The adoption of renewable fuels, particularly hydrogen-derived fuels known as RFNBOs (Renewable Fuels of Non-Biological Origin), in the shipping and aviation sectors is a critical step towards achieving sustainability. However, the transition is hindered by the economic advantage of cheaper, untaxed fossil fuels. This article explores how policy frameworks and public support mechanisms can drive the adoption of RFNBOs, based on a study commissioned by Transport & Environment (T&E) and conducted by Ricardo.
Barriers to RFNBO Adoption
Economic Disparity with Fossil Fuels
The significant cost disparity between renewable fuels and conventional fossil fuels presents a formidable barrier to the adoption of RFNBOs in shipping and aviation. This cost difference is largely due to the untaxed and cheaper nature of fossil fuels, which makes them far more economically attractive. As long as fossil fuels remain more cost-effective, renewable fuels like RFNBOs struggle to gain a foothold in the market. Bridging this economic gap is essential for any substantial shift towards sustainable fuels in these sectors.
This economic disparity necessitates the introduction of targeted subsidies and financial incentives aimed at making renewable fuels more viable and competitive. Without financial support mechanisms, the adoption of RFNBOs would remain an economically unfeasible endeavor. The proposed subsidies are designed to level the playing field, making it possible for RFNBOs to penetrate the market and usher in a new era of sustainable fuel use in both shipping and aviation. This approach underscores the critical role of economic incentives in addressing the initial cost barriers that hinder the adoption of renewable fuels.
Need for Financial Incentives
To address the economic challenges posed by the lower cost of fossil fuels compared to RFNBOs, financial incentives must be introduced to make renewable fuels a viable option. The European Commission has recognized this need and proposed subsidizing RFNBO production as a means to close the price gap between fossil fuels and renewable alternatives. These financial incentives go beyond mere price adjustments; they are essential to foster an environment where renewable fuels can thrive.
Subsidies ensure that RFNBOs become economically feasible by compensating for the inherent cost differences that currently favor fossil fuels. This economic viability is crucial for encouraging the broader adoption of renewable fuels across shipping and aviation. Subsidies and other financial incentives create a more favorable market dynamic, making it possible for renewable fuels to compete with entrenched fossil fuels. By aligning economic interests with sustainability goals, policymakers can make significant strides in transitioning towards a more sustainable fuel mix in these critical sectors.
Proposed Support Mechanisms
Contracts for Difference (CfDs) and Fixed Premiums
One of the most effective public support mechanisms identified by the study involves the implementation of Contracts for Difference (CfDs) and fixed premiums. These mechanisms are designed to mitigate the high costs associated with low and zero-carbon fuels, providing financial stability for both producers and consumers. In particular, CfDs serve as a crucial tool in this regard. By guaranteeing a fixed price for RFNBO production, CfDs can help producers manage the financial risks associated with fluctuating market prices.
This financial stability extends beyond producers to consumers as well. For instance, in the context of e-ammonia production for maritime use, a supply-side CfD can incentivize producers to generate more e-ammonia, while a demand-side CfD can be utilized to encourage vessel operators to adopt e-ammonia as a fuel. This dual approach ensures that both the supply and demand sides of the market are adequately supported, facilitating a smoother transition to renewable fuels. The combination of CfDs and fixed premiums forms a robust framework for promoting the adoption of RFNBOs in the shipping and aviation sectors.
Supply-Side Support
Supply-side support mechanisms, where subsidies are awarded directly to RFNBO producers, are considered the most appropriate strategy for fostering initial market growth. This approach ensures that RFNBOs are readily available at key bunkering ports in the shipping sector and supports the early stages of fuel production projects in aviation. Providing targeted supply-side subsidies creates a stable market environment, making it possible for producers to invest in and scale up renewable fuel production.
By focusing on supply-side support, policymakers can create a sustainable market for RFNBOs, addressing the initial hurdle of availability that often plagues new technologies. Ensuring that renewable fuels are accessible at strategic locations is essential for encouraging broader adoption across both sectors. This support helps pave the way for a more resilient market, capable of accommodating the growing demand for sustainable fuel alternatives. Ultimately, supply-side support forms a cornerstone of a comprehensive strategy to promote the widespread use of RFNBOs in shipping and aviation.
Bridging the Price Gap
Auctions and Green Premiums
To bridge the price gap between RFNBOs and conventional fuels, policymakers are encouraged to implement a system of auctions in a ‘pay-as-clear’ format. This approach involves organizing competitive auctions where the same subsidy amount is awarded to all successful bidders. By doing so, it encourages market participants to absorb some of the costs in the form of green premiums. The ‘pay-as-clear’ system promotes cost-efficiency and market-driven solutions, gradually integrating RFNBOs into the market with minimal financial support.
This method helps to distribute the financial burden more evenly, making it possible to support the adoption of RFNBOs without overwhelming public resources. By encouraging market absorption of some costs, the auction system incentivizes innovation and cost reduction among producers. This approach aligns economic incentives with environmental goals, creating a more sustainable market dynamic. Over time, as RFNBOs become more widely adopted and production costs decrease, the reliance on subsidies can be reduced, paving the way for a self-sustaining market for renewable fuels.
Role of Emissions Trading System (ETS) Revenues
The surrounding policy framework plays a crucial role in the successful implementation of public financial support for RFNBOs. Utilizing a portion of Emissions Trading System (ETS) revenues is one such policy tool that can significantly boost RFNBO adoption in the short to medium term, especially in the shipping sector. By allocating 25% of ETS revenues to support RFNBO initiatives, policymakers can create a substantial funding source for incentivizing the adoption of renewable fuels.
Higher RFNBO mandates under programs like FuelEU Maritime can further reduce the subsidy burden by achieving climate targets more efficiently. The integration of ETS revenues into the support framework not only provides a steady stream of funding but also aligns financial incentives with environmental objectives. The role of ETS revenues is crucial in creating a viable economic landscape for RFNBOs, ensuring that financial support measures are both effective and sustainable. This approach underscores the importance of a robust policy framework in promoting the widespread adoption of renewable fuels in maritime and aviation sectors.
Supporting the Aviation Sector
Funding Early Projects
In the aviation sector, financial support is particularly vital for getting early projects off the ground and reaching final investment decisions. Using 25% of ETS revenues to fund a CfD can cover half of the mandated RFNBO volumes in aviation until 2040. This targeted financial support provides the necessary confidence for investors and stakeholders, enabling the sector to launch significant renewable fuel projects.
By providing targeted support, policymakers can ensure that the aviation sector is well-positioned to adopt RFNBOs. This financial assistance helps bridge the initial cost gap, making it possible for renewable fuel projects to become economically feasible. As these early projects reach fruition, they pave the way for broader adoption, creating a more sustainable aviation sector. These initiatives demonstrate the critical role that financial incentives play in supporting the transition to renewable fuels, particularly in sectors that face significant technical and economic challenges.
Strategic Technologies and Policy Recommendations
Policymakers should consider deploying CfDs to prioritize marine and aviation RFNBOs as strategic net-zero technologies. This approach should be part of broader initiatives like the Net-Zero Industry Act (NZIA) and Clean Industrial Deal. By focusing on strategic technologies, policymakers can drive the adoption of RFNBOs and achieve long-term sustainability goals. These initiatives complement the existing policy framework, ensuring that financial support mechanisms are aligned with overarching climate objectives.
This strategic focus allows for the prioritization of key technologies that are essential for achieving net-zero emissions. By integrating CfDs into these broader initiatives, policymakers can create a cohesive and comprehensive strategy for promoting the adoption of RFNBOs. This approach ensures that all aspects of the market, from production to consumption, are adequately supported, facilitating a smoother transition to renewable fuels. Ultimately, prioritizing strategic technologies within a robust policy framework is crucial for driving the adoption of RFNBOs in both shipping and aviation sectors.
Enhancing Policy Frameworks
Internalizing External Costs
European policymakers should enhance the surrounding policy framework to boost ambition and ensure a level playing field for RFNBOs. Internalizing the external costs of fossil fuels through mechanisms like the Emissions Trading System (ETS) and the Energy Taxation Directive (ETD) is a critical step in this process. By addressing the true cost of fossil fuels, these policy measures can create a more competitive environment for renewable fuels.
This approach involves recalibrating the economic landscape to reflect the environmental costs associated with fossil fuel consumption. By doing so, policymakers can make renewable fuels like RFNBOs more economically attractive, encouraging their adoption across shipping and aviation sectors. The process of internalizing external costs ensures that the market reflects the true environmental impact of different fuel options, promoting a more sustainable and equitable energy landscape. This strategy is essential for making renewable fuels a viable and competitive alternative to fossil fuels.
Comprehensive Policy Measures
A robust policy framework is essential for the successful implementation of financial support measures and achieving climate targets. Comprehensive policy measures should include both supply-side and demand-side support mechanisms, strategic investments, and targeted financial incentives. By leveraging these tools, policymakers can create a conducive environment for the adoption of renewable fuels in shipping and aviation.
These measures should address all aspects of the market, from production to consumption, ensuring that renewable fuels are both available and economically viable. Strategic investments can support the development of necessary infrastructure, such as bunkering ports and fuel production facilities, while targeted financial incentives can make renewable fuels more attractive to consumers. By creating a comprehensive and well-coordinated policy framework, policymakers can lay the foundation for a successful transition to renewable fuels. This approach underscores the importance of a holistic strategy in promoting the widespread adoption of RFNBOs in these critical sectors.
Conclusion
The adoption of renewable fuels, especially those derived from hydrogen and known as RFNBOs (Renewable Fuels of Non-Biological Origin), in the shipping and aviation sectors is vital for achieving sustainability. Nevertheless, the transition to these eco-friendly fuels is significantly hampered by the economic advantage that cheaper, untaxed fossil fuels maintain. This challenge is notable because fossil fuels do not bear the same tax burdens, making them less expensive than their renewable counterparts.
In an effort to address this issue, a study commissioned by Transport & Environment (T&E) and conducted by Ricardo examines how policy frameworks and public support mechanisms can accelerate the adoption of RFNBOs. By implementing effective regulations and incentivizing the use of renewable fuels, governments can level the playing field for RFNBOs against fossil fuels. Through these measures, it is possible to mitigate the economic disadvantages faced by renewable fuels, encouraging wider adoption in critical sectors like shipping and aviation, ultimately contributing to long-term environmental sustainability.
