Getting investors to say yes to low-GHG fuels for aviation and marine: Opportunities in Europe’s Clean Industrial Deal

Authored by Nikita Pavlenko , ICCT Program Director, and Chelsea Baldino ICCT Program Lead

Although the requirements in the FuelEU Maritime and ReFuelEU aviation regulations already send a strong signal about future demand for low-greenhouse gas (GHG) emission fuels, many renewable fuel projects still haven’t reached final investment decision (FID). Costs are the primary challenge, but now there’s new hope for progress. The European Commission’s recently announced Clean Industrial Deal (CID) is generating lots of well-deserved buzz, and as we’ll outline here, the Commission’s commitments could help support low-GHG emission advanced fuels in a few important ways.?

We define advanced fuels as (1) second-generation biofuels produced from hard-to-break-down cellulosic materials that require nascent technologies to convert them to biofuel and (2) renewable hydrogen and its derivatives, also known as renewable fuels of non-biological origin (this includes e-fuels like e-kerosene). Advanced fuels are critical for the long-term decarbonization of maritime shipping and commercial aviation because first-generation fuels like low-GHG hydroprocessed vegetable oils, although already produced at commercial scale, are only available in limited quantities and carry fraud risk. It’s second-generation advanced fuels made from cellulosic wastes and residues or renewable electricity that could be produced at a much greater scale in the European Union.??

While advanced fuels offer much larger GHG savings than many of the existing alternative fuels on the market, they’re also more expensive and challenging to finance. Previous analyses highlighted how the high upfront capital costs of second-generation fuel pathways make it challenging to attract investment due to uncertain market prices and project timelines. Many industry stakeholders have called on the European Union to implement policies to de-risk these investments and foster market certainty. The CID’s intention to centralize and expand the funding available from the EU Emissions Trading System (ETS) and the Innovation Fund can respond to this call by providing funding for capital support and assisting early stage projects. The CID also calls for adoption of a new State Aid Framework and this, too, can help Member States better provide the needed capital support.?

The EU ETS currently reserves 20 million allowances for a sustainable aviation fuel (SAF). As detailed in a previous ICCT blog post,?the?funds from EU ETS reinvestment by themselves could only cover a portion of the projected cost gap between fossil jet and e-kerosene, in order to meet the European Union’s e-kerosene targets. More importantly, the reinvestment subsidy is given to airlines, not fuel producers, and none of the allowances are earmarked for advanced fuels; for this reason, it does little to reduce market uncertainty for producers of more challenging advanced fuels. Additional grant funding or price support mechanisms stemming from the CID could instead directly improve the fuel producers’ balance sheets, which would support them in reaching FID and allow them to get the needed investment to start building production facilities.??

Member States are also urged in the CID to finalize revisions of the Energy Taxation Directive (ETD). If Member States accept the 2021 proposal for fossil jet taxation and roll back the aviation sector’s traditional exemption from fuel taxes, it would be a critical component of bridging the cost gap between SAFs and conventional fossil jet and be a potential additional revenue source for renewable fuel. The abovementioned ICCT blog post?also highlighted how the proposed ETD tax rate on jet fuel could significantly contribute to closing the cost gap for e-kerosene.???

There’s more good news for SAFs in the CID’s proposal to expand the Hydrogen Bank program with an additional auction and to create a new Hydrogen Mechanism in Q2 2025; the mechanism would de-risk investments in aviation and marine fuels by connecting producers and offtakers and providing them with financing instruments. Such support for renewable hydrogen is likely to be critical for e-kerosene production to scale up in Europe.??

The Commission’s commitment in the CID to reducing permitting requirements for electricity, grid expansion, and storage may not only impact the power sector, but could also speed up the rollout of domestic e-fuel production and vehicle fast charging infrastructure. Bottlenecks in upgrading the grid raise the cost of electricity, and that’s one of the most important factors influencing?e-fuel cost.??

The FuelEU Maritime and ReFuelEU aviation policies are setting a global precedent for how to decarbonize the maritime and aviation sectors by pairing rigorous sustainability criteria with binding long-term targets. However, those policies are at risk if emerging advanced fuel technologies fail to scale up. The world is watching to see if the European Union succeeds in implementing these regulations, and it’s important that advanced fuel pathways get the support they need to reach FID and start production. The upcoming Sustainable Transport Investment Plan will outline further measures to support renewable and low-carbon fuels for the aviation and marine sectors, and the ICCT’s research and analysis will inform this process.?