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Filling up the E-fuel Tank: Policy Options to Advance E-fuels

The transportation sector is one of the largest emitting sectors today and parts of the sector, like aviation and long-haul trucking, lack easy alternatives to the energy-dense liquid fuels currently in use. E-fuels, also referred to as electrofuels, provide a potential decarbonization solution. E-fuels are fuels that can be used in traditional engines designed for fossil fuels and, if made from clean energy, e-fuels could play an important role as a means of decarbonizing existing fleets and transportation sectors that depend on liquid fuels.

E-fuels use electricity to create fuels from basic chemical components, rather than refining fuels from petroleum or a biomass feedstock. These chemical components include hydrogen, carbon dioxide (CO2), and nitrogen. They are referred to as e-fuels because electricity is used to obtain some of these original elements, particularly hydrogen. If the electricity and other energy used to create the e-fuel is carbon neutral, then the resulting fuel can also be low-carbon or zero-carbon. CO2 can either come from capture at a point source or direct air capture. Some “e-fuels” can also be synthesized using thermochemical methods such as catalysts that operate at high temperatures or biological techniques such as conversion of CO2 or carbon monoxide into ethanol.

But e-fuels are more expensive than conventional fossil fuels and are unlikely to develop without further policy support. If we want to ensure that e-fuels can scale up to the challenge of decarbonizing aviation and other hard-to-electrify sectors by mid-century, then we need to start making e-fuels today. Supporting e-fuels production will spur technology improvement, bring down costs, and, as we gain real-world experience, improve our understanding of how e-fuels can help us reach our energy and climate goals. This requires policies that support early production of e-fuels and continued research to improve e-fuel production technologies. By supporting this industry, the federal government can help expand jobs in the sector and advance U.S. technology and innovation leadership.

To help advance early e-fuels deployment, there are three broad policy categories to consider: 1) policies that support demand for e-fuels; 2) policies that support the production of e-fuels; and 3) analysis and target-setting for near-term e-fuels deployment.

Federal Policy Options to Support E-fuels Demand

To support investment in the nascent e-fuels industry, producers need to know that there will be buyers willing to include higher-cost e-fuels in their fuel purchases. Federal policy can help support the development of this market.

 Implement a Federal Low Carbon Fuel Standards (LCFS) to Drive Demand and Innovation. An LCFS requires producers of liquid fuels to achieve a gradual reduction in the carbon intensity of the fuels they sell. Most state LCFS policies allow compliance through averaging, trading of carbon intensity credits, and use of CO2 removal credits. An LCFS provides an incentive for production of low-carbon e-fuels since making e-fuels helps producers of traditional liquid fuels comply with the standard. Currently, four states—California, Oregon, Washington, and New Mexico—have adopted an LCFS and additional states are considering similar measures. Stakeholders are also considering a federal LCFS. Adoption of a national LCFS would provide a stable, long-term incentive for production of low-carbon fuels, including e-fuels.

Ensure Federal Government Procurement Initiatives Incorporate E-fuels. The federal government is a major purchaser of fuels and, if a portion of those purchases were low-carbon e-fuels, this could drive greater and earlier e-fuels production. The federal government has focused its buy-clean initiative on procurement of clean construction materials. A similar purchasing effort could be set up for low-carbon fuels, including e-fuels. The Department of Defense (DOD) purchases far more fuel than any other government department and directing even a small portion of those purchases toward low-carbon fuels would provide an important early market for e-fuels. The Air Force, for example, is working with the e-fuels company, Twelve, to evaluate the company’s e-fuel production process and product. While other federal departments buy less fuel than DOD, e-fuel procurement programs by other federal departments could still provide a meaningful demand-side e-fuel incentive.

Allow E-fuels to Qualify Under the Renewable Fuel Standard. Fuels that rely on biomass as their core feedstock for both hydrogen and carbon can qualify under the Renewable Fuel Standard (RFS). But e-fuel production pathways that use low-carbon electrolytic hydrogen and captured CO2 may not meet the requirements for use of a biomass feedstock. Congress could change this to allow any low-carbon e-fuel to be eligible for credit under the RFS.

Provide Funding to Bridge the Cost Gap for Clean Solutions Like E-Fuels. E-fuels face a significant cost premium. In addition to direct government procurement and production tax credits, Congress can help cover the e-fuel cost gap by creating a fund that would be distributed through a competitive subsidy mechanism. E-fuel producers would submit bids for the subsidy that producer requires to support the sale of a certain quantity of e-fuels. Subsidies would be awarded to the producers requiring the smallest subsidy until the fund was fully spent. With sufficient competition, such a mechanism would ensure that government funds are used efficiently while supporting the most competitive projects. The European Union uses a similar mechanism for clean hydrogen that is capitalized by governments but operated by an independent entity, H2Global.

Federal Policy Options to Support E-Fuels Production

Federal research support and production incentives can help lower the e-fuel cost premium. 

Create Parity Between Captured Carbon Utilization and Storage. Capturing CO2 is one step in the process of making e-fuels. The Carbon Oxide Sequestration Credit (45Q) provides a lower tax credit value for carbon captured and utilized compared to carbon captured and sequestered. CO2 utilization differs from permanent storage because, depending on the use, the CO2 used in a product may later be released in to the atmosphere. The existing tax credit accounts for this difference by requiring a life cycle analysis for utilization and providing the tax credit only for the net CO2 kept out of the atmosphere. But even after this life cycle analysis requirement, the tax credit value is still lower for utilization than sequestration. To fix this disparity, a bipartisan, bicameral group of members of Congress introduced the Carbon Capture Utilization Parity Act (Senate announcement and House announcement) to equalize tax benefits for underground storage and utilization. Providing parity will ensure equal support for equal carbon removal value and help support utilization solutions like e-fuels.

Implement and Extend the Tech-neutral Clean Fuel Production Tax Credit. The Clean Fuel Production Credit (45Z) offers a maximum credit of $1 per gallon for non-aviation fuel and $1.75 per gallon for low-carbon aviation fuel, adjusted based on the greenhouse gas emissions associated with the fuel’s life cycle. The credit will be available for fuels sold January 1, 2025, through December 31, 2027. Due to its short duration, it is unlikely that the credit will significantly improve the prospects for e-fuels projects requiring large new investments, as those cannot recoup their costs over just a few years. Extending the tax credit’s duration for all producers or for new facilities would allow the credit to more effectively support new investments.

Ensure Continued Research, Development and Demonstration Support for E-fuels. For a nascent industry like e-fuels, innovation and development of a broad set of technology options is critical to ensure that the most promising pathways are identified and pursued. Past efforts such as ARPA-E’s 2016 Renewable Energy to Fuels Through Utilization of Energy-Dense Liquids (REFUEL) program succeeded in helping to scale up e-fuel companies like Twelve. DOD continues to provide funding for research of alternative or synthetic fuels, but more is needed. Congress should provide consistent funding, through either the Department of Energy or Defense, of e-fuels research and demonstration of promising e-fuels technologies.

Federal Target-setting for E-Fuels.

Clear definitions and production targets, based on sound analysis, will help set the stage for growth of the e-fuels industry.

Create a Federal Definition for Low-carbon E-Fuels. There is not yet clarity on what fuel production techniques may be used for a fuel to qualify as an e-fuel. Nor is there any federally defined carbon intensity threshold for an e-fuel to count as low-carbon. Congress can remedy this uncertainty by defining what criteria must be met to qualify as a low-carbon e-fuel. Such a definition will provide certainty in the marketplace for e-fuels and help integrate e-fuels into regulatory frameworks.

Explore the Potential Role of E-fuels Transportation Decarbonization. Current transportation decarbonization analysis, like the 2023 multi-agency strategy for reaching net-zero greenhouse gas emissions in the transportation sector, have not closely evaluated the potential role of e-fuels. The administration should establish an inter-agency working group to evaluate and publish an analysis of the potential role of e-fuels in meeting the nation’s economic and climate objectives. Alternatively, Congress could commission the National Academies of Sciences, Engineering, and Medicine to conduct such a study and provide recommendations on the development and utilization of e-fuels in support of the United States’ clean transportation goals.

Establish E-Fuel Targets for the Aviation Sector. Aviation will need to be decarbonized either by offsetting aviation emissions with permanent carbon removal or by switching to low-carbon electricity-based or biomass-based fuels. U.S. policy initiatives like the Sustainable Aviation Fuel Grand Challenge have focused primarily on ramping up production of biomass-based fuels, which promise to be lower cost in the near term. Because e-fuels may also be necessary to fully decarbonize aviation, particularly given limits on the supply of biomass resources, it is important to also set targets for e-fuel production. This could be done either by Congress or the administration and, to be effective, would need to be paired with policies sufficient to achieve those targets.

Conclusion

The e-fuels industry promises to play an important role in helping to decarbonize sectors like aviation that need energy-dense fuels. In order to develop this industry here in the United States, continued policy support will be needed to support early market demand for e-fuels and lower the costs of production.

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