Germany and the EU announced a deal on Saturday to end petrol car sales in 2035, while stopping short of a total ban on combustion engines.
Under the deal, cars that run on synthetic e-fuels will still be permitted in future.
Berlin sought the concession after complaining that the EU’s initial proposal left little room for alternatives to electric cars.
“We are securing opportunities for Europe, by keeping important options open for climate-neutral and affordable mobility,” said German Transport Minister Volker Wissing.
The objections from Europe’s biggest economy and car maker had threatened to derail a milestone EU climate law.
Requiring new cars to be zero-emission from 2035 is a central plank of the EU’s plan to become the “first climate-neutral continent” by mid-century.
But defining what counts as zero-emission is still a matter of dispute in Brussels. Italy, Poland and Bulgaria had also raised concerns about the EU’s plans.
Announcing a deal on Saturday, Mr Wissing said a new "e-fuels only" category would be added to the EU law.
EU climate chief Frans Timmermans said a new regulation would be adopted as soon as possible.
“We have found an agreement with Germany on the future use of e-fuels in cars,” he said.
Britain plans to end the sale of petrol and diesel cars by 2030. The US has not set a hard date.
An initial EU plan called for e-fuels to be kept in review once the bloc agreed to require zero-emission car sales from 2035.
But Germany’s veto meant a vote was postponed this month after Mr Wissing sought stronger assurances that e-fuels would play a part.
The dispute exposed familiar cracks in Chancellor Olaf Scholz’s three-party coalition in Germany.
Mr Wissing’s liberal party had insisted on keeping e-fuels alive even as Green party colleagues and climate activists described them as expensive and inefficient.
E-fuels are liquids similar to petrol that can burn in combustion engines, but are produced from green sources.
They are not yet made in large quantities and sceptics such as Mr Timmermans says they will never be as cheap or clean as electric cars.
There was no consensus among German car makers. The head of Porsche said e-fuels had “a useful complementary role”, while Volkswagen’s chief operating officer said the debate was “unnecessary noise”.
Volkswagen and Mercedes-Benz have both made it clear that they expect to switch their focus to electric cars.
But Mr Scholz took up the liberal party’s position as bickering in the coalition becomes increasingly public.
Green Party leader and German Vice Chancellor Robert Habeck suggested this week that his plan to ban oil and gas boilers had been deliberately leaked to weaken him.
