As European automakers brace for a possible trade war waged by President Trump, they are working to ward off another threat on their home turf: the prospect of paying hundreds of millions of dollars to Tesla and Chinese competitors muscling in on their core markets.
Under stricter European Union regulations taking effect this year, automakers selling cars in Europe face hefty penalties if their vehicle production fails to meet tough targets for reducing carbon emissions. With demand for electric cars in Europe slumping and manufacturers squeezed by competition from China, automakers, politicians and industry groups are lobbying for relief.
After an industry summit in Brussels Thursday, Ursula Von Der Leyen, the president of the European Commission, the European Union’s executive branch, acknowledged the challenges that the auto industry faced and pledged that regulators were “acting swiftly” to address them.
Under the rules, carmakers can meet their targets by increasing the number of zero-emissions cars they produce or reducing their output of vehicles with combustion engines.
There is another option: They can buy emissions credits by “pooling” with companies that make only electric cars and have an abundance of credits. In a twist of fate, that has the European carmakers turning to some of their biggest rivals, including Tesla and Geely of China, which owns Volvo Cars and has a controlling stake in the electric vehicle maker Polestar.
The strategy of buying emissions credits is not new, but it has recently set off alarms in France and Germany, home to Europe’s biggest automakers, because it comes when demand for electric cars is softening, leading to threats of factory closures and the loss of thousands of jobs. Adding to the concerns in Europe is Elon Musk, the chief executive of Tesla, who has criticized E.U. tariffs on electric vehicles made in China and has been accused of interfering in politics in Britain and Germany.
“A rigid stance that would result in billions transferred to Chinese manufacturers, some of whom have conquered their European market share through unfair trade practices, or to Tesla, whose C.E.O. Elon Musk is openly attacking European regulations and values, would be a political error,” France’s minister for European affairs, Benjamin Haddad, wrote in an open letter published in French newspapers this week.
The E.U. measures also require at least a quarter of all new cars produced this year to be electric. Most of Europe’s big carmakers including Mercedes-Benz, Volkswagen and Stellantis are nowhere near hitting their targets. They produce more electric vehicles than ever before, but they also continue to crank out gas-fueled cars and trucks to meet customer demand.
When Europe first started tightening emissions rules in 2021, Stellantis, formed from the merger of PSA Group and Fiat Chrysler, purchased around $2 billion in emission credits from Tesla from 2019 to 2021.
Still, that’s less than the potential penalties. Luca de Meo, chief executive of Renault, estimated that paying fines could cost the industry more than $15 billion, and Volkswagen said in an analyst call earlier this week that they could face fines as high as $1.6 billion.
According to an analysis by the Swiss bank UBS, Tesla’s compensation could exceed $1 billion under the pooling scheme. Carbon credits have been a boon to Tesla’s cash flow: The company earned $1.79 billion from such sales in 2023.
Last year, Tesla’s income from selling emissions credits in Europe, the United States and elsewhere more than doubled to $2.8 billion, the company reported.
European companies say that a thicket of rules are putting them at a growing disadvantage with the United States, where Mr. Trump has vowed to curb business regulations and rolled back auto pollution rules in his first term. His threats to impose tariffs could further squeeze European automakers.
Europe’s auto industry, which employs 13 million people across the 27-member bloc, is particularly vulnerable. Registrations of new electric cars in Europe dropped 6 percent in 2024, compared with the previous year, many of them from Chinese manufacturers, who recorded a 45 percent increase in E.V. sales in Europe. Their share of the market is only expected to increase.
European auto executives are arguing that the projections made when Brussels approved the ambitious carbon-cutting project, known as the Green Deal, in 2020, it did not price in disruptions like supply chain interruptions caused by pandemic restrictions and the energy crisis provoked by Russia’s invasion of Ukraine.
“The European Green Deal must be subject to a reality check and a realignment — to make it less rigid, more flexible and to turn the decarbonization of the automotive industry into a green and profitable business model,” Ola Källenius, the head of Mercedes-Benz and president of the European Automobile Manufacturers Association, wrote in an open letter to European leaders.
Regulators insist that Europe stay the course to cut emissions by 55 percent by 2030, compared with 1990 levels. By 2035, production of new gas vehicles would be banned in Europe.