European electric car sales are set to recover this year with automakers bringing more than 160 models to market, but executives have warned profits could fall further due to regulatory costs and discounts.

Electric vehicle sales growth stalled in Europe's major markets last year as governments cut subsidies and companies delayed the launch of new EV models until 2025 in anticipation of tougher new emissions rules on the continent.

Independent automotive analyst Matthias Schmidt predicts electric car sales in Western Europe, including the UK, will surge by 40% to 2.7 million units in 2025 as carmakers scramble to meet CO2 targets . He expects the share of electric vehicles to break through the 15-17% range this year and reach 22% of the entire market. "We certainly expect the market to rebound in 2025 due to the regulatory push from the EU," he said.

But the return of EV sales growth will also come with the high cost of meeting tougher emissions rules and more discounts as consumers seek affordable cars. With underlying demand remaining weak, executives said the overall outlook for the European auto industry remains challenging amid intensifying competition from China and rising U.S. protectionism.

"As far as the competition between electric and hybrid cars is concerned, we are well prepared," said Fabrice Cambolive, head of the Renault brand. 13% of the brand's sales are electric. car. "The signals we're seeing are very volatile in terms of demand. Our customers are very hesitant."

European auto industry body Acea estimates that fines, carbon credit costs or selling electric cars at a loss could cost carmakers 16 billion euros if fines are not postponed in 2025. Its preliminary data shows that registrations of new electric cars in Europe fell by almost 6% last year.

Shares in electric car maker Polestar fell 11% on Thursday after the company revealed it would take another two years to turn positive free cash flow and scaled back its market expansion plans.

Schmidt expects more than 160 electric cars to be launched in Europe this year, including budget models priced under 25,000 euros such as the Renault 5 and Citroën ë-C3. The lineup also includes 20 new models, such as BMW's Neue Klasse electric sport utility vehicle and Mercedes-Benz's new electric CLA, while an updated Model Y that Tesla unveiled in China on Friday is also heading to Europe .

Mercedes-Benz CEO Ola Källenius said that starting in 2025, the company will launch a record number of products in the company's history and that the company will "launch a range of products, the majority of which will be Pure electric products”.

But he warned that "natural demand" from consumers was unlikely to increase to levels by 2025 that would allow the industry to sell battery-powered cars at healthy profit margins.

Starting this year, the European Union will require carmakers to reduce carbon emissions by increasing the proportion of electric vehicle sales. Carmakers and analysts have been closely watching Britain, which last year launched an electric car quota scheme requiring 80% of car sales to be zero-emission vehicles by the end of the decade.

Performance in the UK's first year of electric vehicle targets provides an early indication of how regulatory pressure is impacting sales and profits.

Registrations of new electric cars jumped 21% last year to a record 382,000, with the UK narrowly overtaking Germany for the first time to become Europe's largest electric car market.

However, carmakers are losing billions of pounds by discounting electric cars to attract customers unwilling to give up their petrol cars. Despite the price cuts, companies still account for a large share of electric car sales, with only one in 10 private buyers opting for an electric model.

Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, warned: "When manufacturers have very limited resources, the funds available to stimulate demand will come under significant pressure."

Analysts predict weak profits in Europe will weigh on automakers' global results. UBS expects the European automotive group's EBIT to fall 7% from 2024.

UBS analyst Patrick Hummel said that while companies have strong interest in selling more electric vehicles this year, "the question is how much additional discounts will automakers offer to sell more electric vehicles" ".

In addition to discounts and promotions, some manufacturers will face the additional cost of buying carbon credits from the likes of Tesla and Chinese rivals at the forefront of the electric transition to meet new EU regulations.

This month, Stellantis, Ford, Toyota, Mazda and Subaru announced plans to "pool" carbon emissions with Tesla, allowing them to buy emissions credits, while Mercedes-Benz wants to partner with Geely's Volvo and Polestar.

Hummel estimates that the various measures taken to achieve the target, including discounts and carbon credits, will have an impact on industry-wide profits of up to €4 billion.

While the European auto industry has been calling on Brussels to consider making regulations more flexible, it also wants governments to help revive consumer demand for electric vehicles by reinstating incentives.

After the sudden cancellation of purchase subsidies at the end of 2023, registrations of new electric vehicles in Germany dropped by 27% last year. France saw a year-on-year decline of 3%, with a 21% decline in December alone.

Some governments have begun to express concerns about the targets, and the UK is considering how to more easily meet its mandatory electric car sales targets. France has suggested that carmakers should be exempted from hefty fines if they fail to meet EU emissions rules.

But it's unclear where the political debate will be resolved.

In France, a popular leasing scheme for less affluent households to buy electric cars ended in February 2024, with 50,000 requests in two months, more than double the total expected in a year.

Paris last month cut subsidies for electric car purchases from a maximum of 7,000 euros to 4,000 euros, but further support for electric vehicles or penalties for polluting vehicles remains unclear as the French government has yet to adopt a 2025 budget.

In Germany, uncertainty over subsidies has affected electric car sales.

Renault engineering chief Gilles Le Borgne said the German government removed the incentives "immediately". He added that above all, carmakers "need stability in public policy around electric vehicles" and that "it usually takes 1,000 or 2,000 euros (of support) to change things in some way".