Carbon price to impact biofuels markets: Ieta

The range of legal proposals aligning climate and energy legislation with the EU's 55pc emissions-reduction target by 2030 — including the revision of the bloc's emissions trading system (ETS) — will impact the biofuels markets, Adam Berman, EU policy director at the International Emissions Trading Association (Ieta), told Argus.

How important is carbon pricing for biofuels markets?

Carbon pricing is really important as a tool for climate action in the road transport sector. But it is not the silver bullet and needs to be complemented by sector specific policies to make alternatives, such as biofuels, price-competitive. On top of an enhanced ETS, with a separate road transport and buildings ETS, changes to energy taxation and other mechanisms will enable cost competitive biofuels to be rolled-out at scale.

Is there enough political support for road transport under the EU ETS?

Let's be clear, there is no direct inclusion of road transport or buildings into the general ETS. The commission's proposal is to establish a separate ETS for road transport and buildings. Sectors predominantly covered by the ETS have reduced emissions by over 30pc since 1990. For road transport, emissions have gone up by over 33pc since 1990. So a carbon price will provide a strong signal alongside enhanced policies like higher renewables ambition levels. Ultimately, the EU ETS covers 40pc of emissions, works well and provides really significant revenues for decarbonisation.

Will there not be political push-back?

It is a precarious moment politically. A reasonable carbon price for transport is needed that increases over time with revenues redistributed in a meaningful way to low-income households. Mitigating push back might also include moderating the proposed price structure.

As it stands the commission's proposal allows, from the very first day, for the road transport/building ETS price to float freely. We have no idea what that price could be with estimates ranging from €50 to even €150 per tonne. Germany has a good national ETS for road transport with a fixed price and price corridor. All said, there's a good chance that the ETS for road transport and buildings will get through. Otherwise it'll be very hard to reach the overall GHG emission reduction targets.

Will there be enough of an ETS carbon price signal to push biofuels?

This separate ETS for road transport and buildings is more suited to the higher abatement costs in the transport sector. It is a quicker path to biofuel usage than if regulation alone were used or if road transport had been put into the general ETS. Over time, there will almost certainly be a higher road transport/housing ETS price, because of the higher abatement costs with those sectors.

The general ETS is multi-sector so it would take some time before solutions like biofuels would equate to where the [separate road transport] abatement cost is. I would not want to hazard a guess as to the exact carbon price if the market is allowed to float freely, but it may well be above €100/t.

What will carbon pricing do for sustainable aviation fuels (SAFs)?

Carbon pricing is part of the picture. At the moment, the International Civil Aviation Organisation's (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (Corsia) scheme is at an early stage. SAFs and other solutions have to be brought in. But it is very hard to know at exactly what carbon price solutions like SAFs become cost-effective as a result of fuel price fluctuations, national regulation and more.

And it is not just about SAFs getting cheaper but also about traditional emitting fuels getting more expensive, also via carbon pricing. The EU ETS will not reach the point of driving change towards SAFs very soon. Still, only three years ago, we were at an ETS price of less than €10/t. The higher the ETS price gets, the more acceptable solutions like SAFs become for hard-to-abate sectors.

Is there impact from inclusion of maritime shipping under the ETS?

The expansion of the ETS to cover maritime shipping will quite substantially increase the biofuels market. The maritime industry has not achieved significant decarbonisation. Placing shipping under a carbon price is a starting point and sends a very clear signal to biofuel producers that they need to be ready at scale with solutions. Maritime is likely to be a net purchaser of allowances. So firms will be shown quite quickly that the carbon price signal is strong enough to incentivise low-carbon solutions like biofuels.

By Dafydd ab Iago

Adam Berman will be one of the speakers at the forthcoming Argus Biofuels Europe and Asia Markets virtual conference, which takes place 9-11 November. For details of the conference programme and how to register to attend, please visit our website.