Avoided CO2 emissions – Renewable hydrogen and “green” e-fuels in the EU (Part 3)

1. Background to the RFNBO “GHG savings” requirements

In our previous article, When is H2 = RFNBO, we examined the criteria to be met for e-fuels (in particular, green hydrogen and its derivatives) to be classified as a renewable fuel of non-biological origin (RFNBO) under the European Union’s (EU) directive on renewable energy (RED II¹) and the Delegated Acts². The importance of the RFNBO designation is that the fuel would then count towards the minimum targets for renewable fuels in the EU in order to meet the EU’s mandatory carbon reduction targets.

The targets for RFNBOs in the transport sector were increased through the Revised Renewable Energy Directive (RED III, also known as the “Fit for 55” package)³ which also created targets for usage of RFNBOs in other sectors (including the iron, steel, aluminium, chemicals, fertiliser, cement and construction industries). Part of the criteria for RFNBOs under RED II requires “the greenhouse gas emissions savings from the use of [RFNBOs to be] at least 70%“⁴ compared to the fuels being replaced.

The Second Delegated Act established the methodology to be used by e-fuel producers to calculate the greenhouse gas (GHG) emissions used in the entire production process, in order to ascertain if the abovementioned GHG savings are achieved.

2. The impact of incorporated CO₂ on the GHG savings of an RFNBO

E-fuels such as e-methanol, e-methane and e-kerosene (for use in the production of SAF) are synthetic fossil fuels which blend clean hydrogen with captured CO₂ emissions. These e-fuels will be important in decarbonising the transportation sector. Although combustion of e-fuels in their end-user applications will emit carbon at much the same rate as conventional fossil fuels, those emissions can be seen as not adding anything further to the CO₂ that would have been emitted into, or existed in, the atmosphere if it had not been captured to make the e-fuel. For example, to the extent that the “same” CO₂ is captured from an industrial process and then incorporated into an e-fuel, the capturing process can be regarded as one in which emissions have been “avoided”, thereby reducing the overall amount of GHG emissions arising from that industrial process plus the end-use to which the e-fuel (that would otherwise have used fossil fuel) is put.

The Second Delegated Act imposes limitations on the permitted sources of CO₂ to be incorporated into an e-fuel to attain such a CO₂-neutral classification (such permitted deducted emissions being the Avoided CO₂ Emissions).

For e-fuel producers seeking to obtain RFNBO status, it is therefore of critical importance that the CO₂ being used in the production of the e-fuel can qualify as an Avoided CO₂ Emission in order to obtain the required 70% GHG emission saving.

3. What are Avoided CO₂ Emissions?

As set out above, the basic principle is simple enough, but in turning it into regulation – which, if complied with, will enable producers to attract subsidies or charge a green premium – legislators have to tread carefully to try to avoid creating perverse incentives for what might be environmentally unhelpful behaviour.

Accordingly, the Second Delegated Act begins straightforwardly enough by defining the following as being sources of Avoided CO₂ Emissions⁵: Emissions from “existing use or fate” that are avoided when the input is used for fuel production. However, after that, it gets more complicated.

These emissions would have been released as CO₂ into the atmosphere in any event prior to their capture and incorporation into the e-fuel⁶, and are eligible provided that the CO₂ is sourced from one of the following pathways:

a. CO₂ which has been:

(i) captured from specified industrial activities listed under Annex I to the EU ETS⁷ (e.g. oil refining, steel, cement, certain combustion installations) (Specified Industrial Source);

(ii) accounted for under an effective carbon pricing system (e.g. by paying a carbon tax or surrendering an emissions allowance); and

(iii) incorporated in the e-fuel prior to 1 January 2041 (or 1 January 2036 for CO₂ from fuel combustion for electricity generation);

b. CO₂ which has been captured from the air (e.g. through direct air capture technology);

c. CO₂ which has been captured from the production or the combustion of biofuels, bioliquids or biomass fuels:

(i) complying with the sustainability and GHG saving criteria under RED II; and

(ii) where the CO₂ captured did not receive credits for emissions savings from CO₂ capture and replacement under RED II;

d. CO₂ which has been captured from the combustion of RFNBOs or e-fuels complying with their own GHG savings criteria (i.e. recycling the same RFNBO-eligible CO₂); or

e. CO₂ which has been captured from a geological source of CO₂ where the CO₂ was previously released naturally (e.g. volcanic emissions or geothermal fields).

In addition:

a. the CO₂ must not be derived from combustion of a fuel deliberately for production of CO₂; and

b. the captured CO₂ must not have received any emissions credit under “other provisions of the law” (to avoid double-counting).

4. Considerations

a. CO₂ captured from industrial sources

Any CO₂ that is captured from a Specified Industrial Source must have been taken into account through an effective carbon pricing system, which would either be under the EU ETS (for EU domiciled industries), CBAM (for non-EU industries) or other state or national carbon pricing systems considered “effective”.

(i) EU ETS: The European Union Emissions Trading System (ETS) generally requires certain affected industries located in the EU to purchase and/or trade emissions allowances in order to cover their CO₂ emissions in the applicable year.

Whilst the EU ETS does not require emissions allowances to be surrendered for CO₂ that is captured for permanent storage, or for utilisation in such a way that it becomes permanently chemically bound (or mineralised), this exemption would not apply to CO₂ being sold for e-fuel production given that the incorporated CO₂ will be released on combustion of the e-fuel as noted above. An industrial producer would therefore still have to surrender emissions allowances or purchase allowances in respect of captured CO₂ that is intended for onward sales.

Therefore, the cost of the CO₂ being supplied will likely pass through the cost of the ETS allowances that will need to be surrendered/purchased in order to cover the captured CO₂.

CO₂ from Specified Industrial Sources may therefore be more expensive than CO₂ captured from other permitted sources. The time limitations on CO₂ from Specified Industrial Sources being an eligible Avoided CO₂ Emission⁸ will also impact its long-term viability as a source of CO₂ for e-fuel production.

(ii) CBAM: The European Union Carbon Border Adjustment Mechanism (CBAM), commencing in 2026, requires importers into the EU of certain carbon intensive goods (e.g. cement, aluminium, steel) produced outside the EU to pay for the carbon emissions associated with the production of such goods (to the extent not already paid for). The price to be paid is generally determined as the price of the emissions allowances that would have been required under the EU ETS had such goods been produced in the EU.

In theory, CO₂ from Specified Industrial Sources could be imported into the EU for the production of e-fuels. However, CBAM does not currently apply to pure CO₂, meaning that any imported CO₂ from industry could not satisfy the requirement for such CO₂ to have been accounted for unless (a) the jurisdiction of production has equivalent carbon pricing rules pursuant to which the imported CO₂ would have been accounted for in its country of origin or (b) the output of the industrial process which emitted the CO₂ (e.g. the aluminium or steel) was itself accounted for under CBAM on importation to the EU.

b. CO₂ captured from biogenic sources

CO₂ captured from the production or combustion of biofuels, bioliquids or biomass fuels (Biogenic Products) will qualify as an Avoided CO₂ Emission if the Biogenic Product produced or combusted:

(i) complies with the relevant sustainability and GHG emission savings criteria for such renewable fuels under RED II; and

(ii) did not receive any previous emissions credits.

The use of CO₂ from biogenic sources is proving to be the most popular pathway, which may be driven by the fact that the majority of biogenic sources of CO₂ are not subject to the temporal restrictions and carbon pricing considerations applicable to Specified Industrial Source CO₂.

There are, however, many biogenic production pathways for CO₂ and each pathway would need to be carefully considered on a case-by-case basis to ascertain if the resulting CO₂ could qualify as an Avoided CO₂ Emission, which would include analysis on the source of the biogenic material being used as a feedstock, how it is processed and for what the end product is to be used.

A few example biogenic pathways, and the regulatory considerations that would apply, are set out in the Annex to this article.

c. CO₂ from direct air capture

Capturing CO₂ from the atmosphere using direct air capture (DAC) technology certainly appears to be the most straightforward pathway to Avoided CO₂ Emissions from a regulatory perspective. However, due to the current costs of this technology coupled with the lack of policy incentives to use it, developers may be less likely to pursue this pathway. DAC technology is also more power-intensive for each unit of CO₂ captured, which may need to be considered in the overall GHG savings calculation and may limit such technology to locations with availability of hydro or geothermal power.

5. Final remarks

It is critical for e-fuel producers to ensure that CO₂ incorporated into the e-fuel is an Avoided CO₂ Emission.

As indicated above, there are many production pathways, but each one may have financial, technical, environmental or other constraints which will need to be analysed to ascertain which pathway will be optimal for each individual project.

This will involve careful consideration of the technical, commercial and legal landscape applicable to the relevant CO₂ supply chain and the robustness of the GHG emissions modelling of the full production and transportation chain which will be required to ensure that all relevant GHG emission reduction targets are capable of being met.

The complexities involved here, whilst not a roadblock to e-fuel production, may make it more difficult for the RED III targets to be achieved given the need for developers to expend time and cost to navigate these regulatory requirements.

ANNEX

Sample Biogenic CO₂ Pathways

1. Directive 2018/2001/EU ↩︎
2. Commission Delegated Regulation (EU) 2023/1184 of 10 February 2023 Supplementing Directive (EU) 2018/2001 of the European Parliament and of the Council by establishing a Union methodology setting out detailed rules for the production of renewable liquid and gaseous transport fuels of non-biological origin (First Delegated Act) and Commission Delegated Regulation (EU) 2023/1185 of 10 February 2023 Supplementing Directive (EU) 2018/2001 of the European Parliament and of the Council by establishing a minimum threshold for greenhouse gas emissions savings of recycled carbon fuels and by specifying a methodology for assessing greenhouse gas emissions savings from renewable liquid and gaseous transport fuels of non-biological origin and from recycled carbon fuels (Second Delegated Act) ↩︎
3. Directive of the European Parliament and of the Council amending Directive (EU) 2018/2001, Regulation (EU) 2018/1999 and Directive 98/70/EC as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652 ↩︎
4. Directive 2018/2001, Article 25(2) ↩︎
5. Paragraph 10 of the Annex to the Second Delegated Act ↩︎
6. In accordance with feedback provided by the European Commission pursuant to “Q&A Implementation of hydrogen delegated acts Version of 26/07/2023”, this may include CO₂ from the treatment of biogenic wastes and biogenic CO₂ stemming from processes which are outside the scope of the sustainability and GHG saving criteria. ↩︎
7. Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC ↩︎
8. The CO₂ must be incorporated into the e-fuel before 1 January 2041 (or 2036 for CO₂ from fuel combustion for electricity generation). ↩︎

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