Despite the fact that "the technology is there to make a significant difference in a short period of time", said British MEP Chris Davies.
"Industry has stalled in reducing CO2 emissions".
Taking account of development and production cycles, MEPs abandoned an earlier proposal to introduce the cap from January 1, 2012.
Carmakers must meet these targets by technical means alone, i.e., without relying on other CO2 saving measures, such as biofuels, special tyres or improvements in air-conditioning systems.
From 2020, average car emissions must not exceed 95g CO2/km.
Long-term targets, urge MEPs, should be determined by no later than 2016: these targets "will possibly require further emissions reductions to 70g CO2/km or less by 2025".
Specialist manufacturers will have the right to exclude 500 vehicles annually from inclusion in the data used to determine average emissions.
Under a new process - Carbon Allowance Reductions System (CARS) - carmakers would have to pay penalties for exceeding the emissions limits. On the other hand, low emission cars, such as hydrogen, fuel cell and plug-in vehicles, would benefit from a credit system.
The Parliaments also voted to introduce requirements for the display of information relating to the fuel economy and CO2 emissions of new cars on vehicles and promotional literature, as well as in showrooms.
A minimum of 20% of advertising space should be set aside for this.
Europe’s carmakers have hit out at the Parliament saying its CO2 targets are too tight. ACEA, the makers’ representative body, said: “The manufacturers support the EU objective of 120g/km and will play their part…The EU should now agree on realistic carbon reduction targets for the car industry...The upcoming CO2 legislation is not likely to be adopted before 2009. In the meantime, the car industry will continue to introduce further CO2-reducing solutions."
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