This is an extract from a recent report “Comparative Assessment of the EU and US Policy Frameworks to Promote Low-Carbon Fuels in Aviation and Shipping” prepared by UC Davis and CGEP.

In the EU, key policy tools include the integration of low-carbon fuels for aircraft and ships via the RefuelEU Aviation and FuelEU Maritime Regulations, as part of the Renewable Energy Directive, and the inclusion of aviation and maritime transportation in the Emission Trading Scheme (ETS). The 2023 ETS reform expanded its scope to cover 50% of voyages to/from EU ports. Aviation was included in the ETS in 2012 for flights within the European Economic Area (EEA). The Fit for 55 package phases out free permits for intra-EEA flights by 2026. From 2027, the ETS may extend to emissions from departing EEA flights if ICAO’s CORSIA is not strengthened by 2025. 

The 2012 ETS reform aimed to include all flights departing from or arriving at EEA airports but was limited to intra-EEA flights to allow ICAO time to create a global agreement. A similar debate occurred during the Fit for 55 negotiations, with the Parliament pushing for extra-EEA flight emissions to be included, akin to the 50% maritime coverage. Extending the aviation ETS beyond intra-EEA flights would function similarly to CBAM, applying a carbon price beyond Europe to prevent carbon leakage. The revised ETS increases funding for technological development and social protection. Around EUR 2 billion from ETS revenues may cover 20 million ‘SAF allowances’ for airlines from 2024 to 2030 (and possibly until 2034), helping manage early SAF deployment costs. These allowances apply only to intra-EEA flights and are linked to SAF mandates under the RefuelEU Aviation regulation. The European Commission will define the mechanisms for distribution.

The Innovation Fund is a major policy tool for advancing climate-related technologies, focusing on energy and industry. It is among the world’s largest programs for deploying net-zero and innovative technologies and targets the demonstration and commercialization of low-carbon technologies, including aviation and shipping fuels. Contributions from the Innovation Fund are not considered state aid. However, it only provides a partial solution compared to the total investment needed, with aviation alone requiring USD 40-50 billion annually, equivalent to the Fund’s entire 2020-2030 budget. Effective progress depends on mobilising significant private investments alongside the Fund. Recent legislative updates require progressive integration of low-carbon fuels in aviation and maritime transport through the RefuelEU Aviation and FuelEU Maritime regulations, complementing the Renewable Energy Directive and the Fit for 55 package.

RefuelEU Aviation mandates fuel suppliers at airports with over 800,000 passengers/year or 100,000 t/year to provide increasing shares of SAF, including biofuels, recycled carbon fuels, and synthetic aviation fuels. Aircraft operators must uplift at least 90% of their fuels at these airports to prevent leakage. SAF shares must rise from 2% in 2025 to 6% by 2030, and up to 70% by 2050. Synthetic aviation fuels must reach 1.2% by 2030, 2% by 2032, 5% by 2035, and 35% by 2050. A 10-year flexibility mechanism allows suppliers to adjust SAF shares across airports. The regulation also introduces a flight labelling program for carbon footprint and CO2 intensity.

FuelEU Maritime focuses on the GHG intensity of energy used on ships over 5,000 gross tonnes, which account for 90% of maritime emissions. It applies to half the energy used for extra-EU voyages and mandates onshore power supply for passenger and container ships in main EU ports. GHG intensity must decrease by 2% in 2025, 6% in 2030, and 80% by 2050. Synthetic hydrogen and RFNBOs receive double credit until 2033, with a 2% RFNBO sub-target starting in 2034 if RFNBOs are below 1% by 2031. Wind-assisted propulsion also gets a reward factor. Flexibility mechanisms include banking, borrowing, and pooling of compliance.

RefuelEU Aviation excludes intermediate crops, palm fatty acid distillate, palm- and soy-derived materials, and soap stock derivatives. It includes hydrogen and its derivatives from non-fossil energy sources (renewable and nuclear, but not natural gas with CCS) if they achieve at least 70% life-cycle GHG emissions savings compared to fossil fuels. Accounting methodologies for RefuelEU Aviation and FuelEU Maritime address additionality, temporal correlation, and CO2 sourcing, excluding fossil carbon streams after 2040. PBtL fuels have separate accounting for biofuel and RFNBO/hydrogen shares. Non-compliance penalties are at least double the price difference between conventional and low-carbon fuels for aviation, and EUR 2,400 per tonne of VLFSO energy equivalent for shipping. EU policies include SAF and low-carbon shipping fuel waivers in the CEEAG, inclusion in the Net Zero Industry Act, and support through the EU sustainable finance taxonomy and Global Gateway flagship projects in Africa and India.

Insights from the analysis of existing policy framework:

The stringent regulatory requirements in place in the EU give very clear signals on the presence of future market demand for low-carbon fuels in aviation and maritime transportation. This is not only the case for sustainable biofuels made from feedstocks in the low ILUC risk category, but also for advanced options such as RFNBOs. Regulatory requirements are especially relevant in aviation, where synthetic fuels are discussed with specific language. Maritime transport is also clearly taken into consideration. The strong focus of the EU policy on the creation of market demand through ambitious regulatory signals is a clear difference with respect to the US. A second important difference between the EU and the US lies in the use of carbon pricing. This is seen primarily via the EU ETS, as both aviation and maritime transportation are subject to it. Notably, carbon pricing for maritime purposes applies not only to intra-EU waterborne transport, but also to half of international maritime voyages.

Carbon pricing comes with the advantages of (1) providing price signals to energy consumers that align with long-term GHG reduction goals and (2) generating public revenues. Price signals enable important investments in energy efficiency, as they are more cost effective than in the absence of a carbon price. Carbon price revenues can be reinvested to stimulate GHG reductions or technological progress. Amongst other possible uses, they can reduce public debt, mitigate regressive impacts, or address emissions sources for which regulatory or incentive measures are ineffective due to market failures or unusual circumstances.The availability of revenue to support or de-risk capital investments is especially important in sectors like aviation and shipping. These sectors are highly exposed to asset stranding risks in a transition towards carbon neutrality in the absence of progress regarding low-carbon fuel availability at lower cost.The EU policy includes provisions to manage near-term impacts of SAF deployment on consumer prices via SAF allowances and to reinvest revenues from carbon pricing to stimulate progress on innovative, low-carbon alternatives to the fossil fuel benchmark.

Effect of policies:

The combined action of pricing, regulatory requirements, and incentive policies in place in the EU can stimulate domestic production. However, incentives to mobilise near-term investments, including for exports, may be weaker in the EU compared to US. Reasons include a larger low-cost renewable energy potential in the US and greater simplicity with which producers can access value from the IRA (tax credits) and LCFS (market-based mechanism), as compared to the EU Innovation Fund. Headwinds for low-carbon aviation and shipping fuel deployment in the US are largely related to far lower stimulation of demand, even in California and other states with Low Carbon Fuel Standards, as all have a far greater focus on road transportation. The lack of predictable long-run demand combined with challenges regarding policy stability make it difficult for producers to justify investing in capital-intensive production capacity projects with long payback periods. More extensive project reviews associated with the EU funding mechanisms by CINEA and the EIB enable greater steering capacity, in the EU, for investments directed towards GHG reductions and energy diversification.This is in line with the legally binding net-zero emission requirements of the EU Climate Law.

The need for more careful planning and coordinated execution of investments to reduce GHGs could be well-suited if large-scale access to cost-competitive EU solar and wind energy resources is constrained. Interest to bridge the risk of constraints was confirmed by maritime fuels and SAF being included in the EU Global Gateway. With possible limitations in access to a low-cost renewable energy generation potential with respect to other global regions, it is especially important that the EU maximize the value of the resources it has. More extensive review and planning may, however, slow down the overall pace of project development. This could limit growth of domestic supplies, domestic value generation, and job creation from low-carbon technologies. The EU legislation does not preclude, in principle, the possibility of relying on imports to comply with regulatory requirements. However, it requires compliance with sustainability criteria and additionality, temporal correlation, and deliverability in the case of hydrogen from electrolysis.

However, specific provisions in EU legislation exclude fuels produced from installations that received support in the form of operating or investment aid unless this support is fully repaid from those that can qualify to meet the RefuelEU Aviation and FuelEU Maritime (as well as other Renewable Energy Directive) mandates. This choice helps level the playing field for investments targeting the EU market, irrespective of where the investments are made. It also underscores a desire to reduce risks of supply disruptions and price increases due to changes in policy decisions beyond EU jurisdiction. For example, if future US administrations sought to repeal incentives enacted by the IRA or if other countries adopted similar choices. Better control on supplies, however, can slow the pace of investment in global supplies of low-carbon maritime fuels and SAF vs. a counterfactual without this clause. EU policies remain largely agnostic about which energy carriers might be most readily traded across borders. Which energy carrier dominates international trade flows will depend on product physical characteristics (i.e., energy density and state at ambient pressure and temperature), production costs, transportation costs (most relevant for hydrogen and other gaseous fuels), infrastructure-related developments (e.g., for storage and handling), and transatlantic coordination.

Due to major challenges for hydrogen in this respect, and because pipeline transportation is not an option for transatlantic deliveries, the most likely options are either biofuels or hydrogen derivatives. These include ammonia, if safety challenges can be effectively handled, or synthetic fuels such as methane, methanol, or other synthetic hydrocarbons. Taken together, these considerations highlight the importance for the EU and the US to strengthen their dialogue regarding low-carbon fuels for aviation and shipping. Such a dialogue can offer important opportunities to balance domestic and diversified supplies and produce larger amounts of lower cost, low-carbon options, at scale. The EU has begun to build a diverse set of international partnerships to achieve this goal. These are in line with developments already started in the context of the Global Gateway. These partnerships can be supported by trade agreements that integrate conditions related to climate action and the effective implementation of the Paris Agreement and, thanks to cost reductions enabled by scale, can also support a global transition towards GHG emission reductions.

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