Cerulogy Study – Truckin’on
The European Union is in the process of finalising its first ever CO2 emission standard for heavy duty vehicles, with a proposal from the European Commission targeting 30% reduction in CO2 emissions for Class 4, 5, 9 and 10 heavy duty vehicles by 2030. Currently, the proposed standard allows for compliance through efficiency improvement, through the manufacture of zero and low emission vehicles and through the use of fuels that release less physical carbon dioxide on combustion than diesel fuels, but the standard provides no option for compliance through reducing the upstream emissions associated with fuel production. CO2 reductions from alternative fuels are currently incentivised through the Renewable Energy Directive, while emissions reductions at the refinery are incentivised through the ETS.
While EU policy separates vehicle efficiency from the lifecycle carbon intensity of the fuels used, in practice the decarbonisation of the heavy duty sector (and similarly of marine and aviation sectors) will require a combination of lower emission vehicles and lower carbon intensity fuels. Indeed, many of the technologies required for the decarbonisation of heavy duty fuels are expected to play a major role in long term decarbonisation of the EU economy, but have struggled to date to reach successful commercial application – these include biomass to liquids advanced biofuel technologies, power to liquids technologies to produce electrofuels, and the implementation of carbon capture and sequestration and green hydrogen production at the refinery. It is therefore natural to ask whether there is an opportunity to leverage the heavy duty standard to accelerate development of these key technologies, in a way that would support achievement of EU climate objectives beyond the heavy duty sector.
A major difference that exists between existing fuel decarbonisation policy and the proposed heavy duty vehicle CO2 emissions standard is that the heavy duty standard is a regulation applying directly and consistently to heavy duty manufacturers across the whole EU, and containing clearly defined costs of non-compliance (through a set excess-emissions charge). Manufacturers will need to set compliance strategies well in advance of 2030 given the lead time to develop and engineer more efficient trucks, and given these compliance strategies and the known cost of non-compliance manufacturers should have a clear idea of the value to them of carbon reductions that could be used within the standard. This contrasts with the alternative fuels sector, where the value signal from policy is much more market dependent, and very challenging to predict in advance, while the value signal from the ETS for refinery emissions reduction projects is simply too weak to support novel but expensive projects. If some fuel decarbonisation credits were allowable for compliance in the heavy duty standard, this relative value certainty could be used to accelerate the development of high capital expenditure projects that have proved difficult to attract investment to under existing alternative fuels policy. Adding a fuel decarbonisation credit option in the heavy duty standard would also add flexibility to compliance strategies for heavy duty vehicle manufacturers, and allow the cost of the programme to be reduced should deploying emissions reduction technologies on heavy duty vehicles prove to be more expensive than anticipated by the impact assessment.
This report provides an outline for a programme to allow specific types of fuel decarbonisation project to generate credits for compliance by manufacturers with the heavy duty standard, insofar as they deliver carbon savings in the production of heavy-duty fuels (primarily diesel, potentially also diesel alternatives such as DME). It envisions a system whereby manufacturers would form binding ‘credit-offtake agreements’ with project operators, committing the projects to supply the carbon savings they generate to the vehicle manufacturer (retiring them from use against targets in other climate obligations such as RED or ETS) and committing the manufacturer to offtake all credits generated up to an agreed level. These contracts would be undertaken on the basis of either an upfront payment or investment from the manufacturer to the project operator, or on the basis of a credit purchase agreement with guaranteed credit prices set for the duration of the contract. The proposal envisions a limited window for project registration. This registration window would be open until a set date, for instance the end of 2025, and a period of up to 15 years during which credits would be eligible for transfer into the heavy duty obligation – but these and other details should be consulted on with the relevant stakeholders prior to introducing a mechanism of this sort in legislation.
The fuel decarbonisation projects considered for inclusion in this mechanism would currently contribute to meeting targets in the RED or ETS, and be incentivised on that basis. It is important for the credibility and integrity of any new scheme that these projects may not be double counted and rewarded under multiple EU policies. It is therefore recommended that any lower carbon fuels used to generate credits towards heavy duty CO2 standard compliance should be excluded from counting towards existing targets under the RED or ETS.
On the face of it, it would seem difficult to translate carbon reductions from fuels measured in tonnes of CO2 into compliance with a CO2 emissions standard set in tonnes of CO2 per gram-kilometre per vehicle, but it is shown that the structure of the proposed heavy duty standard is such that the conversion is mathematically simple. All that is required to allow the calculation of the compliance contribution of tonne of carbon savings is to set an assumption on the operational lifetime of the heavy duty vehicles sold. The other necessary assumptions to convert between absolute carbon savings and CO2 emissions reduction (on vehicle loads and activity) are already defined in the proposed standard. Given an assumed average vehicle operational lifetime of 15 years, it is shown that the excess emissions charge of 6,800 €/tkm per vehicle is equivalent to a carbon price of 282 €/tCO2e.
Four families of fuel decarbonisation projects are identified as examples that have a clear role in long term EU decarbonisation strategy and that could benefit from additional policy support to accelerate commercial deployment: biomass to liquids (BtL) projects; electrofuels projects; green hydrogen use at the refinery; CCS at the refinery. For all of these project types, a clear long-term (15 year) carbon price signal of the order of 200 €/tCO2e has the potential to aid deployment. In particular, low-end estimated costs from the literature for biomass to diesel projects using pyrolysis and upgrading or gasification and Fischer-Tropsch synthesis, for green hydrogen, and for CCS, are consistent with commercial deployment given a carbon price signal around 200 €/tCO2e. Electrofuels currently have higher expected costs, but projects able to lock-in low cost electricity supplies may also be viable at this level of incentive. Examples are presented building on the cost curves prepared by the Joint Research Centre for the heavy duty standard impact assessment showing cases in which it could be beneficial for a manufacturer to invest in fuel decarbonisation credits to meet the final few percentage points of their CO2 emissions standards for given heavy duty vehicle classes. In one example, the value of the CO2 emissions reductions transferred into the heavy duty standard would support the development of a Fischer Tropsch biofuel facility. In a second example, the value would support introduction of CCS for the power plant of a medium sized refinery.
The regulatory framework outlined herein is conceived as a strictly limited alternative incentive to accelerate the development of key fuel decarbonisation technologies that have struggled to attract investment to date due to uncertainty in the value proposition from other policies. These technologies have a clear role in the EU strategic long-term vision for a decarbonised economy (European Commission, 2018a), with the potential to make major contributions to building blocks 2, 3, 4, 6 and 7 of the strategy. A well designed mechanism need not compete with existing regulatory support, but rather could complement them by adding clarity to the value signal for early technology adopters, paving the way for broader technology roll out subsequently.