After months of forceful lobbying from Germany, the ministers from the 28 EU member states agreed to reopen a deal sealed in June, but said they would work to secure it in weeks, not months.
German carmakers Daimler and BMW produce heavier vehicles which guzzle down more fuel than those from firms such as Italy’s's Fiat, meaning they would find it challenging to meet a proposed EU cap on carbon emissions of 95 grams per kilometer for all new cars from 2020, analysts say.
"It's not a fight over principles but how we bind the necessary clarity in climate protection with the required flexibility and competitiveness to protect the car industry in Europe," Germany's Environment Minister Peter Altmaier said.
"I am convinced we can find such a solution. We can find it in the next weeks," he said.
EU Climate Commissioner Connie Hedegaard told reporters she was disappointed that agreement on implementing a target first laid out five years ago had been blocked.
"It is not a terrific thing that we could not conclude on cars," she said.
She also said flexibility was limited and a German proposal to delay full implementation of the 95 gram target for four years to 2024 was not acceptable.
Environmental campaigners say Germany is abusing the EU's democratic process, throwing away the chance to make European cars more energy efficient and to reduce the bloc's dependency on oil imports.
British-based consultancy Cambridge Econometrics researched how much Europe would save on oil imports if the 95 g/km target was implemented across the EU fleet. It found the EU as a whole would save around 70 billion euros ($94.94 billion) per year, while Germanyrmany would save 9 billion euros in fuel bills.
"It's an unacceptable price, which will be paid by every European driver in higher fuel bills, by the planet that will warm quicker and potentially by Europe's auto sector that will be less competitive," Greg Archer, a program manager at campaign group Transport & Environment, said.
"The deal struck in June was a reasonable political compromise. Now we go back to the drawing board."
Although Germany managed to get the support of other EU ministers on Monday, many member states have voiced unease at the manner in which Berlin blocked the deal.
Sweden's Environment Minister Lena Ek said the risk was that further delays could hold back adoption of the rules until 2015 because of impending European Parliament elections next year and the appointment of new commissioners.
Germany would bear "a very heavy responsibility", she told reporters.
As well as seeking to protect its carmakers, Germany also wants to avoid the car emissions law complicating its decision on forming a new governing coalition.
The German Greens are strongly in favor of cutting CO2 to 95 grams per kilometer, but Chancellor Angela Merkel and her conservatives support the German carmakers.