It's official: the EU is cancelling its 2035 ICE ban

The European Commission has proposed diluting its previously announced 2035 tailpipe-emissions mandate—reducing the target from a 100% cut (effectively an ICE ban) to a 90% reduction versus 2021—which would allow a limited number of combustion-engine vehicles and hybrids to remain on sale, subject to European Parliament approval. Carmakers falling short of 100% must offset the remaining 10% through use of low‑carbon steel made in the EU and CO2‑neutral fuels, and the Commission also proposed ‘super credits’ that count each qualifying EU‑made small EV (under 4.2m and priced €15,000–€20,000) as 1.3 cars toward compliance, a shift that reflects industry and national lobbying and will affect manufacturers’ compliance strategies and demand for low‑carbon inputs if adopted.

Analysis

The European Commission has proposed diluting the previously announced 2035 tailpipe-emissions mandate from a 100% reduction to a 90% reduction versus 2021, which would allow some combustion-engine and hybrid models to remain on sale; the change follows lobbying from major automakers and national governments and still requires European Parliament approval. Carmakers that do not achieve a 100% cut must offset the remaining 10% by using low-carbon steel produced in the EU and CO2-neutral fuels, creating explicit compliance pathways that tie emissions targets to specific supply-chain inputs.

The Commission also proposed super credits that count each qualifying small electric car (under 4.2m, EU-made, priced €15,000–€20,000) as 1.3 vehicles toward manufacturers' emissions tallies, explicitly incentivizing low-cost EU EV production. That dual approach—partial relaxation plus targeted incentives—lowers the immediate regulatory pressure on legacy OEMs while steering industrial demand toward low-carbon materials and small, affordable EVs.

Market signals in the brief show mildly positive sentiment and a moderate market-impact score, implying relief for incumbent automakers but continued regulatory uncertainty until Parliament approval. Key implications for investors include potential near-term earnings relief for European OEMs, increased commercial opportunities for low-carbon steel and e-fuel suppliers, and a strategic advantage for manufacturers capable of delivering qualifying small EVs at the specified price point, with the caveat that final rules may change in the legislative process.

Key Decisions for Investors

• Consider modestly increasing exposure to European incumbent automakers that benefit from a softened 2035 ban, while sizing positions to reflect legislative risk
• Monitor the European Parliament approval process closely and avoid making large directional bets until final text is confirmed
• Evaluate upstream suppliers of low-carbon steel and CO2-neutral fuels for potential demand tailwinds from offset requirements and consider selective exposure
• Identify and favor OEMs with credible plans and capacity to produce EU-made small EVs priced €15,000–€20,000 to capture proposed 1.3 super-credit advantages
• Reassess valuations and growth assumptions for pure-play EV makers in the EU market given the potential for a slower near-term EV adoption curve and adjust hedges accordingly