Transportation Fuel Standard Programmes
Instruments that incentivise the adoption of decarbonised fuels by imposing a limit on the carbon intensity of fuels used in transportation.
Transportation Fuel Standard Programmes
These programmes are often applied to fuel suppliers and retailers and encompass a range of transport sectors (e.g. they can include road transport, aviation and maritime fuels in different ways).
They work by establishing:
- A limit on the overall carbon intensity of transport fuels supplied within a given scope. The limit is then applied to suppliers.
- A set of eligible fuels that when sold generate tradable credits to contribute to the overall carbon intensity limit.
- A requirement that suppliers need sufficient credits to represent their overall fossil supply.
- A revenue stream for the use of low carbon fuels, as suppliers with a deficit of credits can procure them from those with a surplus.
- Demand indirectly by influencing the selection of fuels by consumers.
Demand creation potential rating by sector
We have developed an indicative rating of the green demand creation potential of each policy by sector, based on the share of demand it can apply to, and its potential impact on an indicative business case. Depending on local/national context, this may be more or less impactful in different sectors.
Based on this analysis, domestic fuel standards programmes can be applied to support the aviation and maritime sectors, but may need to be paired with other measures. For example, in the international maritime sector, these would need to be carefully co-ordinated with the regulatory measures currently under consideration in the IMO.
Note: A multilateral measure establishing a Global Fuel Standard for the maritime sector is currently under development at IMO which national measures would need to be carefully coordinated with.
Key Attributes: Transportation Fuel Standard Programmes
Carbon leakage risk
Depending on how a fuel standard incentivises transportation fuels, it could increase costs and increase carbon leakage risks in internationally exposed transportation sectors. However, since the cost is likely to be shared with more localised transport services (e.g. road transport) this is likely to be relatively low.
Technology agnostic
Fuel standard programmes typically include several sectors in their scope, and allow multiple decarbonisation levers to contribute to overall targets.
Ability to ramp up over time
Intensity limits can be increasingly tightened through the low carbon standard over the years. However, as low carbon solutions proliferate across sectors, the overall demand for credits may drop - reducing their value and the overall financial impact of the instrument.
Burden of cost
Buyers bear the burden of incurring additional costs that come with procuring lower carbon fuels. This could disproportionately impact smaller businesses and lower margin industries/ sub-sectors with less resources to absorb the cost.
Long-term stability
Fuel standard programmes can be put in place with a long-term horizon, but the overall value of the associated incentives may vary over time.
Complexity
To ensure the success of these policies, governments need robust systems in place to facilitate emissions reporting; measurement; monitoring; and enforcement. Trade-offs between different sub-sectors also need to be considered (if multiple sectors fall under the standard’s scope).
Deep Dives & Case Studies
Decarbonisation levers incentivised by policy
1: Aviation & Maritime - Efficiency of use: Improving fuel efficiency by optimising routes, speed, and other operational practices. This is incentivised given the higher cost of fuel
2: Maritime - SZEF: Scalable zero emission shipping fuel (SZEF), including zero/near-zero emissions methanol and ammonia
Key considerations
• Inclusion of more nascent fuels: for less mature/more expensive fuels (e.g. hydrogen derivatives and advanced biofuels) governments can consider awarding additional credits (i.e. ‘multipliers’) to further incentivise such fuels. When determining the appropriate application of multipliers, trade-offs between the decarbonisation of different sub-sectors need to be carefully considered. Alternatively, limits for specific fuels in sub-sectors can be implemented (e.g. prioritise the use of sustainable biofuels in hard-to-abate sectors over road transport that can be more readily electrified).
• Implementation over time: fuel standards can be tightened over time as the availability of decarbonised fuels increases, production costs fall, and enabling infrastructure becomes more widespread. The supply and demand of credits will need to be taken into account, as rapid decarbonisation of specific sub-sectors (e.g. road transport) may make the price of credits too cheap to have an impact in more costly-to-abate, heavy transport sectors.
• Method of inclusion: standards can be applied differently for different fuels and sectors. For maritime and aviation fuels, there are three main ways:
1 Not in scope of programmes: those that do not include maritime or aviation, but focus on other sectors (e.g. road transportation).
2 'Opt in’ programmes: in this case, the sale of sustainable maritime or aviation fuels generates credits. However, retailing of fossil aviation and maritime fuels does not generate a deficit.
3 Full inclusion: where retailers of fuels receive credits, but the sale of fossil aviation or maritime fuels generatecredit deficits.
• Accounting methodologies: variations exist between GHG emission accounting methods used, e.g. tank-to-wake or well-to-wake in maritime. Certain fuels with low tank-to-wake emissions can have high emissions from its upstream production. Thus, using a well-to-wake method can give amore comprehensive life cycle assessment and should be adopted consistently across transport modes in scope of fuel standard programmes.
• Risks of increasing demand for unsustainable, cheaper fuels: without the right guardrails restricting or stopping the use of unsustainable fuels, standards could increase demand for fuels made from less sustainable feedstocks. This in turn could increase stresses on food security/feedstock supply. Ideally, policies should prioritise the use of appropriate feedstocks, particularly in sectors with very limited decarbonisation options (like aviation).
• Need for co-ordination with other instruments/regulations: the international maritime sector is globally regulated by the IMO, and a mandatory Global Fuel Standard and GHG pricing mechanism is currently under consideration. The use of domestic fuel standards programmes would need to be carefully coordinated to support implementation of such instruments. One option may be to allow sellers of SZEF to opt in and receive credits, indirectly subsidising SZEF.
Case study: California Low Carbon Fuel Standard
Examples of key enabling initiatives/ detailed studies
