrids (PHEVs), as well as various compliance flexibilities. This analysis provides an insight into carmakers’ paths to comply with the target in 2025.

As with past car CO₂ targets, carmakers are expected to close their compliance gap in the target year, rather than ahead of time. Between 2019 and 2020, carmakers furthest away from their targets improved their CO₂ performance by 20 gCO₂/km. In the first half of 2024, most carmakers are close to meeting their target with gaps ranging from 10-17 gCO₂/km. Leaders in EV sales such as Volvo Cars have already reached their 2025 target. Volkswagen (VW) and Ford are the furthest behind with gaps of 28-29 gCO₂/km and may consider forming compliance pools with leaders to reduce the gap. For instance, if VW pools with Tesla, it would only need to achieve a 17% BEV share in 2025 (down from 22%). Similarly, if Ford pools with Volvo again, BEVs would need to account for just 9% of its sales, instead of 21%.

It is crucial to stress that the 2025 target is not an electric car mandate, and - technically - no mandatory EV sales share is necessary. The target, proposed back in 2017 and unchanged since then, is a CO₂ average: selling more efficient petrol cars (or fewer SUVs) helps as much as selling electrics. In addition, numerous flexibilities are allowed: an additional bonus for >25% ZLEV sales, eco innovations, as well as pooling emissions with other manufacturers, e.g. pure EV players.

In 2025, carmakers are expected to boost EV sales in 2025. In T&E’s central compliance scenario, EV sales are expected to rise to 24% market share in 2025 (from 14% in the first half of 2024), supported by an expansion of mass market EV offerings, including seven affordable (<€25,000) EVs available. If carmakers rely more on hybrids, they would need less BEVs to comply (20%). The growth in EV sales would account for more than half (60%) of the CO₂ reduction needed to reach 2025. This comes after three years of stagnation, due to carmakers focus on profits from ICE and higher-priced EVs.

While BEVs play the biggest role, carmakers also rely on other compliance options. In T&E’s compliance scenario, on average, 20% of the CO₂ reduction would be achieved by selling more hybrids, while regulatory flexibilities would contribute to a 12% CO₂ reduction, and PHEVs could provide 8% of the improvements. Stellantis (33%) and VW (30%) would rely the most on HEV sales to meet their targets. As a result, despite not being a future proof option, the share of mild hybrids is expected to double (from 19% to 37%). BMW is expected to rely most on PHEVs (18%).

The car CO₂ regulation has proven effective and will continue to push carmakers towards electrification but needs to be accompanied by national EV policies: charging masterplans and stable, targeted subsidy schemes. To ensure Europe's automotive industry remains competitive and leads in the mass-market EV sector, policymakers must resist calls to weaken the 2025-2035 targets or delay compliance. The current lead enjoyed by Chinese EV makers only shows that the longer the EU protects its laggard automakers, the less competitive they will be.

Stagnation phase: The slow growth of BEVs in the 2022-2024 period is due to the CO₂ standards design and carmakers profit driven strategy. This stagnation has been expected by T&E and market analysts since 2020.

• The EU car CO₂ regulation is designed with 5-year steps with new targets in 2025 and 2030. Past evidence shows that carmakers don’t comply with car CO₂ targets in advance, but only when the targets require it. Previous T&E analysis showed carmakers were only half-way to the 2020 target 4 months before the start of 2020.

• Carmakers focus on ICE profits ahead of the next growth phase driven by 2025 targets. In the stagnation phase, carmakers prioritise short-term profits through the sale of high-margin vehicles (e.g. Volkswagen’s “value over volume” strategy). Previous T&E analysis has shown that carmakers' disproportionate focus on larger, more premium models has resulted in high prices for EVs in Europe which has slowed down EV sales as a result.

Growth phase: Carmakers are expected to ramp up mass-market affordable EVs to meet 2025 targets

In the next growth phase from 2025 onwards, electric car sales would pick up as carmakers need to prioritise EV sales to meet the next car CO₂ target. As presented in section 4, T&E expects EV sales to grow to 20%-24% in 2025, partly thanks to affordable models coming to the market (see section 3). This stop-and-go strategy creates a succession of stagnation and growth phases.

However, as carmakers prioritise their profits and shareholder payouts, many OEMs are calling on the European Commission to weaken the car CO₂ regulation despite the fact that the targets have first been proposed back in 2017. For instance, ACEA’s president Luca De Meo is calling for “a little more flexibility” in the regulation implementation while Volkswagen wants the EU to soften CO₂ emissions targets. This briefing looks ahead to 2025, analysing carmakers' compliance gap based on sales in the first half of 2024 and describing how all carmakers can adapt their sales to meet the targets (methodology described in annex 6.1 of downloadable pdf briefing).

While Volvo Cars is already on track to meet its 2025 target based on sales in the first half of 2024, Volkswagen and Ford are furthest away. Other carmakers are in the middle and expected to meet their targets. This overall compliance picture with one leader, two laggards and other carmakers with a moderate gap around 10 gCO₂/km has not changed much since 2023. However, given there’s been a BEV slowdown since 2023, the compliance gap has slightly increased for most carmakers over the first half of 2024 (compared to the full year 2023). This situation is not new as most carmakers had similar gaps with their 2020 target in 2019.

The BEV slow-down in the first half of 2024 led average CO₂ emissions to increase to 109 gCO₂/km from 107 gCO₂/km in 2023. Volvo Cars is the only legacy carmaker that is already compliant (over-compliance of 31 gCO₂/km). Among the non-compliant carmakers, Kia is the closest to the 2025 target with a gap of 10 gCO₂/km. Most of the carmakers’ targets are well within reach with gaps ranging from 10 and 17 gCO₂/km.

To close the gap by 2025, Ford and Volkswagen will need to redouble their efforts.

Ford and Volkswagen are the furthest away from their targets with gaps of 28 and 29 gCO₂/km respectively. While these two carmakers will need to double down on their efforts in 2025 to close the gap, they have many possible compliance strategies as highlighted in section 4.

Back in 2019, carmakers also had large gaps with their 2020 targets.

Looking at the market average, the compliance gap is 15 gCO₂/km in H1 2024, a similar value as the 13 gCO₂/km gap in 2019 compared to the 2020 target. BEV sales are expected to normalise in the second part of 2024 as the market recovers from the abrupt removal of the subsidy in Germany (e.g. by lowering EV prices as VW has already done). The full year 2024 gap would be lower than the current 15 gCO₂/km and could even become lower than 2019. Hyundai was the major carmaker that was the furthest away from its 2020 target in 2019 with a gap of 17 gCO₂/km. Despite this gap, it still over-complied in 2020, improving its CO₂ performance by 20 gCO₂/km. Ford and Volkswagen currently have significantly higher gaps than in 2019 (Ford eventually formed a pool with Volvo Cars and VW with MG) while Kia and Mercedes-Benz are currently doing better than 5 years ago.

Methodology: T&E has modelled carmakers’ expected compliance strategies starting from the market car sales forecast from GlobalData (Q2 2024) and modelling the additional share of BEV, PHEV and HEVs required for each carmaker to comply with their 2025 CO₂ target (see methodology in annex 6.1 of downloadable  briefing). The central scenario is based on the assumption that carmakers would not use the pooling flexibility of the regulation but include other regulatory flexibilities like zero and low emission (ZLEV) benchmark and eco-innovation credits (annex 6.4). Scenarios accounting for pooling between carmakers are presented at the end of the section 3. Additional scenarios with high and low reliance on hybrids are presented in section 4. The full methodology is available in annex 6.1 and 6.2.

T&E’s modelling of carmaker’s compliance strategies shows clearly how carmakers can comply with the targets. Overall, the CO₂ improvements are expected to be achieved thanks to: BEV (60% of the average CO₂ improvements), HEVs (20%), flexibilities (12%), and PHEVs (8%). More details on the expected sales shares per powertrain is provided section 4 and annex 6.2.

All carmakers plan to launch new models in time for the new 2025 targets, including many new mass-market models from segments A to C. Among these, seven affordable models with price starting below €25,000 are expected to be available in 2025 and will be crucial for carmakers compliance. T&E expects these affordable models to account for a growing proportion of total EV sales. In 2025, these models could account for up to 300,000 to 400,000 units - which would account for 10%-15% of the BEV market. The vast majority of these models would come from Renault and Stellantis as both will have several affordable models available in 2025. These models will support the growth of the BEV market, which could reach up to 2.8 million BEVs. 

These affordable EV models are also in high demand. The European Commission published a survey under the European Alternative Fuels Observatory (EAFO) showing that 57% of respondents would like to buy an electric car but that the cost of BEVs is seen as the main barrier of current EVs. Similarly, a survey conducted by Yougov for T&E has shown that 25% of new car buyers already intend to buy an electric car in the next year, but when given the option of a €25,000 electric car, the share of new car buyers willing to buy a battery electric model increases to 35%. This would equate to an additional 1 million EVs being sold in Europe annually, replacing combustion equivalents.

Each carmaker’s expected strategy in the T&E scenario is detailed below:

Alongside an expected push for more HEVs, Volkswagen and Ford can also reduce emissions by pooling with a frontrunner.

The regulation allows carmakers to use a pooling flexibility. High-emission carmakers can pool with frontrunners to benefit from their higher EV sales and better CO₂ performance. For example, Volkswagen could pool with Tesla. In that case, Volkswagen would only need to reach a 17% BEV share in 2025 for the whole pool to comply instead of 22% without pooling. As done in 2020, Ford could pool with Volvo Cars and limit its BEV sales to 9% instead of 21% without pooling. In the case where Volkswagen pools with Volvo Cars, the German carmaker would only need to reach 21% BEV sales. With pooling, the BEV share of the overall market would be limited to 23% if both Volkswagen and Ford have to pool with competitors instead of 24% without pooling.

Based on the analysis of carmakers' potential compliance strategies (section 3), T&E expects the BEV market share would rise to 24% in 2025 in the scenario where all carmakers are compliant without forming pools. In a scenario with no improvement in ICE powertrains, the BEV market would have to reach 26%, while 20% would be enough if all carmakers focus on improving their ICE efficiency, selling more hybrids and reducing the sales of the polluting SUVs.

T&E expects that 60% of CO₂ improvements between H1 2024 and 2025 would come from BEVs.

In our compliance modelling, increasing BEV sales is expected to be the main compliance strategy, and the contribution of all ICE improvements is expected to be only 28% of the total CO₂ improvement.

T&E expects that the HEV share would double as some carmakers focus on short-term compliance

After BEVs, sales of mild and full hybrids (HEVs) are expected to be the second most important compliance strategy in T&E’s central compliance scenario. The share of mild hybrids (MHEVs) is expected to double from 19% to 37% as 20% of the CO₂ improvements are expected to be achieved by HEVs. PHEVs are then expected to achieve 8% of the improvements and would slightly grow from 7% to 9% of the market. Regulatory flexibilities which include the ZLEV benchmark and the eco-innovation credits account for 12% of the CO₂ improvements (see annex 6.4 of downloadable briefing).

T&E’s modelling of carmakers' potential compliance strategies shows that there is a clear path to compliance for all carmakers to reach their 2025 target. Carmakers can rely on a mix of increased BEV, PHEV and HEV sales, as well as compliance flexibilities - the exact mix varies from one OEM to another. T&E’s analysis breaks down the most likely contribution of each of these compliance levers and does so for each carmaker, thus providing a unique picture and insight into how carmakers would comply with the target.

Despite this shift towards electrification, it is expected that carmakers will continue to be profitable even if some lower EV prices. For example, UBS analysis shows VW will still be profitable, with an operating profit margin of 6.2% even though the regulation compliance could cut VW’s 2025 profits by €2bn. In other words, the regulation is pushing VW to steer its strategy towards volume mass-market BEVs and global competition rather than towards short-term profit-optimisation.

The rise of hybrid vehicles sales may be a short-term fix to help laggard carmakers to meet their 2025 targets. But this strategy is not smart. It is neither in line with climate goals given the high CO₂ emissions in real-world conditions (e.g. PHEV emissions of 100 gCO₂/km in real world compared to 27 gCO₂/km in laboratory tests - close to 4 times more - and other ICEs emissions of 152 gCO₂/km in real world compared to 128 gCO₂/km in laboratory tests - around 20% more -, see annex 6.3 of downloadable briefing), nor with securing industrial competitiveness as carmakers need to have only zero emission car sales from 2035. Carmakers’ strategy should focus on launching the affordable compact BEVs that are in high demand by the mass market.

The car CO₂ regulation is a crucial climate and industrial policy on cars. But it needs to be supported by national EV policies. In particular, national governments should implement comprehensive charging master plans and stable, targeted subsidy schemes like social leasing.

If policymakers want the European industry to remain competitive and become leaders in tomorrow's mass market EVs instead of remaining stuck in a technology of the past, they must resist calls to weaken the regulation or waive the 2025 compliance fines. Instead, they should firmly commit to the 100% zero emission car target in 2035 as part of the review in 2026 and reward local EV and battery manufacturing with a green industrial plan to complement the Green Deal. In July, EU Commission president Ursula von der Leyen already confirmed the EU’s zero-emissions cars target for 2035. The longer the EU waits to make the transition, the less competitive the European automotive industry will become and the harder it will be to catch up with the global competition. Efforts are needed today to ensure that the European automotive industry takes part in the EV market boom, rather than remaining stuck in a technology of the past.