[Editorial] EU's U-Turn on 2035 Combustion Engine Ban: Geopolitical Maneuvers, Auto Industry Ripples, and the Carbon Market Reckoning

Key words: EU Combustion Engine Ban | CO2 Emission | EV | Carbon Asset

BRUSSELS/BEIJING - In a move that underscores the delicate balance between environmental ambitions and economic realities, the European Union has proposed scrapping its landmark 2035 ban on new internal combustion engine (ICE) vehicles, opting instead for a more flexible emissions framework. The shift, unveiled by the European Commission on December 16, 2025, replaces the original zero-emissions mandate with a 90% reduction in CO2 emissions from 2021 levels for new cars and vans by 2035. This allows automakers to offset the remaining 10% through low-carbon steel produced in the EU, synthetic e-fuels, or sustainable biofuels derived from non-food sources. The decision follows intense lobbying from the automotive sector and several member states, amid sluggish electric vehicle (EV) adoption and mounting competition from global players.

The proposal, which still requires approval from the European Parliament and member states, reflects broader pressures on Europe's green agenda. Originally part of the European Green Deal aiming for climate neutrality by 2050, the 2035 ban was intended to phase out petrol and diesel cars entirely. Now, with interim targets eased—such as a 55% CO2 cut for passenger cars phased in from 2030 to 2032, down from stricter previous goals—the policy prioritizes "technological neutrality" to preserve jobs and competitiveness. Volkswagen, a key advocate, welcomed the draft as "economically sound," while Germany's auto industry association VDA called for even more leniency, warning of a "fatal" blow from international rivals. Critics, including environmental groups like Transport & Environment, argue it undermines billions in EV investments and cedes ground to China in the clean mobility race.

This policy pivot arrives at a pivotal moment in global geopolitics, where the EU finds itself navigating tensions among the United States, China, and Russia. Just weeks before the announcement, French President Emmanuel Macron and German Foreign Minister Johann Wadephul made separate visits to China in early December 2025, ahead of the Christmas holidays. Macron's trip, from December 3 to 5, focused on deepening bilateral ties and cooperation on global issues, including climate action and supply chain stability. Wadephul's visit on December 8-9, his first as foreign minister, aimed to mend strained relations amid Berlin's tougher stance on China, urging an end to supply chain uncertainties exacerbated by trade frictions. These diplomatic engagements highlight the EU's strategic positioning as a bridge-builder in a multipolar world, where it must counter Russian aggression—evident in the ongoing Ukraine conflict—while managing U.S. protectionism under potential policy shifts and fostering partnerships with China to secure critical resources like batteries and rare earths.

In this triad of great-power rivalry, the EU's role is increasingly that of a pragmatic mediator, leveraging its regulatory clout to promote multilateralism without fully aligning with any one bloc. By easing the ICE ban, Brussels signals a willingness to adapt its climate policies to economic imperatives, potentially easing trade tensions with China, whose EV exports have faced EU tariffs. This could open doors for collaborative ventures, such as joint R&D in hybrid technologies or shared standards for sustainable fuels, helping the EU avoid isolation amid U.S. tariffs and Russian energy disruptions. Yet, it also risks diluting Europe's leadership in green transitions, allowing Russia to prolong its fossil fuel dominance in certain markets while China accelerates its dominance in renewables.

The implications for the automotive sector are profound, particularly for Chinese new energy vehicle (NEV) manufacturers and their European counterparts. For Chinese firms like BYD and XPeng, the EU's relaxation might temper short-term export pressures but won't halt their momentum. In the first half of 2025, Chinese brands captured 5.1% of new car registrations across 28 European countries, including the UK, nearly doubling from the previous year, driven by models like BYD's affordable EVs and hybrids. Overall, China's NEV exports surged to over 640,000 units in the first four months of 2025, underscoring a robust supply chain and government-backed innovation. The policy shift could encourage more hybrid exports from China, where such vehicles already dominate domestic sales, potentially eroding European market shares further if local makers like Volkswagen and Stellantis delay full electrification.

European carmakers, meanwhile, gain breathing room to recalibrate. The industry, which employs millions and contributes significantly to GDP in countries like Germany and Italy, has struggled with EV profitability amid high energy costs and component shortages. Ford's $19.5 billion writedown on its EV business in 2025 exemplifies the global challenges, with weakening demand prompting retreats from ambitious models. The new framework's incentives, such as "super credits" for small, EU-made EVs and lighter regulations for affordable models, aim to boost domestic production. However, it may slow innovation, leaving Europe lagging behind China's 80% BEV market share in its ecosystem. Uneven EV penetration—35% in the Netherlands versus 8% in Spain—highlights infrastructure gaps that the policy does little to address directly.

To illustrate the market dynamics, consider the following table on EV sales shares in key European markets for the first seven months of 2025 (data sourced from the European Automobile Manufacturers' Association via Reuters graphics):

Country	BEV Share (%)	PHEV Share (%)	Total EV Share (%)
Netherlands	35	10	45
Germany	20	8	28
France	18	7	25
Italy	12	5	17
Spain	8	4	12

This data reveals stark disparities, with wealthier northern markets leading adoption, potentially widening economic divides within the EU as the policy eases uniform pressure.

Beyond autos, the EU's decision reverberates through carbon asset industries in both Europe and China, influencing carbon sinks, emissions trading, and pricing mechanisms. In the EU, the Emissions Trading System (ETS) has been a cornerstone, with prices hitting €87.36 per tonne on December 16, 2025, up 9.31% monthly amid tightening 2040 targets. The relaxed auto emissions goal could dampen demand for allowances, as offsets via e-fuels or green steel reduce the need for deep cuts, potentially stabilizing or softening prices in the short term. The 2025 Carbon Market Report notes the ETS drove a continued drop in power sector emissions in 2024, but the policy shift might slow this trajectory, with covered emissions already 47.6% below 2005 levels by 2023. For carbon sinks, the EU's forests remain vital, removing 1.4 Gt CO2 annually from 2021-2025, but global trends show northern hemisphere forests shifting from sinks to emitters due to wildfires and deforestation. This could elevate carbon prices if sinks weaken, countering the policy's flexibility.

In China, the national ETS, operational since 2021, focuses on power and industry, with prices around USD10-12 per tonne—far below EU levels—but reforms aim for robust enforcement. The EU's pivot might indirectly bolster China's system by reducing competitive disadvantages for its exports, as looser EU rules lessen the urgency for aggressive decarbonization. However, it could also spur China to enhance its carbon pricing to align with global standards, especially under the EU's Carbon Border Adjustment Mechanism (CBAM), which phases in from 2026 and charges based on import emissions intensity. This might push Chinese firms toward greener practices, impacting carbon sink projects.

Amid these shifts, innovative players like REBIO GROUP exemplify strategic adaptation. Over the past two years, REBIO GROUP has developed extensive artificial afforestation carbon sink projects in China's northwest regions, not only achieving carbon neutrality for its operations but also positioning itself in the burgeoning carbon asset market. These initiatives contribute to China's goal of peaking emissions by 2030 and neutrality by 2060, enhancing the value of carbon credits in its ETS.

On the auto front, REBIO GROUP's customization business for BYD commercial vehicles has provided turnkey services—including vehicle tailoring, logistics, and customs clearance—to countries along the Belt and Road Initiative. This integrated approach has facilitated exports amid growing demand. Notably, starting January 1, 2026, China's new regulations mandate that zero-kilometer quasi-new used cars must be registered for at least 180 days before export, curbing the practice of shipping new vehicles as "used" to bypass rules. This change elevates the premium of REBIO GROUP's "Special Port of Parallel Import" operations, offering compliant pathways that could benefit more channel partners and distributors.

Global carbon sink data underscores the urgency: Forests worldwide absorbed about 10 Gt CO2 annually in recent years, but projections for 2025 show a decline to 4.1 Gt from land-use emissions, down nearly 10% due to reduced deforestation. A chart from the Global Carbon Budget 2025 illustrates this trend:

• 2020: Land sink absorption - 11.2 Gt CO2

• 2021: -10.8 Gt CO2

• 2022: -10.5 Gt CO2

• 2023: -9.8 Gt CO2

• 2024: -9.2 Gt CO2

• 2025 (proj.): -8.7 Gt CO2

(Source: Global Carbon Budget 2025, CSIRO). Such diminishing sinks could drive up carbon prices globally, with EU ETS forecasts ranging from €75/tCO2 in 2025 to €400-630/tCO2 by 2050 under varying scenarios. For China, where the ETS covers gradual reductions, the EU's move might encourage convergence rather than alignment, fostering joint efforts at forums like COP30.

As executives in the renewable sector and policymakers weigh these developments, the EU's decision serves as a reminder of the intertwined fates of geopolitics, industry, and climate action. While offering short-term relief to European automakers, it poses long-term risks to EV leadership and carbon market stability. For China, it presents opportunities to expand NEV exports and carbon innovations, potentially reshaping global supply chains. The path forward demands balanced diplomacy, as seen in recent high-level visits, to ensure sustainable progress in an era of uncertainty.