The options to decarbonize for hard-to-abate sub sectors of mobility limited and expensive

Introduction

The goal is to decarbonize the world and to become net-zero by 2050. Decarbonization technologies play a crucial role in this quest. To achieve this the price of emitting greenhouse gas emissions should be high enough to trigger a change in behavior, and to make low carbon investments viable. In addition, the cost of the important technologies to decarbonize should be attractive enough to stimulate companies to adopt these technologies. Ideally the costs to decarbonize need to be lower than the costs to pay for the greenhouse gas pollution. Here the marginal abatement costs come into play. The abatement cost of an intervention or technology is simply the costs incurred to reduce greenhouse gas emissions by one tonne. In concrete terms, it relates to the total additional costs, which refers to the investment costs plus the difference in operating costs, divided by the avoided emissions. In this report we focus on the results of two studies that have the marginal abatement costs of the hard-to-abate sub-sectors of mobility for 2020, 2035 and 2050: long-haul trucking, aviation and shipping and the fuel used in these sub-sectors. The studies are from MIT Center for Energy and Environmental Policy Research (see here) and from Concawe/Aramco (see here). We compare these marginal abatement costs with the ETS price, the forecasted ETS price by Bloomberg NEF and the shadow carbon price of the Network of Greening the Financial System (NGFS). We finish with a conclusion.

Marginal abatement costs 2020

In previous reports we focused on the marginal abatement costs of electricity generation (see more here) and the life cycle emissions of road mobility (see more here). In this report, we have a slightly different focus. We focus not only on the marginal abatement costs per tonne CO2, but we also look at the hard to abate sub-sectors in mobility. These are long-haul trucking, aviation and shipping. Why are these the hard-to-abate sub sectors in mobility? The main reasons are as follows. These sub-sectors have only limited options to decarbonize. For example, electric batteries for vehicles currently do not have a sufficient range for long-haul trucks and the charging infrastructure is not ready yet. These trucks need a charging infrastructure that differs from the infrastructure for battery electric cars. A fuel cell truck could be an option but also here the fueling infrastructure is not sufficient yet. The most likely option is continuing to burn a fuel in an internal combustion engine truck, albeit using a fuel with substantially lower emissions.

For aviation and shipping, the options are also limited. Battery-electric may be a possibility for short range travel but not for long range at this point in time. The longer the distance, the fewer the options. Changing the fuel to one that emits less CO2 and other greenhouse gases currently seems the only viable option to decarbonize. This is the direction that both aviation and shipping is taking. The graphs below show the results in terms of marginal abatement costs for these hard to abate sectors.

We start with the marginal abatement costs (MAC) for long-haul trucking, short-haul aviation and short-sea shipping in 2020. These are the costs in EUR per tonne CO2 if a mobility sub-sector uses a certain type of fuel with lower emissions than the fossil fuel benchmark. For the calculation of these costs the study from MIT uses the hydrogen, ammonia and e-fuel value chains. These value chains are in detail as follow. The hydrogen value chain covers electricity generation (onshore/offshore wind, hydropower), water electrolysis, cavern storage, liquefaction, distribution (tank ship/tank truck), liquid buffer storage, mode specific refueling infrastructure, long-haul semi-truck (700 bar tank, fuel cell), short-sea ship (cryogenic tank, fuel cell), short-haul aircraft (cryogenic tank, jet engine). The ammonia value chain uses hydrogen from cavern storage (see hydrogen value chain) and additionally covers ammonia synthesis including nitrogen direct air capture and liquefaction, liquid buffer storage, distribution (tank ship), direct fuel bunkering (ship to ship), short-sea ship (cooling tank, fuel cell). The e-fuel value chain uses hydrogen from cavern storage (see hydrogen value chain) and additionally covers e-fuel synthesis including CO2 direct air capture, distribution (tank ship/tank truck), e-fuel buffer storage, mode-specific refueling infrastructure, long-haul semi-truck (state of the art, internal combustion), short-sea ship (state of the art, internal combustion), short-haul aircraft (state of the art, jet engine) (see more here).

In 2020 all of the available fuels with substantially lower emissions compared to the fossil fuel benchmark had much higher marginal abatement costs than the ETS price at that time (the red line). This means that for these sectors buying ETS allowances was the more attractive than using non-fossil fuels. In 2020 of these sub-sectors only aviation was part of the ETS.

In the study of Concawe/Aramco the marginal abatement costs are calculated in a different way. These abatement costs refer only to fuel supply (including embedded carbon), without accounting for use-case efficiencies. For example, fuel cell electric vehicles (FCEV) have a higher efficiency than internal combustion engine (ICE) vehicles leading to lower abatement costs for hydrogen fuel. This study is based on the following assumptions.

First, renewable electricity is used for the production of e-fuel. Second, the CO2 for the production of these alternative fuels comes from different sources. In 2020 and 2030 CO2 comes from a concentrated source such as CCS and in 2050 from direct air capture (DAC). Third, ships and trucks will consumer conventional fossil fuels only in 2020 and 2030, supposing that not enough e-fuels will be available. In 2050 the liquid fuels used will be 100% e-fuels (e-diesel, see here).

The graph below shows the same results as the graph above, namely that the costs of alternative fuels were substantially higher than the ETS price in 2020. E-kerosene and bio kerosene are mainly used in aviation while most of the other fuels could be used in shipping.

Marginal abatement costs 2035 and 2050

Going forward we would like to know if the abatement costs of using alternative lower emission fuels will become attractive compared to the expected ETS price. First, we need the costs of these fuels for 2035 and 2050. The two studies provide more clarity on this. They show that the marginal abatement costs decline because of higher production, more renewable electricity and lower production costs.

Second, we need to determine what the ETS price will be in 2035 and 2050 as the sub-sectors fall under the ETS. Bloomberg NEF has ETS price forecasts up to 2035. This is the lighter blue line in the graph below. For longer dated prices we use the shadow carbon prices of NGFS. The shadow carbon price is the average of the different components that contribute to the costs of emissions, of which the EU ETS price is one. The NGFS has expected shadow carbon prices for different scenarios. In this report we focus on three scenarios: Net Zero 2050, Current Policies and Nationally Determined Contributions (NDCs). These shadow carbon prices are in 2010 dollars per tonne. To come to 2035 and 2050 carbon prices in dollars per tonne, we adjust these prices for the expected price trend for Germany (2010 versus 2035 or 2050). As the marginal abatement costs are in euros, we also correct the NGFS shadow carbon prices for the exchange rate currently priced in the market for 2035 and 2050. The results are the red (net-zero 2050), yellow (Current Policies) and darker blue (NDC) lines in the graphs below for 2035 and 2050.

The graph above shows the results for 2035. In 2035 there is a large number of alternative fuels that have marginal abatement costs below the expected shadow carbon price (in red). This indicates that mainly for trucking and to a lesser extent for aviation and shipping it is more attractive to opt for the alternative fuel to decarbonize than to buy the ETS allowances. However, there are fewer options available under Current Policies and NDC scenarios and the Bloomberg NEF forecast.

In 2050 all the alternative fuel options have lower costs than the shadow carbon price under the Net Zero 2050 scenario as the graphs above and below show. However, the outlook changes quite dramatically under the current policy scenario (yellow line). Under this scenario the costs for alternative low carbon fuels are still too high compared to the shadow carbon price. Under the NDC scenario (blue) some of the mentioned alternative fuels would be an attractive option.

Conclusion

The hard-to-abate sub-sectors in mobility – long-haul trucking, aviation and shipping – have very few options to decarbonize and the costs of these options are also very high compared to the current ETS price. So stakeholders in these sectors have an incentive to buy ETS allowances than to decarbonize. This will only change if the costs of the decarbonization options decline and/or the ETS price rises. Alternative fuels become cheaper if there is more renewable electricity available to produce these fuels and production is substantially ramped up. Higher production that drives down the price. In a Net Zero scenario the costs of these fuels are expected to decline while the ETS price will be expected to rise. However the picture dramatically changes for other scenarios. For the Current Policies scenario costs for these fuels remain too high compared to the shadow carbon price. Under the NDC scenario these sectors could choose a number of these alternative fuels. However, technological advances could also change these dynamics. For example, if there were to be a battery technology in the future that substantially surpasses the current energy density of electric batteries than these could also have a serious uptake in the hard-to-abate subsectors of mobility.