France and Germany have struck a provisional deal to soften Europe’s 2035 emissions rules in exchange for stronger protection of European car production.
Although it still requires approval from other EU countries and the European Parliament, the compromise between the bloc’s two largest economies significantly increases its chances of becoming law.
But Toyota, whose European headquarters are in Brussels, is pushing back. The Japanese manufacturer welcomes more flexibility for hybrids but warns that excluding trusted trading partners such as Turkey and Japan could undermine the competitiveness Europe is trying to protect.
Germany gets its hybrids, France its protectionism
The agreement, reached on Thursday during the European summit in Brussels, could break months of deadlock over two major pieces of legislation: the EU’s automotive CO₂ targets and the Industrial Accelerator Act.
Germany secured further concessions on the 2035 emissions rules. The European Commission had already proposed replacing the effective ban on new combustion-engine cars with a requirement that manufacturers reduce their average CO₂ emissions by 90%.
However, the Commission wanted the remaining 10% compensated through credits linked to renewable fuels or European low-carbon steel. Under the Franco-German compromise, that compensation requirement disappears.
This would make it easier for manufacturers to continue selling combustion-engine cars and hybrids after 2035, although the fleet-wide reduction target remains demanding.
Another concession concerns so-called supercredits. Originally intended to encourage small, affordable electric cars, these incentives would be extended to EVs of all sizes, potentially benefiting German premium manufacturers.
A narrower definition of ‘Made in Europe’
In exchange, Berlin accepted France’s demand for stronger European preference in public subsidies and procurement. The proposed Industrial Accelerator Act aims to ensure that public money supports vehicles and components manufactured in Europe rather than simply benefiting manufacturers importing from abroad.
Germany had previously defended a broader “Made with Europe” approach, encompassing numerous international trading partners.
Under the compromise, eligibility would focus on the EU’s 27 member states, with limited exceptions for close partners such as Britain and Norway. Britain’s participation could depend on aligning with European trade-defense measures, including tariffs on Chinese electric vehicles.
Countries such as Turkey, Japan and South Korea could consequently find themselves excluded from certain European industrial incentives.
Toyota: ‘We are not guests in Europe’
Toyota’s response came on Friday morning, just hours after the agreement emerged. “Toyota is not a guest in Europe. We are a European manufacturer, and we want Europe’s automotive industry to succeed,” said Yoshihiro Nakata, President and CEO of Toyota Motor Europe.
Toyota supports a 90% CO₂ reduction target for 2035, greater recognition of renewable fuels and a more gradual transition for hybrids and commercial vehicles.
But it strongly opposes a narrowly defined European-preference system, advocating “Made with Europe” instead of “Made in Europe”. The company wants trusted free-trade and customs-union partners, particularly Turkey, Japan and Britain, to remain eligible for European incentives.
It proposes gradually increasing European content requirements to 70%, with substantive automotive localization rules taking effect no earlier than 2030. “Isolation makes us weaker,” warned Matt Harrison, Toyota Motor Europe’s Chief Corporate Officer.
The Turkish paradox
Toyota’s argument is more than a theoretical objection. The manufacturer produces the Yaris and Yaris Cross in France, the Corolla in Britain and the C-HR in Turkey. It also operates European factories that manufacture engines, transmissions, and other components.
Under the proposed rules, a British-built Corolla could potentially qualify for certain European incentives while a Turkish-built C-HR might not, despite both factories belonging to Toyota’s established European manufacturing network.
Toyota Motor Europe employs more than 26,000 people directly and has invested over €12 billion in Europe since 1990. The company’s Brussels headquarters also give this confrontation a particularly Belgian dimension.
A lifeline for hybrids, but whose hybrids?
The compromise exposes a contradiction in Europe’s industrial strategy. While France and Germany want to extend the commercial life of hybrids beyond 2035, the EU is simultaneously seeking stronger protection against rapidly expanding Chinese hybrid imports.
Volkswagen, BMW and Mercedes-Benz could benefit from greater regulatory flexibility, while Renault and Stellantis could gain from European-production incentives.
Chinese manufacturers such as BYD and Chery would face stronger pressure to localize production and sourcing of components within Europe.
Toyota finds itself in an unusual position: benefiting from the relaxation of emissions rules while potentially losing out under the new industrial-preference requirements.
For Belgium, where company cars dominate new registrations, future European-origin requirements could eventually influence eligibility for certain fleet incentives. However, existing company-car tax advantages would not automatically disappear for imported vehicles.
Belgian automotive manufacturing, including Volvo’s Ghent factory and local component suppliers, could benefit from stronger European-content requirements.
Protection or postponement?
The agreement still needs wider support from EU member states and the European Parliament. It is far from becoming law. Supporters argue that Europe’s car industry needs breathing space to preserve jobs, protect production, and finance its transition to electric vehicles.
Critics fear that weaker emissions rules and stronger protectionism could delay the investments needed to compete with Chinese manufacturers already advancing rapidly in electric vehicles.
Toyota’s intervention highlights the central dilemma: Europe wants to protect its automotive industry, but how narrowly should it define what constitutes European manufacturing?
The Franco-German bargain may help Europe’s carmakers survive the transition. Whether it makes them more competitive is another question.
