Green progress or green gap: How does the automotive sector align with the EU’s sustainability targets?

Industry progress: Tackle tougher hurdles for greater gains

Despite these challenges, the future is beginning to take shape. Original equipment manufacturers (OEMs) are ramping up EV production, and new battery and fuel cell plants are under development. Simultaneously, companies are focusing on improving production efficiency and reducing environmental impacts, such as greenhouse gas emissions and air pollution.

Our research analyzes the current progress of European automotive companies on their sustainability journey. We assess how closely the sector is aligning with the EU’s long-term environmental objectives (figure 1), and global climate targets. Our focus is on the areas where the industry’s environmental impacts are most material. Starting in 2025, the Corporate Sustainability Reporting Directive (CSRD) mandates that companies adhere to the new European Sustainability Reporting Standards (ESRS). This will allow for a comprehensive assessment of their progress toward the Green Deal agenda.

The analysis reveals that the automotive industry’s sustainability efforts have led to tangible progress in two long-standing strategic areas: climate change mitigation and pollution reduction. The former requires reducing emissions across the entire value chain, aligning with the global commitment to limit warming to 1.5°C. The latter is crucial because road transport significantly contributes to local air pollution and is the largest source of microplastics. Vehicle manufacturers must continue working towards the EU’s long-term goal of reducing pollution to levels that no longer pose risks to human health or natural ecosystems.

In the latter part of the analysis, we explore a critical emerging issue that will significantly impact automotive products and operations in the near- to mid-term future: the adoption of circular economy practices. The EU’s regulatory framework on the automotive industry’s circularity requirements is already relatively advanced as compared to other sectors, with binding quotas on recycling and secondary input uses for the production of batteries and vehicles generally applying from the next decade onward.

Biodiversity is another emerging area with increasing external requirements. Regulations like the EU Deforestation Regulation⁶ clearly demonstrate this, specifically aiming to stop the global destruction of forests caused by the production of goods or materials consumed in the EU.

Key findings: Automotive industry’s progress across the EU’s key environmental pillars

1. Emission reductions: tackling more than the low-hanging fruit

Automotive companies are on track to reduce emissions from their own operations by 20% since 2021, despite an increase in vehicle production from 23.3 million to 24.8 million units.⁷ However, these reductions have primarily focused on the low-hanging fruit, such as switching to renewable electricity and optimizing energy efficiency. This is positive, but not enough. The next step requires tackling more complex challenges.

The global target is to limit warming to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C.⁹ The EU is committed to implementing international agreements, as demonstrated by its inclusion of the goal of climate neutrality in the EU climate law.¹⁰

The Science-Based Target initiative (SBTi) sets emissions reduction trajectories for companies that are aligned with the 1.5°C goal. According to SBTi, automotive companies must reduce their emissions by 4.2 percent annually to be aligned with the 2030 climate target.¹¹ This cross-sector pathway contrasts with sector-specific paths that address the unique role of specific industries in driving the decarbonization of the broader economy. For example, the energy sector is required to follow a steeper reduction pathway compared to cross-sector requirements.¹²

Automotive companies are on track with a 20% reduction in emissions from their own operations over the period of 2021 to 2023 (figure 2).

The observed emissions reductions in the automotive sector can be attributed to the industry’s effort to embrace and accelerate the energy transition. Many manufacturers have switched to procuring, and increasingly, self-producing, up to 100% renewable electricity. This shift has been enabled by the significant growth of green power generation across EU member states, where renewables now account for 41% of the Union’s electricity mix.¹³ Additionally, energy efficiency improvements in production, such as optimizing compressed air systems, and buildings, like installing LED lighting, have contributed to these gains. The surge in energy prices beginning in late 2021¹⁴ further incentivized these investments by providing a compelling economic rationale.

The largest remaining source of emissions in the automotive industry is generally the use of natural gas for heating processes and buildings. Addressing this will require manufacturers to shift to alternative energy sources. For example, green hydrogen is emerging as a critical component of green steel production. However, phasing out natural gas remains challenging due to the limited availability of alternative fuels and market-ready substitute technologies.

2. Reducing holistic value chain emissions remains a challenge

While companies are on track to reduce emissions from their operations, the primary source of emissions remains the use phase of vehicles, followed by emissions from purchased goods and services. Progress here has been lagging. To make an impact, automakers must accelerate their electrification efforts and expand the use of renewable energy, sustainable inputs, and materials across the entire value chain.

While emissions across the entire automotive value chain (scopes 1, 2, and 3) declined by 3% from 2021 to 2023 (figure 3), this rate is too slow to align with the 1.5°C goal, which requires at least 4.2% annual reduction, according to the SBTi benchmark. On a positive note, emissions per vehicle dropped by 9% during the period, demonstrating that key industry players are introducing effective climate measures.

In 2023, global emissions from the EU’s major OEM value chains reached 1.5 billion tons, nearly half of the total annual emissions from all 27 EU member states combined.¹⁵ Carbon dioxide emissions from operating road vehicles accounted for the majority of these emissions, approximately 80% (figure 3). For example, a car produced by Renault Group in 2023 will emit on average 31 tons of CO₂ during its use phase over its lifetime.¹⁶

Due to the vast number of road vehicles, the EU’s road transport sector contributes around 20% of the Union’s total greenhouse gas emissions. Unlike other sectors such as energy, emissions from road transport have not declined significantly. Since 2005, the sector’s emissions only decreased by 4%.¹⁷ Without a swift reduction in emissions from the use phase of new vehicles, overall sector reductions are likely to stagnate, posing a major obstacle to meeting climate targets.

The primary strategy adopted by OEMs to reduce use phase emissions is the gradual electrification of their vehicle portfolio, alongside improvements in the energy and fuel efficiency of electrified models and internal combustion engine (ICE) vehicles. Another focus is promoting green electricity for vehicle charging, which maximizes the emission reduction potential of electric powertrains. For example, the use phase CO₂ emissions of the Mercedes-Benz EQE can be reduced to 0.2 tons over its lifetime if powered by renewable electricity. However, if the EU electricity mix—still reliant on coal and gas—is used, emissions rise to 13.8 tons.¹⁸

The second most significant source of OEM emissions is embedded emissions in the purchased goods and services from their supplier networks. OEMs have started revising their procurement processes by requiring suppliers to use green electricity or CO₂-reduced materials and services. This is becoming critical as traction batteries significantly raise the total energy demands for EV production compared to ICE vehicles.¹⁹

While use-phase emissions and purchased products and services emissions are the main contributors, other emission sources must be addressed with tailored solutions. These include emissions from waste, business travel, and logistics operations. For example, many companies are shifting to rail transport, using biofuels for road and maritime logistics, and sourcing locally to reduce transport routes and emissions.

Companies have increasingly integrated emissions reduction efforts into their overall strategies, aiming to reduce value chain emissions from the early stages of vehicle development. This phase is critical, as it largely determines the total carbon footprint of a vehicle. Carbon pricing is used as a steering instrument, often in combination with maximum emission thresholds, serving as critical vehicle design parameters. Internal carbon prices are typically based on CO₂ market prices, such as those set by the EU Emission Trading System (ETS), and are applied to the expected emission of one ton of CO₂ from a process or product.

In conclusion, the automotive value chain has seen only marginal reductions in overall greenhouse gas emissions. This shortfall indicates that the sector is not yet on track to meet the emissions reductions necessary to align with global climate targets. A bolder vision is required to electrify the fleet rapidly, supported by clear road maps for public infrastructure development and consumer incentives. Reducing scope 3 emissions further requires a more holistic approach that integrates all aspects of the automotive life cycle, from materials sourcing to end-of-life management and recycling.

3. Industry must uphold electric vehicle transition amid market hesitation

To accelerate EV adoption and ensure long-term returns, automakers must uphold ambitious strategies—expand EV portfolios, drive innovation, and build a robust EV support ecosystem. There is an urgency to do so as the EU’s large road vehicle fleet contributes to 20% of the Union’s total greenhouse gas emissions. Without a rapid reduction in use phase emissions from new vehicles, the road sector’s overall emissions reductions are likely to remain stagnant, posing a significant challenge to meeting climate targets.

The transition to EVs has been the primary focus for reducing road transport emissions. EVs are considered the most efficient and mature technology for replacing fossil fuels with renewable energy, leading to the necessary reductions in emissions in the road transport sector. Automakers are gradually shifting their portfolios from ICE vehicles to EVs, reflected in the growing shares of EVs in the new vehicle fleet across the EU. From 2019 to 2023, the market share of battery electric vehicles (BEVs) in the passenger car segment grew from 2% to 15% (figure 4).

However, this transition must speed up. The EU aims to electrify a fleet of 290 million vehicles by 2050, a challenge due to the long lifespan of vehicles with cars averaging 18 years.²⁰ To meet this long-term target, the European Commission has set an effective end date for sales of cars and vans with ICEs in 2035 as part of the EU CO₂ fleet standards.²¹ This deadline is essential to ensure that nearly all cars, vans, and buses on EU roads are zero-emissions by 2050, alongside all-new heavy-duty vehicles, as outlined in the EU’s Sustainable and Smart Mobility Strategy.²²

To achieve this, BEVs’ sales shares must grow on average by seven percentage points each year for the next decade to achieve a 100% market share by 2035. This would require more than double the current three percentage points growth on average per year observed from 2019 to 2023 (figure 4).

Moreover, the initial enthusiasm surrounding the large-scale market introduction of EVs has waned. In the first half of 2024, the market share of BEVs declined compared to the same period in 2023, with a significant drop occurring in the EU’s largest vehicle market, Germany (from 15.8% to 12.5%).²³ While manufacturers were under no regulatory pressure to further increase BEV market share to meet CO₂ fleet targets this year, the next phase of regulations for 2025 to 2029 is looming. With the current stagnation in the market adoption of BEVs, it will be challenging to meet this upcoming target.²⁴

Several factors contribute to this, including ongoing concerns about range and affordability.²⁵ While some car drivers, particularly those with access to home charging and solar power, remain satisfied with EVs, others find the current offerings do not provide sufficient convenience or cost savings. Addressing these issues, such as rapidly expanding charging infrastructure, will require a coordinated effort from stakeholders across the energy, infrastructure, automotive, and public sectors.

Strategies pursued by the automotive industry include advancing battery technology, extending EV product portfolios, and improving vehicle design to mitigate concerns about range and long-term costs, such as eventual battery replacement. Of crucial importance is reducing vehicle purchase prices and achieving price parity between ICE vehicles and EVs. For instance, Renault Group’s Ampere division aims to reduce costs by 40% between the first and second generations of its C-segment EVs by 2027.²⁶

However, some OEMs are scaling back their electrification ambitions, delaying their timelines for achieving a 100% EV fleet.²⁷ Investment levels in EVs and related technologies also serve as indicators of the industry’s commitment to electrification. In 2023, OEMs invested 39 billion euros in low-carbon vehicles, demonstrating alignment with the EU Taxonomy. Yet, 72% of total capital expenditure (capex) remained nonaligned with the EU Taxonomy, with only a two percentage points decrease from 2022.

The current skepticism surrounding the speed of the EV market uptake reinforces the “chicken-or-the-egg” dilemma. If European OEMs doubt the market’s potential, they may hesitate to implement necessary measures and investments, delaying vehicle cost reduction and the availability of new models. This, in turn, dampens consumers’ demand for EVs, further stalling the transition to EVs.

4. Air pollution from vehicles has improved but remains the EU’s most significant environmental health threat

The EU aims to eliminate harmful pollution by 2050, with the automotive industry playing a critical role in reducing emissions not just from vehicle exhaust but also from tires and brakes, which contribute significantly to air pollution and microplastic contamination. Despite substantial improvements in vehicle emissions since 1990, nonexhaust particles now pose a growing challenge.

By 2050, the EU aims to reduce air, water, and soil pollution to levels no longer harmful to human health and natural ecosystems.²⁸ For the automotive industry, critical areas include reducing pollution from their production sites and the vehicles they sell. Road transport remains a significant source of air pollution, contributing 36% of nitrogen oxides (NOx) and 8% of particulate matter with a diameter of 2.5 μm or less (PM2.5)²⁹ in 2022, with higher levels in urban areas. Notably, two-thirds of particle emissions come from nonexhaust emissions, such as tire abrasion.

Air pollution from vehicles has improved substantially since 1990 due to vehicle technology advancements, stricter emission limits, and testing procedures. By 2022, NOx emissions fell by 69% and PM2.5 by 50%,³⁰ putting the sector on track to achieve the 2030 targets under the EU’s National Emission Reduction Commitments Directive.³¹

However, air pollution remains the EU’s most significant environmental health threat, causing over 300,000 premature deaths annually.³² Three-quarters of these deaths are linked to PM2.5 and the rest to NO₂ and ozone. The EU is strengthening air pollution standards, such as the Ambient Air Quality Directive, aiming for stricter future limits closer to the World Health Organization (WHO) guidelines.

Looking ahead, the automotive industry is focused on advancing technologies to reduce pollutants, such as selective catalytic reduction systems and diesel particulate filters. The introduction of the Euro 7 emissions standard, set to take effect on Nov. 29, 2026, will further tighten limits on exhaust emissions and test procedures, especially for trucks and buses.³³ Euro 7 will also, for the first time, set limits on brake particle emissions and tire abrasion, addressing their significant role in producing ultrafine particles and microplastic pollution.

Vehicle-generated microplastics, particularly tire and road wear particles (TRWP), are a growing concern, as they are the largest source of microplastic pollution in the EU,³⁴ releasing an estimated 500,000 tons of particles annually.³⁵ Most TRWP remains near roadways, eventually being washed away by rainfall,³⁶ into the soil and aquatic environments, where they pose significant risks to ecosystems and human health. Addressing this issue requires a coordinated approach, as TRWP generation depends on factors such as driving behavior (for example, speed), vehicle weight, tire technologies, and road maintenance practices.

Tire manufacturers are innovating to reduce TRWP emissions and are committed to continuing this work. Abrasion levels differ significantly between tire brands, with one study showing a range from 59 grams to 171 grams per 1,000 kilometers across over 100 tires tested.³⁷

In conclusion, while the automotive industry continues to refine ICE technologies to meet future emissions standards, the EU’s vision of pollution-free air foreshadows increasingly stringent thresholds. The regulation of brake and tire emissions, introduced for the first time, marks a new challenge in reducing particulate matter and microplastics but will be essential to achieving the EU’s long-term environmental and public health goals.

5. Creating circularity unlocks dual sustainability benefits

The industry can achieve significant environmental and economic gains by adopting circular practices, such as using recycled materials and enhancing product longevity. With global material consumption soaring and the use of secondary materials declining, the EU’s Green Deal emphasizes the need to shift from a linear economy to a circular one. However, the complexity and effort involved present significant challenges for the industry.

Global consumption of materials and resources continues to rise rapidly. Over the past six years, the global economy has consumed almost as much material as it did throughout the entire 20th century. Alarmingly, the use of secondary materials fell to 7.2% in 2023, down from 9.1% in 2018.³⁸ This underscores the urgent need to align with the EU’s Green Deal vision, which aims to decouple economic growth from resource consumption by shifting from a linear “take-make-waste” model to a circular economy.

A circular approach offers benefits for the environment and the automotive industry. The focus is on reducing environmental impacts through enhancing product durability, reuse, refurbishing, and recycling. The EU’s green transition hinges on access to critical raw materials, particularly for the automotive industry, which faces significant supply risks for materials like lithium for batteries or platinum for fuel cells.³⁹ While this poses a risk to the broader EU green transition, it also affects individual companies. In the long term, businesses can reap benefits from adopting a circular economy model. A recent Deloitte survey of 128 supply chain managers from German companies revealed that two-thirds believe that circular approaches can mitigate supply risks for critical raw materials and create new business opportunities.⁴⁰

The industry has made progress in improving production efficiency, particularly in reducing energy and water usage based on data from company reports. However, the challenge that remains is decoupling the industry’s production from its reliance on virgin materials—one of the most challenging tasks the industry faces. The building blocks of a circular automotive value chain include:

• Closing the material loop
• Transitioning to renewable and secondary raw materials (those obtained from recycling)
• Extending the lifespan of vehicles and their components and improving production resource efficiency

Reducing virgin material use is complex. Vehicles demand substantial material input, with the average car registered in the EU in 2023 requiring 1.5 tons, a figure that continues to rise.⁴¹ The automotive sector accounts for 10% of the EU’s plastic consumption⁴² and nearly 20% of steel demand.⁴³ In addition, vehicles use materials derived from 60 different raw materials.⁴⁴ As electrification increases, the demand for critical raw materials will grow substantially.

OEMs have begun incorporating recycled and renewable materials, but reporting remains inconsistent. Mercedes-Benz, for example, reports that 184 components of the EQE model, weighing 78.3 kilograms, are made from recycled plastics and renewable raw materials.⁴⁵ Renault Group, meanwhile, used 25 kilograms of recycled plastics per vehicle in 2023 (representing 12% of total plastics used) and noted a high share of recycled steel in production.⁴⁶

Steel recycling is more advanced than plastics recycling, with 40% of steel produced through reprocessing scrap and 85% of end-of-life steel being recovered for recycling in the EU.⁴⁷ Manufacturers like Volvo Group report that about 50% of their wrought iron comes from recycled metal and 97% of cast iron is sourced from recycled iron.⁴⁸

The push for increased plastic recycling is a critical regulatory focus. The revision of the End-of-Life Vehicles Regulation sets circularity requirements for vehicle design and management, including targets for minimum plastic content by 2030. It anticipates similar quotas for other materials, such as aluminum and rare materials used in electric drivetrains.

Electrified vehicles add another layer of complexity to circular strategy, particularly in developing circular value chains for batteries. Companies like Mercedes-Benz and Volkswagen are piloting battery recycling facilities,⁴⁹ while Volvo Cars is working on a project that repurposes batteries from their plug-in hybrid vehicles as stationary energy storage, acting as “fast balancers” for the electricity grid.⁵⁰

A critical regulatory framework for the industry is the EU Battery Regulation,⁵¹ which sets minimum recycling rates, performance standards for recycling technologies, and quotas for secondary inputs. The regulation mandates ambitious recycled content targets for critical raw materials used in EV batteries, starting in 2031. By 2036, batteries must contain minimum shares of recycled contents for cobalt (26%), lithium (12%), and nickel (12%). To support these targets, the regulation introduces transparency requirements such as the Battery Passport—required from 2027—which will provide detailed information on battery composition to assist repairers, remanufacturers, second-life operators, and recyclers.

While quotas place pressure on the automotive players, they offer a clear indication of future demand for specific circular economic activities important to develop a viable recycling industry. However, significant uncertainties remain, challenging the switch to circular production. For example, the market faces uncertainties regarding the pace of EV adoption and the resulting availability of batteries for recycling, diffusion of cell chemistries, and availability of recycling technologies. Furthermore, the balance for policymakers is to create viable recycling market conditions that do not curtail incentives for reusing batteries for other applications. Meanwhile, automotive companies face the complex task of creating new ecosystems to manage circular battery value chains.

6. Stepping up efforts to protect ecosystems and biodiversity

Biodiversity protection is gaining importance in the sector as companies face pressure to minimize their ecological footprint. International commitments, new regulations, and upcoming sustainability reporting standards will require greater transparency and accountability, pushing the industry to incorporate nature protection into their strategies and contribute to global conservation efforts.

Biodiversity is essential to human well-being, a healthy planet, and long-term economic prosperity. Nature provides food, medicine, energy, clean air and water, protection from natural disasters, and recreation and cultural value. However, biodiversity loss has reached unprecedented levels in human history, posing significant risks to ecosystems and economies.⁵²

Like climate, biodiversity protection has become a central issue at the international policy level. In 2020, the global community reached a landmark agreement with the Kunming-Montreal Global Biodiversity Framework (GBF).⁵³ This commits 200 signatories to protect 30% of the world’s land and oceans by 2030. Companies are expected to play a crucial role in achieving these targets. The Science-based Targets for Nature (SBTN) initiative,⁵⁴ building on the success of the Science-Based Targets initiative (SBTi) for climate, is developing a framework to help companies—including those in the automotive sector—identify critical supply chain risks, define biodiversity targets, and incorporate nature protection in their business strategies.

The automotive value chain has long impacted biodiversity through pollution affecting soil, plants, air, and water. Extensive road infrastructure and production plants seal off soil and natural habitats. The rise of EVs has intensified demand for minerals, such as cobalt, which are often found in areas of rich biodiversity. Extracting these minerals can significantly disrupt local ecosystems, posing additional challenges to biodiversity conservation.⁵⁵

In response, companies are improving transparency around environmental risks within their operations and across supply chains. The EU Deforestation Regulation⁵⁶ and the EU Corporate Sustainability Due Diligence Directive (CSDDD)⁵⁷ aim to prevent biodiversity loss by holding companies accountable for their environmental impacts. The recently adopted EU Nature Renaturation Regulation⁵⁸ further promotes government action to restore natural ecosystems.

Additionally, companies will soon need to report their impact on ecosystems and biodiversity through the European Sustainability Reporting Standards (ESRS). This reporting will encompass direct operations but also their broader value chains.⁵⁹ Increased transparency and accountability are expected to drive greater consideration of how businesses manage their impact on biodiversity.⁶⁰

Accelerating action: Bold vision will propel the industry to the next level

The path forward for the EU automotive industry requires more than just incremental improvements; it demands a bold and visionary approach that redefines the industry’s role in society and the economy.

The EU Green Deal has set a long-term vision to decouple economic growth from greenhouse gas emissions, reduce primary resource use, and avoid significant negative risks to human health and the environment. This encompasses all environmental areas—climate, air, land, water, and biodiversity. While the automotive sector has made notable progress in addressing some of these issues, there are still critical areas where efforts have only just begun, and the big wins have yet to be realized.

Overall, large EU automotive OEMs and suppliers have successfully decoupled emissions from their own operations and related energy use, largely thanks to the adoption of energy efficiency measures and the power sector’s energy transition. Increasingly, companies are producing their own renewable electricity. The next challenge is to replace natural gas with renewable fuel alternatives, such as biofuels and green hydrogen, while further electrifying production processes.

However, the most significant source of emissions—those generated during the use phase of vehicles—remains a major hurdle. This can be addressed by shifting from ICE vehicles to EVs. Yet, sales of fully electric vehicles, the industry’s most impactful tool for reducing emissions, are stalling in the EU. Some European OEMs have recently scaled back their EV sales targets, expressing doubts about the market’s ability to transition swiftly to EVs. However, the OEMs’ uniform radical commitment to BEVs would provide confidence to customers and investors in this technology and contribute to a faster decline in emissions. The development of EV charging infrastructure, meanwhile, requires coordinated efforts from the automotive, energy, buildings, and public sectors.

New mobility concepts could further reduce emissions while opening up new revenue streams for OEMs.⁶¹ Younger consumers, in particular, are increasingly open to alternatives like “vehicle-on-demand” and “mobility-on-demand” services, such as vehicle subscription models signaling an evolving market.⁶² By shifting from traditional vehicle manufacturing to becoming holistic mobility providers, OEMs could offer a range of services throughout a vehicle’s life cycle, maximizing its value and use.⁶³ Extending the ownership period could reduce the carbon footprint of vehicles, especially if powered by 100% renewable electricity, could optimize the fleet size and utilization⁶⁴ and bring further benefits with the emergence of a circular value chain and opportunities regarding recycling, reuse, and repair. Seizing these benefits will be vital, as adopting circular practices will demand significant effort from the industry, not only due to the required change of existing business models.

Efforts to control local air pollution will intensify as the EU works toward its goal of a nontoxic environment by 2050. The widespread adoption of EVs would contribute by eliminating exhaust emissions, but nonexhaust emissions of pollution from tires and brakes must also be addressed regardless of powertrain type. The forthcoming Euro 7 standard, which sets the first-ever limits on emissions from tires and breaks, is a step forward.

In terms of biodiversity, the global Kunming-Montreal Global Biodiversity Framework, adopted in 2020, aims to halt and reverse biodiversity loss. Concrete measures at the EU level, such as mandatory reporting under the Corporate Sustainability Reporting Directive (CSRD) and global supply chain due diligence, such as the EU Deforestation Regulation, are being implemented to guide companies’ actions in protecting ecosystems.

Finally, the EU’s largest automotive companies are not just passive recipients of quotas, targets, and regulations; they actively shape these frameworks. With this influence comes a significant responsibility to lead by example and drive the industry toward a more sustainable future. If the automotive industry can rise to these challenges, it will drive the broader societal shift towards a sustainable future.