Photo/Illutration A Toyota Group factory in Inabe, Mie Prefecture (Takashi Narabe)

Japanese automakers welcomed a last-minute deal that will exempt cars running on e-fuels from the European Union’s landmark law to end sales of CO2-emitting new vehicles in 2035.

The exemption “will certainly help Japan,” said a senior official of a Japanese car manufacturer.

A complete shift to electric vehicles would be unrealistic given the unstable supply of rare earth metals needed to make batteries for the vehicles as well as the risk posed to national economic security, the official added.

Germany managed to include the exemption in the deal approved by EU countries in an 11th-hour attempt on March 28.

Germany argued that the exemption was needed to protect jobs in the industry that produces combustion-engine cars, including hybrid vehicles.

Italy joined Germany in making the case for cars running on synthesized fuels.

E-fuels are considered carbon neutral because they are made from captured CO2 and green hydrogen to offset the CO2 released from fuel-combustion engines.

Porsche AG, Robert Bosch GmbH and Shell are among companies researching and developing e-fuels.

Traditional technologies can be applied to produce engines that use e-fuels, which can then be supplied through existing gas stations.

Toyota Motor Corp. officials said the exemption marks a significant step for the survival of combustion-engine cars.

The company has set a target of selling 3.5 million EVs in 2030.

However, the EU’s decisive policy shift toward EVs has been a great concern to Toyota, which offers a wider range of cars that include hybrid and plug-in hybrid vehicles, along with fuel-cell vehicles.

There is a growing global competition for rare earth metals that are essential for EV batteries. Manufacturers in a number of industries are heavily dependent on China for the elements.

One major challenge for e-fuels is the high production cost. They are produced at 700 yen ($5.30) per liter, a few times higher than that of gasoline, according to the economy ministry.

Technology to capture CO2 from the atmosphere and low-cost production of hydrogen are also vital to producing e-fuels for public use.

A Brussels-based nongovernmental organization called Transport & Environment warns that e-fuel vehicles could also become a loophole for the fossil fuel industry if drivers run the vehicles using cheaper gasoline.

However, the global shift toward EVs seems irreversible, with most European manufacturers concentrating their resources on battery cars.

Seiji Sugiura, a senior analyst at Tokai Tokyo Research Institute Co., said he had expected the exemption made in the deal.

“Although the latest development helps Japanese automakers, they still have to work hard to make cheaper EVs anyway because the EU’s push for EVs is unlikely to change,” Sugiura said.

A senior official of Honda Motor Co. emphasized that the company doesn’t need to review its shift toward EVs. Honda has pledged to make all of its new cars EVs or fuel cell vehicles in 2040.

(This article was written by Takashi Narabe, Kyohei Kondo and Shinya Wake.)