Ever since the 2015 United Nations Climate Change Conference (COP21), the topic of carbon has been front and center in academic, corporate, and government circles. The general consensus, aside from a few climate change detractors like the U.S. President-elect, is that the world must significantly reduce global carbon emissions by 2030. However, no one has quite decided how to do so – the recent follow-up COP22 conference concluded with no agreement on emission reduction strategy. Much of the attention has been on heavy emitting sectors, such as the power generation and manufacturing industries. There’s been less focus on reducing emissions in transportation, even though the sector is responsible for approximately 25% of global carbon emissions – perhaps because the world’s largest automotive markets are already on the right track in emissions reduction.
Brazil is considered the Saudi Arabia of biofuels, where its more than 40-year-old policies have resulted in nearly 50% of the transportation fuel mix being made up of ethanol. The U.S. and EU have both made significant strides in carbon emissions reduction over the past 10 years through the Renewable Fuel Standard (RFS) and the Renewable Energy Directive (RED) respectively. In China, record ethanol imports have helped support progress on its National Climate Change Plan (NCCP). However, these policies have met their fair share of opposition – the food vs. fuel debate and the mythical “blendwall” – that will likely prevent biofuels from further penetrating the transportation market unless something changes.
To date, nearly all biofuel policies across the globe are driven by one metric – volume. Either there is a standard requirement for blending biofuels with their petroleum counterparts, or a country has a mandated total volume of biofuels that must be consumed in the market. However, increased scrutiny on carbon emissions has caused attention to shift from volumes to pollution. The biofuels industry will undergo a paradigm shift – a shift that California already made in 2011.
The California Air Resources Board (CARB) implemented its Low-Carbon Fuel Standard (LCFS) in 2011, which has driven a low-carbon fuels market that makes up over 11% of the transportation fuel mix in the state. During this time, it has eliminated volume targets; instead the LCFS focuses strictly on a fuel’s carbon intensity (CI) measured in gCO2/MJ on a well-to-wheels (WTW) basis – from extraction, conversion, transport, and combustion of the fuel. While today only the Golden State has adopted the standard, this approach will become a global phenomenon by 2020 because:
- Feedstock, technology, and fuel-agnostic approach opens up opportunities along the entire value chain. Today many of the policies driving biofuels focus on what the fuel is made of (corn, agricultural residues, waste oils, etc.) and what the final product is (ethanol, biodiesel, renewable diesel, etc.). Unfortunately, these regulations have incentivized specific technologies instead of the best solution. Using a fuel-agnostic approach instead promotes innovations along the entire value chain, such as the choice of power, supplemental chemicals, and even ways of transporting the fuel, creating opportunities for other types of businesses in a space that has been predominantly geared towards dedicated fuel producers.
- Not all countries are positioned to support a biofuels industry as it is designed today. Currently the biofuels industry is driven primarily by the availability of bio-based resources. This dependence is why the U.S. and Brazil are major corn and sugarcane ethanol producers, respectively, and Malaysia and Indonesia are major palm oil biodiesel producers. Unfortunately, this model does not offer a solution everywhere. Instead, with carbon intensity as the main factor, countries can tap into their own domestic resources and expertise to drive low-carbon fuels without the limitations of today’s biofuel-centric regulatory model. This shift opens the opportunities for further adoption of natural gas vehicles (NGV) and electric vehicles (EV), and will also stimulate conventional fossil fuel innovation as increased efficiencies will also lower a fuel’s CI.
- This model will be a bridge to move future regulations and policies past the concept of fuel–based vehicles. Technical barriers still remain for widespread adoption of electric vehicles (EV), but the tipping point is coming sooner than many think. Policies today that still focus on biofuel volumes will quickly become archaic in an electrified transportation future. With certain cities, such as Paris and London, vowing to ban the internal combustion engine (ICE) altogether, CI-based policies will be the first phase of a paradigm shift that will transition the soon-to-be obsolete biofuels policies of today into a new era of low-carbon transportation policies.
With the end of the two largest traditional biofuel policies in the world on the horizon in the EU and U.S. in 2020 and 2022 respectively, all players along the transportation value chain need to adapt now to inevitable future change. Savvy corporations already gaining experience on how to operate in California’s low-carbon fuels market will be at a significant advantage as the carbon intensity phenomenon goes global.
For more information contact Yuan-Sheng Yu at YuanSheng.Yu@luxresearchinc.com