The European Union plans to remove a ban on new internal combustion engines (ICE) initially set for 2035, allowing some emissions from petrol engines and hybrids if they are offset by green steel and biofuel use, while supporting small electric vehicle (EV) makers.
Steel sources welcomed potential demand for green steel, yet there is a risk of cheaper options being prioritized.
The European Union is suggesting more relaxed carbon (CO2) emission targets for new passenger cars and light commercial vehicles for 2035, allowing further production of ICE and hybrid cars, according to the European Commission’s Automotive Package regulation proposal, published on Tuesday December 16.
In 2022, the EC had set up the target for 2035: to sell new cars with zero carbon emissions, as outlined in the EU’s Regulation 2019/631 and in line with climate-friendly policies.
Now, this target is lowered to minus 90% to the 2021 emission level, with the remaining 10% emissions to be compensated with the use of “low-carbon steel ‘made in the EU’, or from e-fuels and biofuels”, the EC said.
In a move to support electric mobility, the new Automotive Package also includes credits for car makers toward “small affordable electric cars made in the EU” and financing of European battery makers via the €1.8 billion ($2.1 billion) Battery Booster program.
“It sounds like a lot of money, but in reality it is not enough,” William Adams, Fastmarkets’ head of base metals and principal battery raw materials analyst, said. He added that Swedish battery maker Northvolt received €0.9 billion state funding yet this did not save it from insolvency.
EV market in need of realistic targets
The new EU’s reduction of emission targets is “disappointing but probably necessary” to support the automakers in Europe, Adams said.
In 2025, new car registrations in the EU included 27% of petrol engines and 35% of hybrid EVs (ICEs with extra battery), with approximately 25% of the new fleet being plug-in EVs and battery EVs, the European Automobile Manufacturers’ Association (ACEA) said. The association represents 15 major producers in the region.
Demand from EVs have been crucial for metals and minerals used in their batteries, such as lithium, cobalt, graphite, manganese, nickel, among others.
“ACEA called for an urgent revision of the current CO2 standards for cars and vans because, with today’s market conditions, the 2030 and 2035 CO2 targets for cars and vans are no longer realistic,” the association said in a statement about the new Automotive Package on Tuesday.
Market conditions for the European automotive sector have been challenging, with slow consumer demand and competition from China-made vehicles.
“With annual car production down by 3 million and small car sales down by 1.6 million over the past six years, reviving this segment and supporting the uptake of electric vehicles made in the EU will support production and jobs”, the EC said in a statement.
The EC says that with a new regulation, “plug-in hybrids (PHEV), range extenders, mild hybrids, and internal combustion engine vehicles could still play a role beyond 2035, in addition to full electric and hydrogen vehicles.”
New rules could boost green steel demand but favor cheaper options
Fastmarkets’ sources from the steel industry said the suggested changes could support demand for low-carbon, or “green”, steel, which is a niche market now.
“The number of projects in Europe that genuinely require green steel is very small, and the pool of buyers remains limited,” a source at a German steel service center told Fastmarkets.
“If automakers can offset up to 10% of emissions by using low-carbon or green steel produced in Europe, green steel shifts from being a cost burden to a regulatory asset and a competitive advantage,” a steel mill source in Europe told Fastmarkets.
Fastmarkets launched the world’s first green flat steel premium assessment in Europe in 2023, marking the industry’s search for decarbonization.
Fastmarkets’ methodology defines European green flat steel as “steel produced with Scope 1, 2 & 3 emissions at a maximum of 0.8 tonnes of CO2 per tonne of steel.”
Yet with a lack of clear definition of “green steel” in the new regulations, the policy risks stimulating demand primarily for reduced-carbon steel rather than truly green steel, unless thresholds are clearly defined, Fastmarkets understands.
Most integrated flat steelmakers in Europe still use blast furnace/basic oxygen furnace (BOF) production route but reduce their CO2 emissions to comply with the strict EU regulations, and sales of steel with a 20-30% reduction in carbon emissions represent a tangible segment of the market and can attract significant premiums.
Fastmarkets’ methodology defines reduced carbon flat steel as steel produced in blast furnaces with emissions threshold of 1.4-1.8 tonnes of CO2 per tonne of steel.
Green steel is a more expensive option compared with reduced-carbon steel, Fastmarkets’ data shows.
Fastmarkets’ weekly assessment of the green steel domestic, flat-rolled, differential to HRC index, exw Northern Europe, meanwhile, was set at €140 per tonne at the midpoint on December 11.
Fastmarkets’ assessment of the flat steel reduced carbon emissions differential, exw Northern Europe was €45 per tonne at the midpoint on December 11.
How much green steel would be needed
Industry sources stressed many times that green steel will remain a niche market, unless the EU steps up with public procurement project and incentives, stimulating OEMs to “buy green.”
In Fastmarkets’ calculations, the newly proposed emission offset (to 10% of the 2021 levels) by green steel usage could be capped at around 1 million tonnes per year.
Around 800 kilograms of steel are used in each EU passenger car, according to the International Council on Clean Transportation. In 2024, EU new passenger car registrations amounted to 10.6 million units, ACEA data show. Based on these inputs, around 8.5 million tonnes of steel per year are used for passenger cars production in the EU.
EU new van registrations (light commercial vehicles) amounted to 1.58 million units per year in 2024, while amount of steel used per van is around 1.00-1.20 tonnes. So, total steel in use in vans is around 1.6 million-1.9 million tonnes a year.
Total steel in new EU cars (passenger and vans together) is therefore roughly 10.1 million-10.4 million tonnes, making it the ceiling for the demand.
Assuming only about 10% of new cars and vans need offsets and they “cover it” with low-carbon steel purchases, Fastmarkets estimates around 1 million tonnes per year of green steel demand, generated by the mentioned policy update.
Even if 100% of the allowable 10% compliance were met using only green steel, not biofuels, demand would be mechanically capped at around 1 million tpy unless the threshold is raised or steel earns disproportionate CO2 crediting.
How biofuels may come into play
“Electromobility will remain the dominant pathway, but other viable technologies can help cut emissions”, according to ACEA’s comments on the new EU’s Automotive Package.
E-fuels and biofuels are another way to compensate CO2 emissions and to allow different types of vehicles in Europe, the new regulation says.
There is limited immediate impact from the new regulations, since biodiesels have limited use in passenger vehicles and e-fuels are a nascent industry, according to Fastmarkets’ analyst Melissa Cousin.
E-fuel is gasoline fuel produced using renewable electricity, water and captured CO2, but its production is an emerging industry due to high production costs, Cousin said.
“Biofuels are liquid or gas fuels produced from biomass, now mostly coming from agriculture and waste products; and biodiesel is usually blended with conventional fossil-origin diesel to be used in combustion engines, mostly in delivery trucks, construction and agriculture equipment,” Cousin said.
