The new Clean Industrial Deal and potential impacts for the EU automotive sector

Last week, the European Commission released the Clean Industrial Deal (CID), a wide-ranging strategy that builds on regulation adopted under the Green Deal and outlines several flagship actions for 2025 and 2026. It’s designed to both preserve the European Union’s industrial competitiveness and decarbonize its industry, and together with the upcoming Industrial Action Plan for an Automotive Sector, it’s expected to have significant implications for the EU automotive industry.

The CID pledges to mobilize €150 billion for clean technology research and innovation, manufacturing, and supply chains, €100 billion of this in direct funding  through a new Industrial Decarbonisation Bank that will source some of the money from revenues of the EU Emissions Trading System (ETS) and the Innovation Fund. The other €50 billion will go toward increasing the risk-bearing capacity of the InvestEU Programme and attracting private investments.

The Commission will also revise its State Aid Framework by June 2025, with the aim of reducing barriers to Member States providing capital support for renewable energy and clean technology projects and removing barriers to private investments. Under the CID, the European Union will also adopt measures to increase circularity and create lead markets for clean technology (Figure 1). Let’s review how some key measures could decarbonize battery and vehicle production and expand renewable electricity generation.

Figure 1. Key measures outlined in the Clean Industrial Deal

Battery production

About €600 million of CID funding will go to research and innovation for batteries. This is welcome. The electric vehicle (EV) battery manufacturing industry in Europe is still at an early stage of development and while ICCT research showed that announced battery production capacities in Europe could meet the projected domestic demand, not all announcements have a high probability of realization. Indeed, some first movers in the industry have been struggling financially due to the scale of investments required and the lack of certainty about the development of the market. The existing carbon dioxide standards for light- and heavy-duty vehicles provide regulatory certainty that a market will develop, and now the CID announces a set of measures around the fast implementation of the Critical Raw Materials Act (CRM Act) that will further support growth in manufacturing of EV batteries in Europe.

Circularity is the core of the CID strategy to reduce dependency on imported critical raw materials. The Commission is planning to adopt a Circular Economy Act by the end of 2026 that will simplify the rules on black mass circulation and potentially introduce export limits on battery waste. Those measures would promote development of a European recycling industry and help achieve the targets for the domestic share of recycling in the CRM Act and the recycled content targets of the Battery Regulation. The European Union will also create mechanisms to aggregate demand, facilitate joint purchasing, and match raw materials with industrial projects.

This CID’s mobilization of public funds will be accompanied by an acceleration of the designation of Important Projects of Common European Interest (IPCEIs) and strategic projects under the CRM Act, both of which will be eligible for those funds. Because such measures often involve lengthy and sometimes non-transparent selection processes that do not guarantee output, the European Union could also consider production-linked incentives that equally reward output for all companies bringing sustainable technology to the market. ICCT research showed that, in the United States, the Advanced Manufacturing Production Tax Credits in the Inflation Reduction Act are an effective way of using public funding to increase adoption of EVs, especially if the tax credit value is passed to consumers to reduce vehicle purchase price.

To boost demand for European clean vehicle technology, the Commission will also introduce sustainability and resilience criteria in an Industrial Decarbonisation Accelerator Act expected in Q4 2025. These could include criteria for sustainable battery cells, low-carbon steel, and renewable electricity content for both public and private procurements and would lay the groundwork for the proposal on Greening Corporate Fleets expected in Q1 2026. Along with sustainability criteria, associated due diligence and reporting requirements as in the Battery Regulation are crucial to ensure the social and environmental benefits of mining and battery supply chains.  The CID also mentions guidelines for Member States on social leasing programs for zero-emission vehicles that will be published in the Industrial Action Plan for an Automotive Sector on March 5. Such programs will be funded through the Social Climate Fund, using revenue from the EU ETS, and will support the adoption of EVs by low-income individuals.

Recent ICCT research showed the job creation potential of battery production, and the CID announces the creation of a Quality Jobs Roadmap and a European Fair Transition Observatory. However, the language only lays the groundwork for a future strategy that will support the re-skilling and up-skilling of the EU workforce – the so-called Union of Skills.

Vehicle production

The €100 billion in funding from the Industrial Decarbonization Bank includes a first €1 billion in 2025, and €600 million under a “flagship” call under Horizon Europe in the 2026–2027 work program. These are also welcome, and they may boost the decarbonization of EU steel.

The automotive sector is the second-largest consumer of steel in the European Union (17% of total demand), and steel-related emissions are a large share of vehicle production emissions (27% for combustion engine cars, and 15% for battery electric cars). While technological pathways to drastically reduce steel production emissions are available—green hydrogen-based production is the most important one—scaling is challenging due to the large investment needed and the high costs of green hydrogen. As highlighted in recent ICCT research, creating lead markets for green steel is an important part of decarbonization, and the CID may address this by announcing non-price criteria for public and private procurement that may include low-carbon steel.

Vehicle steel decarbonization will also depend on the availability and price of green hydrogen for green iron production. In Q1 2025, the Commission plans to adopt a delegated act to clarify rules for low-carbon hydrogen production and de-risking investments. The revision of the State Aid rules and other policies such as designing contracts for difference to support clean technologies can help reduce the cost and increase the availability of green hydrogen and green steel.

Additionally, the Industrial Decarbonisation Accelerator Act will develop a voluntary carbon-intensity label on industrial products starting with steel in 2025; it builds on EU ETS data and the Carbon Border Adjustment Mechanism methodology, but uncertainties remain about its alignment with existing Member State initiatives such as the German Low Emission Steel Standard (LESS) and ongoing EU policy initiatives such as the Ecodesign for Sustainable Products Regulation.

Electricity production

As part of the CID, the Commission published the Action Plan for Affordable Energy, which aims to reduce EU dependency on fossil fuel imports; currently, imports are about 26% of the energy mix. The plan aims to enable annual installation of 100 GW of renewable electricity capacity by 2030 through a more interconnected and resilient energy system, making investments in renewable energy projects, and fiscal measures to lower to price of clean electricity. As ICCT research has shown, the expansion of affordable renewable electricity is crucial for realizing the full potential of consumer savings and the climate benefits of EVs. Cheaper electricity will also drive down the total cost of ownership of EVs and likely boost light-duty and heavy-duty EV sales, especially for fleet owners.

The CID is evidence of policy continuity in the European Union, and it builds from Green Deal policies including the Net Zero Industry Act and CRM Act. With much still to be determined in the upcoming specific regulations, ICCT research and analysis will focus on informing these.