The widely circulated news that the EU is backtracking on the ban on selling cars with internal combustion engines in 2035 is greatly exaggerated. Rather than a U-turn, it’s more like a slight braking that probably comes too late to avoid the accident.
On December 16, 2025, the European Commission proposed to relax the CO2 target from a 100% reduction (that is an effective ban on new non-zero emissions cars) to a 90% cut compared to 2021 levels. I will take Parliament and Council approval for the proposal to become operational. Put differently, the proposed change allows limited continued sales of plug-in hybrids, range-extender vehicles, mild hybrids, and even some internal combustion engine cars beyond 2035, provided the remaining 10% emissions are offset (e.g., via EU-produced low-carbon steel, e-fuels, or biofuels). Note, however, that both biofuels and e-fuels still have high costs, which are most likely to stay high during the next decade, just like those of low-carbon steel.
To promote the production of compact and affordable vehicles the Commission has defined a new vehicle subcategory that encompasses electric cars produced in the EU with a maximum length of approximately 4.2 metres. The Commission has also proposed a recommendation to Member States to introduce several incentives. These include purchase bonuses and scrappage schemes, favourable parking conditions (such as reserved spaces, free or preferential parking in urban areas), exemptions or reductions on tolls, reduced-rate charging, preferential access to lanes or low-traffic zones. Clearly, all this amounts to more and more perverted regulation.
In fact, there was no good reason to introduce the ban. The most efficient, market-based and equitable regulation to lower CO2 emissions is the carbon tax. The carbon “price” should be equal to the social cost of carbon, that is the damage done at the margin by emitting more carbon dioxide into the atmosphere.
The literature on the social cost of carbon is large and estimates vary. According to a recent meta-analysis, the social cost of carbon is on the rise (Figure 1). It has been estimated that the average value amounts to 350 US$ per ton of carbon emitted, that is less than 100 US$ per ton of CO2 (one ton of carbon corresponds to approximately 3.67 tons of COâ‚‚).
Figure 1 – Average social cost of carbon by publication year (grey diamonds are as reported, black dots are corrected for inflation and year of emission)
Source: Tol, R. 2023. Social cost of carbon estimates have increased over time, Nature Climate Change, Nature, vol. 13(6), pages 532-536
In Europe the fuel excise tax is equivalent to a carbon tax of about 250 € per ton of CO2, but if one considers the entire tax burden on motor vehicles, each ton of CO2 emitted is taxed about 800 €. In other words, “polluters” are already paying more than they should, even when the other environmental externalities such as air pollution and noise are taken into account.
No further regulation should have been implemented. Instead, a new layer of regulation is on its way. Since 2027, a new Emissions Trading System will be operational. Fuel suppliers will be required to purchase allowances for the CO2 emissions associated with the products they supply. The cost will be passed on consumers effectively adding a carbon surcharge around €45 per ton of CO2.
To sum up, the EU continues to ignore that the efficient solution consists of making producers and consumers pay for the scarce environmental resources they use (hence, the carbon tax) and then let them react as they think appropriate. By contrast, Brussels picks a winner in advance and rigs the race.
Some predict further adjustments. This is not necessarily good news. Investments need a stable regulatory framework. Frequent changes of direction could be counterproductive, even if they led to less stringent regulation.
Photo by Michael Marais
