Transport bursts onto global decarbonisation map

By Matthew Stone, Managing Director of PRIMA

Special to The Digest

Transport has long been recognised as the hardest part of the global economy to decarbonise. Sitting outside the remit of schemes such as the EU’s carbon Emissions Trading Scheme, the road sector has traditionally depended on biofuel mandates to reduce its carbon footprint in Europe and North America. Since these schemes were launched at meaningful levels of renewable consumption in Europe and the US more than a decade ago demand has been ratcheting steadily higher. Exponential growth in liquid renewable transport fuel solutions however is still needed to keep governments and fuel providers on track to overarching climate change commitments. To manage the explosive growth, PRIMA has created the roadmap needed for the energy, regulatory and investor stakeholders to keep on top of this huge and fast-moving sector.

While a modal shift to zero emissions vehicles remains the holy grail for many policy makers, progress is hampered by cost and technology issues. New non-liquid powertrain technologies are undoubtedly a growth area for investors, but the need for investment cash to spur the development of low carbon fuel supply chains which can plug into the existing global liquid supply infrastructure is immediate.

The EU says its transport sector needs to hit a 30% cut in its transport carbon emissions by 2030 to keep the bloc on track to meeting overarching carbon emission reduction targets. “Current trends” in the makeup of vehicle fleets, driving habits and existing carbon reduction schemes are expected to drive a 12% cut in emissions by 2030 compared to 2005. This leaves another 18% cut in emissions needed across a sector still seen as 88% reliant on fossil fuels for its mobility by 2030, with entrenched reliance on fossil fuels for mid-term mobility putting the onus on the international refining sector to respond.

Outside established “Federal” markets in the US and Europe, many more state and national governments the Americas, Asia and Africa have rolled out similar initiatives with a view to carbon emissions reduction. This has established a global demand footprint for low carbon fuels, awakening the interest of international investors looking to stimulate the development of scale solutions to the carbon emissions problem posed by transport.

Circular economy seeks multi-billion investment in waste

Increasingly sophisticated sustainability methodologies have already shifted established mandates’ onus away from relatively easy to scale crops to harder-to-understand waste streams able to compete with other zero emissions vehicle technologies such as renewably-powered batteries in terms of their minimal carbon emissions. This approach is a key component of the “circular economy” philosophy espoused by the EU. The European Commission has cemented the approach post-2020 in its recently rubber stamped RED II directive on renewable energy, which will be accompanied by a Fuel Quality Directive requiring all EU member states to document the carbon emission pathways of their transport fuel consumption to achieve a 6% headline cut in emissions by 2020.

Canada and US states meanwhile are following California’s trailblazing lead in developing a ticketing system around its transport Low Carbon Fuel System (LCFS), which incentivises the consumption of fuels based on their low carbon emissions profile, a mechanism which has sent demand for these streams skyrocketing across the US West Coast. Californian demand for low carbon transport fuel will more than double from near 10% by 2020, with Oregon and Canada close behind.

The main beneficiaries of the trend so far have been the refining firms which have already invested heavily in development waste oil supply chains and the drop-in processing technologies able to convert them into high quality fuel. Other refiners are scrambling in their wake to develop their own long-term profitable renewable fuel manufacturing businesses based around conventional refining assets. The aim is for these to deliver corporate objectives on emissions and sustainability while staking out high energy density liquid transportation fuels’ footprint against competing technologies.

Global investments announced to date suggest the global footprint for so-called renewable diesel —  a direct diesel substitute produced at refinery scale from renewable biomass feedstocks —  is set to surge. Announced projects in Europe look set to more than double capacity from 2.4mn t/yr last year to around 5.5mn t by the early 2020s. This will be dwarfed by the more than 8mn t of capacity on the drawing board in the US, compared to an established US footprint of less than 2mn t/yr at present. Asian oil firms are also looking to get in on the game, with announced plans to convert refining assets to run renewable biomass so far unquantifiable in throughput terms.

Feedstock urgently required

This armada of new fixed asset investment will need feedstock to convert into high-value, low carbon drop in fuel. The scramble is on to secure viable streams of suitable waste at scale while building the trading and origination teams to support these new business lines and manage their associated pricing and contractual risk going forward. These teams need visibility across sophisticated and opaque global supply chains and policy jurisdictions to operate effectively and profitably. Investors need the same tools to decide where to channel funds to achieve optimum carbon emissions and financial returns.

Now entering its third year of publication, PRIMA’s Daily Low Carbon Fuels and Feeds Report has established itself as the handbook for firms looking to navigate this new sector. Alongside its comprehensive suite of daily price points across the waste fuel and feed spectrum, PRIMA keeps the global industry updated with news and insight on the asset investments, product flows and policy changes which are steering the complex as it expands. To see PRIMA’s suite of reports on the low carbon transportation fuel markets, contact [email protected].