Germany and France Soften 2035 Ban on New Gasoline Cars

Germany and France have reached a joint position that softens a key European climate law, with German Chancellor Friedrich Merz declaring the 2035 ban on new gasoline and diesel car sales a thing of the past. While the agreement between Berlin and Paris still requires approval from other EU member states and the European Parliament, the backing of the continent's two largest economies makes it unlikely to be overturned.

The original law mandated a 100% reduction in CO2 emissions for new vehicles sold in the EU by 2035, effectively allowing only electric cars. The European Commission had previously proposed a 90% reduction by the end of 2025, contingent on manufacturers offsetting the remaining 10% through means like low-carbon steel or renewable fuels. The new German-French proposal eliminates this offsetting requirement.

Furthermore, the joint document allows cars running on renewable fuels to be classified as "zero-emission." The benefit initially planned for small, inexpensive electric vehicles, which received a larger weighting in emissions calculations, will now apply to all electric cars regardless of size. These changes are expected to make it significantly easier for manufacturers to meet targets and reduce the risk of heavy fines.

In return for its agreement, France secured German support for stricter "Made in Europe" rules. These rules will tie subsidies, tax benefits, and public tenders to production within the EU, applying to all 27 member states with potential accession for the UK and Norway. This definition is narrower than the Commission's earlier proposal, which could have included dozens of trade partners. The UK government welcomed the move, given the deep integration of its automotive supply chains with the continent.

The automotive stock market reacted positively, with BMW, Mercedes, Volkswagen, Renault, and Stellantis all seeing gains on Friday. However, these companies have experienced a difficult year, with significant stock value declines and, in BMW's case, profit margins hitting a 25-year low. European manufacturers are also contending with competition from cheaper Chinese electric vehicles and weak consumer demand.

Environmental organizations strongly criticized the agreement, arguing it will slow the adoption of electric cars and reduce incentives for investment in battery technology and supply chains in Europe, ultimately harming the industry against Chinese competition. Conversely, the state of Lower Saxony, a major Volkswagen shareholder, praised the deal as a protection for jobs. The European Automobile Manufacturers' Association called the position a step in the right direction but noted the need for further flexibility.

For Israel, which imports all its vehicles, the outcome will influence the models and prices available in the coming decade. A European industry continuing to sell gasoline and hybrid cars for longer might spread its investment in electrification but will also face intense competition from Chinese imports.