How is alternative fuels crediting in the EU vehicle standards a bad idea? Let me count the ways…

We all know that transportation is hard to decarbonize. In the road sector, a drastic transformation is needed, shifting away from today’s internal combustion engines (ICE) to the electric powertrain technologies of the future. Most scenarios in the European Commission’s Climate Impact Assessment, published in September 2020, project deep penetration of zero-emission vehicles in 2050. Some might wonder why this kind of transformation towards electric vehicles is even necessary, since alternative fuels are already available for use in ICEs and could decarbonize the sector without any need for a shift in technologies. While it is true that alternative fuels are available in principle, our research has shown that the potential for alternative fuels to decarbonize the road sector is very limited: low-carbon biofuels made from wastes and residues are in low supply while e-fuels are expensive and inefficient.

Nevertheless, a recent Frontier Economics report proposes a scheme in which the purchase of alternative fuels could be counted towards compliance with European tailpipe CO2 standards for passenger cars, light-commercial vehicles, and heavy-duty vehicles. This includes a formula to calculate CO2 reductions, which could be applied to either a fleet or individual vehicles, that is based on several factors, such as the CO2 savings of the fuel and the assumed lifetime of the vehicle. However, as the German think-tank Agora Verkehrswende has already pointed out, allowing auto manufacturers to purchase fuels credits that count towards the CO2 standards would distract them from the innovation needed to achieve a rapid penetration of electric vehicles on the road. Such a scheme would allow auto manufacturers to shift responsibility for decarbonizing the transportation sector away from themselves and onto fuel producers.

The Frontier Economics proposal presents the idea of crediting fuels in the CO¬2 standards as supporting the nascent e-fuels industry. However, at present, waste-based biodiesel, which is already commercially mature, is the only type of alternative fuel that would make sense for automakers to buy. This is because it is the only fuel that is cheaper (at around 200 euros per tonne CO2 abatement) than the vehicle CO2 standards non-compliance penalty of 280-600 euros per tonne of CO2. Meanwhile, it would actually be cheaper for automakers to fail to meet the standards, and pay the penalty, than to buy credits to support advanced fuels like e-fuels, which would require around 1,200 euros per tonne CO2 abated in policy support to be produced at a significant volume.

Further, the Frontier Economics proposal does not cap the amount of waste-based biodiesel that could be used for the CO2 standards. The Renewable Energy Directive (RED II) caps the contribution of waste-based biodiesel to its renewable energy targets at 1.7% of transport energy. This cap exists for a reason. There is already evidence of fraud in the used cooking oil (UCO) market, with virgin vegetable oil being disguised as waste oil. Biodiesel Kampen has made headlines in the Netherlands after being accused of using fraudulent cooking oil. There have been other cases where virgin soy oil was claimed to be UCO, one involving American and Bosnian companies and the other a Norwegian company. Since Europe imports a large amount of UCO from around the world, it is unfortunately probable that additional, undiscovered UCO fraud cases exist. With Dieselgate behind them, would auto manufacturers really want to be involved in another scandal concerning fraudulent UCO?

The UCO cap in the RED II is not the only sustainability safeguard that is important when considering adding a fuels crediting system to the CO2 standards. The RED II also requires e-fuels to be produced from additional renewable electricity. Without a strong requirement such as this in the CO2 standards, it is likely that e-fuels would divert renewable electricity from other uses, and it could even be possible that e-fuels produced from coal electricity could be credited!

It is peculiar that the Frontier Economics report proposes that individual vehicles be labeled as “low-emission vehicles” if the manufacturer purchases enough fuels credits to cover the vehicle’s lifetime fuel consumption. This diverges from the way cars are normally treated under the CO2 standards, which apply to an auto manufacturer’s fleet of vehicles, not individual vehicles. Labeling individual vehicles would also allow manufacturers to qualify for special tax incentives and other financial support at the EU Member State level. The Frontier Economics report states that labeling vehicles as low-emission would increase the “willingness-to-pay of customers,” meaning that auto manufacturers could charge a higher price for ICE vehicles by labeling them as “low-emission.” In reality, these cars would be using mostly fossil fuels over their lifetimes!

If this Frontier Economics proposal successfully enters the European Commission’s vehicle CO2 standards proposals, it could be an administrative nightmare for Member States to implement. The Frontier Economics proposal does not allow the same alternative fuels counted towards the vehicle standards to also count towards the RED II, which is critically important. However, the RED II is a directive implemented by member states, not the European Commission, as is the case for the CO2 standards. Thus, tracking how fuels are counted towards either legislation will be left to 27 member states, each of which has its own system for tracking RED II compliance. Without a central administrative system to track the generation and use of all alternative fuels, it will be difficult to impossible to enforce this rule against double counting.

This administrative nightmare is worsened by the fact that the Frontier Economics report includes food- and feed-based biofuels, while claiming that the use of these fuels for the vehicle CO2 standards should not exceed the 7% cap in the RED II. The inclusion of the food-based cap here is important because food-and-feed based biofuels generally do not provide climate benefits compared to fossil fuels. But how are automakers going to know if the total amount of food-based biofuels used for both the vehicle CO2 standards and the RED II exceeds the 7% cap? Member states don’t report biofuel usage for the RED II until months after the compliance year has ended. It could also be a way to increase the total consumption of food-based biofuels in countries that have proposed to set a lower food-based cap for the RED II, like Germany and the Netherlands, back up to 7%. This outcome would simultaneously increase greenhouse gas emissions from the fuel mix while stalling the much-needed transition to electric vehicles.

Interestingly, it is mostly the oil industry and some vehicle parts suppliers that claim that low-carbon fuels are necessary to deliver urgent greenhouse gas reductions in today’s vehicle fleet. This argument is a distraction though from what is really needed—continued development of alternative, zero-emission powertrain technologies. In a practical sense, counting alternative fuels towards compliance with the CO2 vehicle standards doesn’t work, at least not without opening up massive regulatory loopholes. Fortunately, vehicle manufacturers themselves have understood this and have already adapted their product plans accordingly, ramping up the share of electric vehicles rapidly in the upcoming years.