In order to avoid significant penalties for emissions, automotive companies must make difficult decisions.

• The possibility of significant penalties for not meeting the EU's emission standards has ignited a contentious discussion among car manufacturers, especially since the industry is not currently on course to attain the new objective.
• In 2025, the European Union's limit on carbon dioxide emissions from new vehicle sales will be 93.6 grams per kilometer (g/km), which is a 15% reduction from the 2021 baseline of 110.1 g/km.
• Fines of several billion euros may be imposed if the agreed-upon limits, established in 2019 as part of the 27-nation bloc's goal to achieve climate neutrality by 2050, are exceeded.

The European Union's stricter emissions targets present a challenge for car manufacturers, but they have several methods to reduce their impact, although all options will likely entail a substantial expense, according to analysts.

The possibility of significant penalties for not adhering to the bloc's new emissions standards has ignited a passionate discussion among car manufacturers, especially considering that the industry is not on course to meet this year's objective.

In 2024, major original equipment manufacturers (OEMs) faced a difficult time due to a perfect storm of challenges on the road to full electrification, and it is predicted that 2025 will not be much better.

In 2025, the European Union's limit on carbon dioxide emissions from new vehicle sales will be 93.6 grams per kilometer (g/km), which is a 15% reduction from the 2021 baseline of 110.1 g/km.

Fines of several billion euros can be imposed if the agreed limits, established in 2019 as part of the 27-nation bloc's goal to achieve climate neutrality by 2050, are exceeded.

CNBC reported that Rico Luman, senior sector economist for transport and logistics at Dutch bank ING, stated via video call that "the question is surrounded by darkness for everyone."

Luman stated that the issue is significant because VW is still grappling with the transition and restructuring, as evidenced by the ongoing challenges in the past few weeks and months while adapting to the new world.

He stated that there is a long-term interest in staying competitive, but in the short run, it is not attractive because it causes harm.

What action can be taken?

The EU's new CO2 target is not being met by most of Europe's top car manufacturers, according to ING's Luman, which means action must be taken to avoid financial penalties.

Instead of pushing battery electric vehicle (EV) sales by rolling out more affordable models and lowering prices, reducing conventional internal combustion engine (ICE) production in favor of plug-in EVs and hybrid models, or "pooling" with competitors that already comply with the target, car firms could simply pay the fines.

Car manufacturers collaborate to be viewed as a single entity when assessing their CO2 emissions performance against a target.

Currently, Volvo from Sweden and a few Chinese companies are believed to be the only large automakers that have met the target, alongside the US-based EV manufacturer.

This year, automakers in Europe will face a "huge emissions drop" due to the stricter EU regulations, according to Stephen Reitman, head of European automotive Research at Bernstein.

"Tesla and Volvo, which is owned by Geely, are the only companies that can help mitigate the greenhouse credit shortage by pooling their excess credits," Reitman said on CNBC's "Squawk Box Europe" on Thursday.

In Europe, Tesla is selling cars that generate greenhouse credits, which are mostly coming from China. This transfer of money from European automakers to Chinese entities or businesses may not be ideal for the EU and national governments.

A heated debate

European OEMs have expressed concern about tightening carbon regulations in Europe, particularly as electric vehicle demand declines.

The European Automobile Manufacturers' Association (ACEA) and German Chancellor Olaf Scholz have both urged the European Commission to take immediate action on the new rules, with the former requesting "urgent relief measures" and the latter suggesting that fines should not be imposed on car companies that do not comply with the new standards.

Any attempt to weaken or postpone the EU's stricter carbon regulations would be equivalent to abolishing them entirely.

Julia Poliscanova, senior director for vehicles and e-mobility supply chains at Transport & Environment, stated in an interview with CNBC last month that the rules are intended to aid carmakers in remaining competitive, even if it means sacrificing some of their higher profit margins in the short term.

Behind on electrification, Poliscanova questioned how delaying the target would help the industry transition.

Ursula von der Leyen, President of the European Commission, announced in late 2019 that she would organize a strategic discussion on the future of Europe's automotive sector.

The dialogue, set to launch this month, aims to quickly address the sector's urgent requirements.