A climate policy cul-de-sac

Renewable electricity is a precious commodity

If we are to limit global warming to a manageable level, governments all around the world must rapidly eliminate carbon emissions from fossil fuels. This means abandoning coal, petroleum and natural gas in favour of renewable energy. In the transport sector, wind and solar power will become by far the most important sources of energy. The transition to renewables must occur quickly and across the globe if the dangerous effects of climate change are to be limited. If this transition is to occur quickly, renewable electricity will be a precious commodity for the foreseeable future. Renewable electricity must therefore be used as efficiently as possible in order to replace the largest possible volume of fossil fuels.

An emphasis should be placed on the direct use of electricity whenever possible. This is because a great deal of energy is lost when electricity is converted to hydrogen or synthetic fuels. Furthermore, electric motors are much more efficient than internal combustion engines.

For instance, hydrogen-powered electric vehicles consume two-and-a-half times more electricity than battery-electric cars over the same distance. Internal combustion vehicles that run on electricity-based synthetic petrol, diesel or methane gas consume around five times as much.

Electricity-based fuels that contain carbon and are combustible should only be used when no alternatives are available. For instance, experts project that even as late as 2050 airplanes will still rely on kerosene for long-haul flights; no technological advances are in the offing that will allow aircraft to carry batteries or hydrogen in sufficient quantities at safe levels. If the aviation sector is to achieve carbon neutrality by 2050, it will have to rely on kerosene produced from renewable electricity and CO₂.directly captured from the air.

Passenger cars are one area where the direct use of electricity is relatively straightforward. Battery-electric vehicles in Europe’s current power mix already produce significantly less CO₂ than fossil fuel vehicles, even after factoring in emissions from battery and electricity production (though the extent of the savings depends on the underlying assumptions of the calculation). The higher the share of clean energy and the more efficient battery production becomes, the smaller the carbon footprint of electric vehicles will be. That is why a variety of political instruments exist to promote electric vehicles. One of these instruments is the EU’s system of carbon emission limits for new cars.

EU fleet emission limits promote electric cars and more efficient combustion engines

The aim of the EU policy is to reduce the amount of carbon released into the atmosphere by putting a cap on the average yearly CO₂ emissions per kilometre and vehicle in manufacturers’ car fleets. If manufacturers exceed their limit values, they must pay an excess emissions premium. The limits are designed to incentivize the development and sale of low-carbon vehicles.

The carbon emission limits follow a tank-to-wheel approach. This means that they seek to limit the emissions of CO₂ released from tailpipe exhaust fumes. In meeting these targets, car manufacturers can pursue two strategies: they can increase the share of electric vehicles, which emit no CO₂ during operation, or they can make their internal combustion vehicles more efficient. Both strategies produce welcome results.

Car manufacturers want carbon offsets for e-fuels

But manufacturers have now started to argue for a more flexible policy from the EU. Specifically, they want to use CO₂ reductions in fuel production to offset CO₂ emissions in their cars. Their reasoning goes like this: manufacturers that provide enough electricity-based fuels (petrol, diesel, methane gas) to cover a car’s average lifetime mileage should be able to offset the total carbon emissions produced by a conventional fossil-fuel powered car. Their aim is to ease conformance with EU carbon emission limits by providing an alternative to electrification and greater fuel economy for reducing tailpipe emissions.

Electricity-based hydrocarbon fuels, also known as e-fuels, can indeed reduce car emissions using conventional vehicle technology. Though internal combustion vehicles powered by e-fuels emit the same amount of CO₂ per kilometre at the tailpipe as cars powered by fossil fuel-based petrol or diesel, they still enjoy a relative climate advantage. The reason is that conventional fuels are produced from fossil hydrocarbons; when they combust, carbon previously trapped in the earth’s crust enters the atmosphere and contributes to global warming. E-fuels, by contrast, are low carbon or carbon neutral across their entire life cycle from well to wheel provided that they meet several conditions. First, the electricity used to produce them must come entirely from renewable sources. If e-fuels are produced using electricity from, say, Germany’s current mix (where the renewable energy share is 38%), their climate advantage relative to fossil fuels vanishes. Indeed, when one factors in the additional amounts of fossil energy that gets lost in the conversion of electricity into chemical energy, the use of fossil fuels is significantly better for the climate. Second, it is crucial that the renewable electricity for e-fuels comes from additional wind and solar installations – otherwise the amount of renewable electricity available to other sectors would decrease – and the manufacture of those installations must keep CO₂ emissions to a minimum, allowing them only when absolutely necessary, as in the production steel for wind turbines. Finally, the carbon used for the production of e-fuels must be captured from the atmosphere.

Carbon offsets for e-fuels would weaken efficiency incentives

How would the use of e-fuels as a carbon offset for passenger car emissions affect the properties of manufacturers’ vehicles assuming that fleet emission limits remain at their current level? Obviously, manufacturers will try to sell more e-fuel-powered vehicles. This in turn will suppress sales of fossil-fuel powered vehicles or electric cars, or both. Let us consider these two consequences more closely:

1. For every e-fuel-powered car sold instead of a conventional vehicle, the size of the fleet subject to emission limits would decrease by one. This would allow the manufacturer’s fossil fuel vehicles to emit somewhat more CO₂. The result would be less pressure on car manufacturers to make combustion vehicles more efficient. Emissions at the tailpipe (tank-to-wheel) would increase because renewable e-fuels release CO₂ when they combust. Even when one considers CO₂ savings from battery and fuel production, fleet emissions would increase slightly because the production of e-fuels still releases emissions. Finally, the e-fuel production would significantly increase electricity demand in car transport.
2. For every e-fuel vehicle sold instead of an electric car, the number of electric vehicles on the road would decline by one. Conventional combustion vehicles would be subject to the same CO₂ emission limits, and the tailpipe emissions of the car fleet would increase just as in the first scenario. But overall CO₂ emissions from battery and fuel production and car use on the road would decrease. The reason is that electric cars in the current system are supposed to be balanced with the CO₂ emissions of the power mix. In contrast to what manufacturers propose for e-fuel cars, car manufacturers do not post carbon offsets for electric cars on account of the additional renewable electricity used. In Europe’s power mix, electric cars in the overall view would thus lead to the release of more CO₂ than combustion vehicles running on e-fuels from renewable electricity and carbon captured from the air. Electricity demand in the automotive sector would increase significantly, though somewhat less than when e-fuel-powered vehicles supplant conventional vehicles.

In light of these consequences, the use of renewable e-fuels to offset fleet emission limits would probably reduce the carbon emissions produced by cars in the short term. At the same time, the increased demand for electricity in car transport would reduce the speed of electrification and of efficiency improvements to combustion cars. But both of these are essential if the economy is to use the limited quantities of renewable electricity as efficiently as possible while replacing the largest possible volume of fossil fuels. The short-term benefits of e-fuels would, therefore, undercut medium- and long-term outcomes. And it would weaken the efficiency incentives of fleet emission limits needed for a quick and comprehensive clean-energy transition in the transport sector.

Manufacturers respond by arguing that electric cars have a similar effect. The more electric vehicles are sold, the more carbon new internal combustion vehicles may release per kilometre. This assertion is true, but it overlooks two key points. First, the offset effect for electric vehicles is already factored in to car fleet emission limits: the current targets for tailpipe emissions reflect the high market penetration levels projected for electric vehicles. A policy that permits carbon offsets for e-fuels without more ambitious reductions to tailpipe emissions – as manufacturers propose – would weaken the effect of fleet emission limits.

The promotion of e-fuels needs to start upstream

At the regulatory level, additional factors speak against the use of e-fuels to offset carbon emissions from passenger cars. As previously noted, the carbon emission limits for car fleets target vehicle manufacturers. They are meant to incentivize the development of more efficient internal combustion vehicles and the sale of more electric vehicles. The decarbonisation of liquid and gaseous fuels is governed by the EU’s Renewable Energy Directive and Fuel Quality Directive. These directives target fuel manufacturers. The Renewable Energy Directive and the European Emissions Trading System are aimed at decarbonising electricity, which includes the electricity used by electric vehicles. The emissions of electric vehicles are, therefore, by no means unregulated. Moreover, other instruments such as energy taxes and/or motor vehicle taxes are needed to induce climate-friendly behaviour in drivers of both electric and combustion engine vehicles. In short, the goal of reducing CO2 emissions in the transport sector should be achieved through a variety of complementary tools targeting a variety of addressees.

Electrification, increased fuel efficiency for internal combustion vehicles and reduced CO₂ emissions in upstream fuel production must all be pushed in parallel, with specific measures tailored to each objective. Accordingly, instruments for the promotion of e-fuels and CO₂ emission limits should be kept separate.

This is not to say that existing climate policies for passenger cars suffice. Additional regulation is needed for CO₂ emissions in car battery production and for energy use in electric vehicles. And we need strategies to identify the most efficient policies and write them into law. What is especially important now is the rigorous pursuit of fuel reductions in internal combustion vehicles and greater shares of electric vehicles on the road. The use of e-fuels as a carbon offset would dim the prospects of swiftly reaching these goals.