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Fit for 55 to pressure EU automakers and refineries, spur EVs

19 July 2021 Cristina Brooks

The latest proposals by the European Commission (EC) signal complete overhauls for the automotive and refining sectors, should the proposals make it to the finish line.

With road sector proposals scattered throughout its "Fit for 55" package of proposals, the EC is now in the midst of a full-fledged push towards net zero for the bloc, following up on pledges made under the 2019 European Green Deal and legally binding 2021 Climate Law.

Whether any proposal will see the light of day is far from certain. Many question whether they can pass through the Council and European Parliament, a process set to take two years, with legislation requiring trading of allowances for car emissions proving unpopular.

Under one eye-catching proposal released on 14 July, the EC will enact a de-facto 2035 ban on the sale of gasoline and diesel cars and vans through a tightening of a directive on CO2 emission performance standards for vehicle manufacturers.

The bloc will also clamp down on vehicle emissions at the tailpipe and through targets for low-carbon fuels via a pair of directives, if approved. From 2026, a new Emissions Trading System (ETS) for road transportation and heating targeting consumer emissions, a baby brother to the existing EU ETS targeting industrial and power emissions, is expected to drive consumers to trade in their fossil fuel-powered cars. Meanwhile, changes to the Renewable Energy Directive (RED II) will drive states to require suppliers to sell cleaner fuels.

As the EC limits the sale of both fossil fuel-powered vehicles and fossil fuels, it will boost electric car charging and hydrogen fuel cell vehicles. Revisions to the Alternative Fuels Infrastructure Directive (AFID) will create binding targets for each member state to install fast battery electric vehicle charging spots on highways and major roads across Europe, as well as hydrogen fueling stations.

So far, electric vehicle uptake by consumers has been stalled by a lack of charging stations. There were 185,000 public charging points in the EU in 2019, and the European Green Deal targets five times as many by 2025. "I would not buy a mobile phone that cannot be charged anywhere, and in a reasonable amount of time. Would you?" said EC Commissioner for Transport Adina Vălean in a 15 July speech.

But member states may reject the proposals, explained the Washington, DC-based think tank The International Council on Clean Transportation (ICCT). Not all states are moving rapidly on installing EV charging points, and Germany, France, and Netherlands together account for a large majority (69%), the European Court of Auditors found. "Unfortunately, some [states] have proven themselves to be real climate protection sluggards who prefer to keep shoveling in CO2 cakes and candy instead of actively participating in the fitness program imposed by the European Commission," wrote the ICCT's EU Managing Director Peter Mock in a statement on the package. He said the AFID would prove a real test for states, which secured non-binding targets under the previous version of the rule.

Not only automakers, but also refineries are on track for a wholesale change to their business model. "Together with the more bearish fossil fuel demand outlook stemming from accelerated electrification owing to stricter vehicle emission standards, discontinued multiple counting of biofuels leading to potentially higher physical blending, a very strong sustainable aviation fuel mandate out to 2050, and incremental taxation of motor fuels align with our broader narrative of reducing, repurposing, or reinventing Europe's refining industry," said IHS Markit Executive Director Hédi Grati, a specialist on European refining.

However, he added, hydrogen fuel has marketing potential as the proposed revised RED II requires industry to consume 50% green hydrogen and transportation to consume 2.6% of hydrogen-based synthetic fuels. "With the 50% renewable hydrogen target in the industry by 2030, we expect to see a further acceleration of capital investment in hydrogen and hydrotreated vegetable oil (HVO), possibly benefiting from subsidies from the EU's recovery funds," said Grati

Electrification of the automotive sector

On the face of it, automakers in Europe are voluntarily switching to electric vehicle production. Many have moved to end fossil fuel vehicle sales through pledges to make only battery-electric or zero-emissions vehicles by different target years. They include Volkswagen (by 2040), Audi (2033), Fiat (2030), Ford (2030), Opel (2028), and Volvo (2030).

Urged on by manufacturers looking to bring zero-emissions vehicles to market, the EC plans an increase in CO2 emission reduction targets for new cars that will mean a de-facto ban on sales of internal combustion engine vehicles, while spurring electric car adoption, by 2035.

Under current CO2 standards, automakers must cut the CO2 emissions of the new passenger cars they sell by 37.5% by 2030 and 31% for new vans, but last week's proposal will deepen the cuts to 55% by 2030 and 100% by 2035 relative to 2021.

If automakers comply with the CO2 rules, it will prevent the transportation sector, which currently contributes the highest emissions by sector at 20% of the total, from being left behind during the energy transition, while helping EU states meet their share of the EU's Paris Agreement target under the revised Effort Sharing Regulation.

The ICCT called the 2035 vehicle CO2 standards a "last-minute victory" for the commissioner in charge of the Green Deal, EC Executive Vice-President Frans Timmermans.

But not all automakers are ready for the challenge. The European Automobile Manufacturers' Association (ACEA) said meeting the target requires a "massive further increase in market demand for electric vehicles in a short timeframe," in a 14 July statement. The ACEA argued the increased availability of electric vehicle charging and low-carbon refueling infrastructure will be key to meeting the target because there is currently not enough.

Automakers disagreed with the CO2 rule, as it would outlaw even low-carbon internal combustion engines in hybrids and hydrogen-fueled vehicles, although the proposals retain incentives for hybrid and low-emission vehicles until 2030. "Without the availability of renewable fuels, a 100% reduction target in 2035 is effectively a ban of the internal combustion engine," said the ACEA, adding that banning a single technology was not a "rational" way forward.

"Without significantly increased efforts by all stakeholders—including member states and all involved sectors—the proposed target is simply not viable," added the ACEA.

A trade body for the electric vehicle sector, the European Association for Electromobility (AVERE), said in a statement it was "pleased" with the clear push for EVs and only regretted the revamp did not include earlier interim and final phase-out targets for manufacturers.

Also under the revised RED II, AVERE welcomed a new obligation for member states to establish a credit trading mechanism that puts electric vehicle charging on an equal footing with biofuel for compliance. "Unlike biofuels, electricity cannot be blended with conventional fuels; this instrument will be necessary to allow electricity to compete on the market with biofuels, reflecting the clear trend towards the electrification of road transport," said AVERE.

Europe's refineries under pressure

The CO2 rule will impact refineries that produce gasoline and diesel, continuing the European refining sector demand decline spurred by the COVID-19 pandemic last year.

IHS Markit found in March that globally 2.3 million b/d of refinery closures have already been completed or announced, over 400,000 b/d of which was in Europe. "If this really gets implemented as proposed by the EC, the more rapid decline in gasoline and road diesel consumption will increase the pressure on traditional refineries even more than the bearish outlook we already have today, and we will see more of them cease to exist as we know them today," said Grati.

There could also be an impact on refineries from the coming changes to the EU ETS, according to Sujith Kollamthodi, director of policy, strategy, and economics practice with British environmental consultancy Ricardo told Net-Zero Business Daily. Ricardo provided analysis support to the EC when it was developing the CO2 and ETS parts of the package.

"The CO2 performance standards only affect new vehicles, and new vehicles are only a small part of the market," said Kollamthodi. "The Commission is quite rightly saying, dealing with just the new vehicles is not acting fact enough, we also need to have measures that help reduce emissions for existing vehicles, and so this will have an impact on the refinery sector for sure."

In the EU ETS, free allocation of emissions allowances to refineries and petrochemicals plants generated windfall profits for the sectors between 2008 and 2015, according to an April policy paper on the proposed ETS by Agnese Ruggiero, policy officer at Carbon Market Watch.

But under the revision to the EU ETS, refineries of all kinds and all other sectors will ultimately stop receiving free allowances by 2030, Ruggiero told Net-Zero Business Daily. After 2035, the Carbon Border Adjustment Mechanism (CBAM) will take over providing the equivalent of free allowances for some protected industries like steel, but not to refineries under the current proposal, she noted.

The free allowances will end even earlier (2026) for refineries that do not invest in energy efficiency and reduce emissions, incentivizing low-carbon technologies.

If refiners are hurt by an end to free allowances while being unable to operate in markets for renewable fuels like biofuel and hydrogen, they may simply move elsewhere. FuelsEurope, a trade body for refiners, said it was concerned over the "lack of recognition of the contribution of sustainable and renewable fuels" in the vehicle CO2 rules and weaker carbon leakage protection under the EU ETS in a statement on the proposals.

Biofuel and hydrogen remain alternatives for refiners, mirroring the path already taken by the likes of Finland's Neste, but Grati acknowledged the difficulties. "Some may embrace the biofuels or e-fuels opportunity by repurposing existing process units and potentially preserve part of their traditional fossil fuels operations, others would accelerate higher yields of petrochemical feedstocks, but some won't have another choice than to shut down," said Grati.

Biofuel advocates also warned the CO2 standards should be changed to "recognize the crucial role of renewable and low-carbon liquid fuels," according to a statement by the Renewable and Low-Carbon Liquid Fuels Platform. Only the most sustainable advanced biofuels escape new taxes under the proposed reforms to the Energy Tax Directive.

Hydrogen seems to have escaped in this cull. Association Hydrogen Europe has called Fit for 55 a step forward in the EU's global leadership on hydrogen, having pressed for ambitious CO2 standards.

Critical voices on road sector emissions trading

Many critical voices have emerged in response to the proposal for a new emissions trading system for road transportation and heating fuel that might increase the cost of vehicle fuel.

EU-funded European consumer organization BEUC said it is "skeptical" about emissions trading for vehicle fuel despite a social climate fund meant to compensate for high fuel costs. "The proposed compensation funds risk being an overly complex system that will not deliver to those in our societies that need it most," it said in a statement.

In June, Member of European Parliament Pascal Canfin told the chamber the move was "political suicide," citing the French Yellow Vest protest movement over taxes on gasoline and diesel that upended French politics in 2018, and noting that such debates that were "toxic to the fight for environmental regulation."

Even biofuels group Renewable and Low-Carbon Liquid Fuels Platform and electric vehicle producer association AVERE are concerned. This is because raising vehicle fuel prices "carries the danger of resulting in undesirable social consequences—even if accompanied by the EU's new Social Climate Fund, the functioning of which is yet to be proven in practice," said AVERE.

AVERE said the new road sector ETS would initially burden consumers, but not enough to make them switch. "Lower-income households, who will feel the effect of moderately increased fuel prices the most in their wallet, also happen to be those least able to effortlessly switch to cleaner alternatives, especially in the absence of a fully developed market for second-hand EVs," the trade body said.

Posted 19 July 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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