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29 Mar 2023


Joël Reland unpacks the European Commission’s decision – in response to pressure from Germany – to exempt Internal Combustion Engine cars powered by ‘e-fuels’ from being banned in 2035, suggesting that this will have implications for the EU’s climate strategy.

The official record of last week’s European Council outlined the usual list of topics discussed: Ukraine, energy, the economy and migration.

Yet arguably the biggest talking point was absent altogether: Germany’s opposition to a proposed future ban on Internal Combustion Engine (ICE) cars – which run on petrol and diesel. The issue dominated discussions on the margins of the summit, and a way forward was ultimately announced only hours after everyone had packed off home.

The result is that Germany ended its opposition to the ban, because the Commission has agreed to exempt ICE vehicles powered by ‘e-fuels’. This might sound like a mundane technicality, but it has potentially significant consequences for the EU’s net zero transition, and for political relations within the Union.

The original EU proposal was that all new cars sold from 2035 onwards must be zero emissions: in other words, either battery electric vehicles (BEVs), which are an increasingly common sight on roads across Europe, or extremely rare Hydrogen Fuel Cell vehicles. (The UK target has a similar 2030 target for banning ICE-only vehicles and 2035 for hybrid vehicles.)

The EU proposal had passed the European Parliament and appeared set for formal sign-off before Germany, backed by Italy, Poland, the Czech Republic and Bulgaria, declared its opposition. Their central concern is that the ban in effect spells the slow death of the internal combustion engine.

For Germany and Italy in particular, this is a threat to their powerful auto industries. They are market leaders in the production of ICE technologies (employing an estimated 800,000 people in Germany) but locking into that market means they have fallen behind other countries, like China, in the development of BEVs. The 2035 ban thus threatens their technological dominance and will likely cost jobs, especially in the automotive supply chain.

Faced with this threat, e-fuels are perceived by some as a silver bullet for the auto industry. Proponents claim they are carbon neutral, and – crucially – made for combustion engines, thus sparing the motor car from the dustbin of history.

E-fuels are synthetic alternatives to fossil fuels, made from CO2 (captured from the atmosphere) mixed with hydrogen (which in theory can be generated using renewable energy). While burning e-fuels emits CO2, proponents argue these emissions were already captured from the atmosphere, meaning no new CO2 is added overall.

Yet the list of concerns around permitting e-fuels is significant.

For a start, they are up to four times less efficient than electric batteries, The International Council on Clean Transport found that almost half of the energy used to create an e-fuel is lost during the production process, and another 70% is lost when it is burned, giving a total energy efficiency of 16%. In contrast, energy to power electric vehicles has an efficiency rate of 72%.

Given energy grids are still far from 100% renewable, increased demand for renewable energy to create e-fuels prevents it being deployed elsewhere in the energy mix, or necessitates major grid expansion, undermining the wider push towards net zero. Swapping 20% of cars to e-fuel and hydrogen power would push up electricity demand by an estimated 36%, according to the NGO Transport and Environment. There is also a risk that the hydrogen for e-fuels is generated with fossils fuels, not renewables.

Another issue is that e-fuels will likely make only a very marginal contribution to vehicle decarbonisation, because the technology is yet to be developed and will likely be very expensive. Transport and Environment estimates they could power at best 2% of cars in the EU by 2035. Another academic study found that all planned global e-fuel projects could meet only 10% of Germany’s demand across aviation, shipping and chemicals. Indeed, e-fuels will have a much more important role to play in harder-to-decarbonise areas like aviation, which are likely to gobble up available supply.

A real danger is that the Commission’s approval of e-fuels for cars could result in manufacturers slowing down their development of BEV technology in favour of the tantalising notion of carbon-neutral fuel. Porsche has already invested $24m into an e-fuel project in Chile.

Given the EU’s wider concern with US and Chinese subsidies for green technology, and plans to vastly boost its domestic production in response, it seems bizarre that the EU is actively incentivising its car industry to shift its focus off the crucial technology – BEVs – in driving its net zero transition on the roads.

Indeed, France’s Transport Minister Clément Beaune has called the proposal an “environmental and industrial failure”, and Spain has been similarly critical. Such comments betray the growing perception of Germany as something of an enfant terrible – or, perhaps, schreckliches Kind – when it comes to the EU’s wider climate and industrial strategy.

This month also saw the passing of the EU’s Net Zero Industry Act, setting targets to massively upscale EU domestic production of green technologies, yet big questions remain over how to finance the significant investment entailed. An EU ‘sovereignty fund’, financed through collective borrowing and similar in scope to the Covid recovery fund, has been mooted, but Germany leads the bloc of member states opposed. Similarly, it has rejected plans to carve green projects out of deficit calculations because ‘debt is debt’.

Instead, funding is likely to rely significantly on state subsidies, supported by a further recent relaxation of EU state aid rules under the Temporary Crisis and Transition Framework. Yet smaller member states are justifiably concerned that this will simply allow the richest countries – namely Germany and France – to leverage more of their existing wealth to support domestic industry, while poorer member states without access to such capital are left behind.

Indeed, of the €672bn of subsidies approved under the temporary framework, 77% has gone to Germany and France. The generous use of state aid has led one Czech official to quip that “Germany is an industry association pretending to be a state”.

Germany’s e-fuel agenda is yet another sign that its domestic agenda trumps common purpose when it comes to meeting the significant challenges of the climate crisis.

By Joël Reland, Research Associate at UK in a Changing Europe.


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