Identification of the major risks/uncertainties associated ... · ii Ref. AEA/ED56293/Task 5 Paper...

EU Transport GHG: Routes to 2050 II Risks & Uncertainties Contract 070307/2010/579469/SER/C2

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Lower transport speeds have an impact on transport demand. For passenger transport slower transport results in shorter travel distances, particularly in the long run. [The rule of constant travel times even suggests that on average all reduced travel time is compensated by additional travel elsewhere in the transport system (potentially by other modes, times, locations or even users).

Final Report Appendix 5: Identification of the major risks/uncertainties associated with the achievability of considered policies and measures

Richard Smokers (TNO) Ian Skinner (TEPR) Bettina Kampman (CE Delft) Filipe Fraga (TNO) Nikolas Hill (AEA)

28 May 2012 Final Task 5 Paper

Risks & Uncertainties EU Transport GHG: Routes to 2050 II Contract 070307/2010/579469/SER/C2

ii Ref. AEA/ED56293/Task 5 Paper Final – Issue No. 4 Restricted-Commercial

Richard Smokers (TNO) Ian Skinner (TEPR) Bettina Kampman (CE Delft)

Identification of the major risks/uncertainties associated with the achievability of considered policies and measures

28 May 2012 Final Task 5 Paper

Suggested citation: Richard Smokers, Ian Skinner, Bettina Kampman et al. (2012) Identification of the major risks/uncertainties associated with the achievability of considered policies and measures. Task 5 paper produced as part of a contract between European Commission Directorate-General Climate Action and AEA Technology plc; see website www.eutransportghg2050.eu

Report Approved By: Signed:

Sujith Kollamthodi (AEA Practice Director - Transport)

Date:

28 May 2012


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Executive Summary

Objectives: The purpose of this Task is to:

Explore and identify key risks and uncertainties associated with the achievability of relevant policies and instruments, including lead times for policy implementation and time lags to the resulting impact on emissions

Assess the extent to which key factors outside the transport sector will affect decarbonisation of transport

Develop approaches to address those risks and uncertainties and optimize achievability

Task 5 looked at the risks and uncertainties associated with three types of policy instruments for reduction of GHG from transport (biofuels, electricity and hydrogen, economic instruments). The main objective was to assess how these risks may adversely impact on the desired result from the considered policy instruments, as well as to develop recommendations to avoid, manage and mitigate the consequences of the risks. In general it was concluded that at least some of these risks and uncertainties can significantly reduce or otherwise hinder the desired impact of the considered policy instruments. It is therefore recommended that the recommendations which were developed in this paper are taken into account for policy development, monitoring and evaluation, and posterior assessment. Main Findings regarding Biofuels:

There are significant risks and uncertainties related to the four conditions that need to be met if the full potential of GHG reduction with biofuels is to be realised: the availability of low-carbon biomass and biofuels, their sustainability and the GHG reduction they actually achieve, their technical compatibility and public support.

In the coming years, the strategies should focus on effective implementation and improvement of the biofuels sustainability criteria, in particular overall GHG performance. In addition, research into new biofuels production processes should be promoted, to ensure a diverse biomass use in the future that does not compete with the food sector nor lead to significant negative impacts from land use change and delivers better overall GHG performance.

In the longer term, risks can be managed by setting the right biofuels targets, policies and (sustainability) boundary conditions. This suggests that priority in the early years should be focussed on getting the right policy and production in place rather than focussing on volume. This should lead to a biofuels supply that is sustainable, diverse, available at a reasonable cost and is compatible with the vehicles and engines used in the various transport modes. In addition, other important issues to consider are feedstock availability and biomass demand from other sectors.

Market response to policies and the outcome of technological developments may differ from what was envisaged. The effects and broader impacts of the policy strategy and measures should therefore be monitored critically, and policies should be adapted when necessary.

In parallel, efforts should also be put into global initiatives that can reduce land use change and biodiversity loss due to biomass cultivation for biofuels, for example within the IPCC and CBD (Convention on Biological Diversity) framework.


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Main Findings regarding Electricity and Hydrogen in transport:

The implementation of electricity and hydrogen as GHG reduction options for the transport sector is a transition that involves drastic and structural changes in both the transport and the energy sector and that will take several decades to start up, roll out and complete.

Governments and stakeholders in the market need endurance and a long term vision to manage this transition in an effective way. Mitigating risks and removing uncertainties is an important and unavoidable part of that.

Proactive steps are required in the short term in laying the ground work for longer term policy instruments, in terms of both early market formation and in setting up and managing a process that timely delivers the insights that are necessary to develop a suitable dominant design for the energy distribution infrastructure.

Important risk and uncertainties that require short term action relate to:

- Impact of zero-emission vehicles under the CO2 legislation1 in combination with the need for a methodology on how to account for the GHG intensity of energy carriers. Determining appropriate metrics is essential to make sure that post 2020 targets provide the right incentives to manufacturers and energy suppliers.

- Uncertainty about the business case. This issue is closely linked with the development of costs of vehicles and infrastructure, consumer acceptance and the role of supply and demand oriented policy measures in the business case.

- Interaction with the energy system. This issue partly concerns developing a more mature view on the dominant design of the charging infrastructure for electric vehicles in interaction with grid-related developments at a local and regional scale, but also concerns interaction on a (trans)national level with regard to how electric and hydrogen-fuelled vehicles, on the one hand, require decarbonisation of the energy supply system and, on the other hand, influence investments in the generation of infrastructure which may or may not be consistent with the need for decarbonisation.

Main Findings regarding Economic instruments, particularly usage pricing:

If road usage charging is to be introduced, it should take place in addition to, rather than instead of, fuel taxation.

Many of the associated risks are linked, and some often mentioned issues (e.g. public acceptability and wider political risks) can be seen in the context of a family of economic, social and environmental risks that were identified.

Many of the latter are real, and could be addressed either in the design of the charging scheme, or by the introduction of complementary policy instruments (which could even be introduced in advance of the charging scheme itself).

1 Such as Regulation (EC) 443/2009 for passenger cars and Regulation (EU) 510/2011 for light commercial vehicles.


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Table of Contents

Executive Summary ................................................................................................ iii

1 Introduction .................................................................................................... 11

1.1 Topic of this paper .............................................................................................11

1.2 The contribution of transport to GHG emissions ................................................11

1.3 Background to the project and its objectives .....................................................16

1.4 Background and purpose of the paper ..............................................................17

2 Exploration and selection of the main risks and uncertainties to be

analysed for the three selected policies and instruments ......................... 19

2.1 Approach to identification and categorisation of risks and uncertainties ............19

2.2 Conception of the policy strategy ......................................................................20

2.3 Implementation of the policy strategy by means of policy instruments ...............20

2.4 Implementation of technologies and behavioural changes in response to

incentives provided by the policy instruments ..............................................................21

2.5 Other impacts, related to the sustainability or other aspects of the

implemented technologies and behaviours ........................................................23

2.6 Selection of policies and instruments ................................................................23

2.7 Biofuels .............................................................................................................24

2.8 Electricity and hydrogen in transport .................................................................26

2.9 Economic instruments, particularly usage pricing ..............................................28

3 Biofuels ........................................................................................................... 30

3.1 Introduction .......................................................................................................30




incentives provided by the policy instruments ....................................................35

3.5 Other impacts ....................................................................................................36

3.6 Conclusions ......................................................................................................38

3.7 References........................................................................................................39

4 Electricity and hydrogen in transport .......................................................... 40

4.1 Introduction .......................................................................................................40




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incentives provided by the policy instruments ....................................................50

4.5 Other impacts, related to the sustainability or other aspects of the

implemented technologies and behaviours ........................................................59

4.6 Summary of lead times, risks and uncertainties associated with applying

electricity and hydrogen to reduce transport’s CO2 emissions ...........................61

4.7 Possible strategies for managing and reducing risks .........................................62

4.8 Managing the transition .....................................................................................68

4.9 Conclusions ......................................................................................................72

4.10 References ....................................................................................................73

5 Economic instruments, particularly usage pricing ..................................... 74

5.1 Introduction .......................................................................................................74

5.2 The policy context .............................................................................................76



5.5 Behavioural changes in response to incentives provided by user charging .......81

5.6 Other impacts, related to the sustainability or other aspects of the policy

instrument .........................................................................................................82

5.7 Conclusions ......................................................................................................82

5.8 References........................................................................................................83

6 Overall conclusions from this task ............................................................... 85

Annex A Summary of information from literature on risks and uncertainties

w.r.t. biofuels......................................................................................... 87

Annex B Summary of information from literature on risks and uncertainties

w.r.t. electricity and hydrogen in transport ........................................ 93

Annex C Summary of information from the literature on user charging ......... 99


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List of Tables

Tables in the main body of the report

Table 2.1 Overview of lead times, risks and uncertainties associated with applying electricity and hydrogen to reduce transport’s CO2 emissions ...........................61

Table 2.3 Potential risks and uncertainties associated with the conception of road user charging policy ..................................................................................................78

Table 2.4 Potential risks and uncertainties associated with the implementation of road user charging instruments .........................................................................80

Table 2.5 Potential risks and uncertainties associated with behavioural responses to road user charging ............................................................................................81

Table 2.6 Other potential risks and uncertainties associated with road user charging .......82


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List of Figures

Figures in the main body of the report

Figure 1.1: EU27 greenhouse gas emissions by sector and mode of transport, 2009 ......11 Figure 1.2: Business as usual projected growth in transport’s lifecycle GHG emissions

by mode .........................................................................................................14 Figure 1.3: EU overall emissions trajectories against transport emissions (indexed) ........15 Figure 4.1: Market share of new technologies develops along S-curve: initial scale-up

phase may suffer from the "valley of death" when after serving the "innovators" and "early adopters" segments in the market the price and characteristics have not yet developed to a level that is considered acceptable by the " early majority" segment of the market. ............................51

Figure 4.2: Learning curve theory applied to the price of compact class passenger cars on hydrogen [HYWAYS 2007] ................................................................52

Figure 4.3: Solving the chicken and egg problem of costs and demand ...........................69 Figure 4.4: Forces and other aspects that influence the implementation of system

innovations, in this case electric vehicles .......................................................70


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Glossary2

BAU Business as usual, i.e. the projected baseline of a trend assuming that there are no interventions to influence the trend.

BEV Battery electric vehicle, also referred to as a pure electric vehicle, or sometimes simply a pure EV. A vehicle powered solely by electricity stored in on-board batteries, which are charged from the electricity grid.

Biofuels A range of liquid and gaseous fuels that can be used in transport, which are produced from biomass. These can be blended with conventional fossil fuels or potentially used instead of such fuels.

Biogas A gaseous biofuel predominantly containing methane which can be used with or instead of conventional natural gas. Biogas used in transport is also referred to as biomethane to distinguish it from lower grade/unpurified biogas (e.g. from landfill) containing high proportions of CO2.

Biomethane Biomethane is the term often used to refer to/distinguish biogas used in transport from lower grade/unpurified biogas (e.g. from landfill) used for heat or electricity generation. Biomethane is typically purified from regular biogas to remove most of the CO2.

CNG Compressed Natural Gas. Natural gas can be compressed for use as a transport fuel (typically at 200bar pressure).

CO2 Carbon dioxide, the principal GHG emitted by transport.

CO2e Carbon dioxide equivalent. There are a range of GHGs whose relative strength is compared in terms of their equivalent impact over one hundred years to one tonne of CO2. When the total of a range of GHGs is presented, this is done in terms of CO2 equivalent or CO2e.

DG TREN European Commission’s Directorate-General on Transport and Energy. This DG was split in 2009 into DG Mobility and Transport (DG MOVE) and DG Energy.

Diesel The most common liquid transport fuel, which is used in various forms in a range of transport vehicles, e.g. heavy duty road vehicles, inland waterway and maritime vessels, as well as some trains.

EEA European Environment Agency.

EV Electric vehicle. Sometimes used to denote a BEV, but also used as a general term for vehicles with electric propulsion, including FCEV, BEV, PHEV, etc. A vehicle which is able to propel itself over substantial distances using electric power.

FCEV Fuel cell electric vehicle. A vehicle powered by a fuel cell, which uses hydrogen as an energy carrier.

GHGs Greenhouse gases. Pollutant emissions from transport and other sources, which contribute to the greenhouse gas effect and climate change. GHG emissions from transport are largely CO2.

HEV Hybrid electric vehicle. A vehicle powered by both a conventional engine and an electric battery, which is charged when the engine is used.

ICE Internal combustion engine, as used in conventional vehicles powered by petrol, diesel, LPG and CNG.

IWW Inland Waterway

2 Terms highlighted in bold have a separate entry.


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Kerosene The principal liquid fuel used by aviation, also referred to as jet fuel or aviation turbine fuel in this context.

Lifecycle emissions

In relation to fuels, these are the total emissions generated in all of the various stages of the lifecycle of the fuel, including extraction, production, distribution and combustion. Also known as WTW emissions when limited specifically to the energy carrier or fuel.

LNG Liquefied Natural Gas. The liquefied form of Natural gas that can be used as a transport fuel.

LPG Liquefied Petroleum Gas. The liquefied form of propane which can be used as a transport fuel.

MtCO2e Million tonnes of CO2e.

Natural gas A gaseous fossil fuel, largely consisting of methane, which is used at low levels as a transport fuel in the EU.

NGV Natural Gas Vehicle. Vehicles using methane as a fuel, including in its compressed and liquefied forms.

NOx Oxides of nitrogen. These emissions are one of the principal pollutants generated from the burning of fossil and biofuels in transport vehicles.

Options These deliver GHG emissions reductions in transport and can be technical or non-technical.

Petrol Also known as gasoline and motor spirit. The principal fuel used in light duty transport vehicles, such as cars and vans. This fuel is similar to aviation spirit also used in some light aircraft in civil aviation.

PHEV Plug-in hybrid electric vehicle, also known as extended range electric vehicle (ER-EV). Vehicles that are powered by both a conventional engine and an electric battery, which can be charged from the electricity grid. The battery is larger than that in an HEV, but smaller than that in a BEV.

PM Particulate matter. These are one of the principal pollutant emissions generated from the burning of fossil and biofuels in transport vehicles.

Policy instrument

These may be implemented to promote the application of the options for reducing transport’s GHG emissions.

TTW emissions Tank to wheel emissions, also referred to as direct or tailpipe emissions. The emissions generated from the use of the fuel in the vehicle, i.e. in its combustion stage.

WTT emissions Well to tank emissions, also referred to as fuel cycle emissions. The total emissions generated in the various stages of the lifecycle of the fuel prior to combustion, i.e. from extraction, production and distribution.

WTW emissions Well to wheel emissions. Also known as lifecycle emissions when limited specifically to the energy carrier or fuel.


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1 Introduction

1.1 Topic of this paper

This paper is one of a series of reports drafted under the EU Transport GHG: Routes to 2050 II project. This paper focuses on risks and uncertainties associated with the achievability of considered policies and measures. The paper identifies risks and uncertainties associated with the conception of the policy strategy, the implementation of the policy strategy by means of policy instruments, the implementation of technologies and behavioural changes in response to incentives provided by the policy instruments, and other impacts, related to the sustainability or other aspects of the implemented technologies and behavioural changes. It focuses on issues that affect the likelihood that a policy strategy or instrument in the end delivers the intended GHG emission reductions.

1.2 The contribution of transport to GHG emissions

Transport is responsible for a quarter of EU greenhouse gas emissions making it the second biggest greenhouse gas emitting sector after energy (see Figure 1.1). Road transport accounts for more than two-thirds of EU transport-related greenhouse gas emissions and over one-fifth of the EU's total emissions of carbon dioxide (CO2), the main greenhouse gas. However, there are also significant emissions from the aviation and maritime sectors and these sectors are experiencing the fastest growth in emissions, meaning that policies to reduce greenhouse gas emissions are required for a range of transport modes3.

Figure 1.1: EU27 greenhouse gas emissions by sector and mode of transport, 2009

10.8%

28.8%

6.5%

9.1%

3.5%

11.3%

5.1%

25.0%

Manuf. and Construction Energy

Industrial Processes Residential

Commercial Agricultrural

Other Transport

2009

17.9%

0.4%

3.2%

0.4%

2.7%

0.2%

0.2%

Road transport Domestic navigation

International maritime Domestic aviation

International aviation Rail transport

Other transport

Transport,

Source: EEA (2012)

4

Notes: International aviation and maritime shipping only include emissions from bunker fuels

3 EC DG Climate Action (2010): http://ec.europa.eu/clima/policies/transport/index_en.htm

4 Based on historic data from the EEA’s GHG data viewer, downloaded from EEA’s website 10/02/12: http://www.eea.europa.eu/data-and-

maps/data/data-viewers/greenhouse-gases-viewer

http://ec.europa.eu/clima/policies/transport/index_en.htm

http://www.eea.europa.eu/data-and-maps/data/data-viewers/greenhouse-gases-viewer




While greenhouse gas emissions from other sectors are generally falling, decreasing 24% between 1990 and 2009, those from transport have increased by 29% in the same period. This increase has happened despite improved vehicle efficiency because the amount of personal and freight transport has increased. The exception for this general upward trend in emissions is the 5% decrease in overall transport emissions between 2007 (where they peaked) and 2009. This decrease is generally viewed as being primarily a result of the impacts of the global recession, and indications are that emissions began to rise again in 2010 as the European economy recovered somewhat. The European Commission (EC) has over the past year embarked on a number of programmes as part of the Europe 2020 Strategy, including the launch of Roadmap for moving to a competitive low carbon economy in 20505 (EC, 2011a – further referred to as the 2050 Roadmap) and Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system (EC 2011b – further referred to as the Transport White Paper) – both published in March 2011.

The 2050 Roadmap is a strategy that seeks to define the most cost-effective ways to reduce

GHG emissions based on the outcome from modelling to meet the long-term target of reducing overall emissions by 80% domestically. The Roadmap considers the pathways for each of the sectors, identifying the magnitude of reductions required in each sector in 2030 and 2050 (shown as ranges) in a variety of scenarios ranging from global co-operation on climate action to fragmented action. For the transport sector (which includes CO2 from aviation but excludes CO2 from marine shipping), the targets for 2030 are between +20% and -9%, and the 2050 targets are -54% to -67%. The Roadmap anticipates that the transport sector targets could be achieved through a combination of fuel efficiency, electrification and consideration of transport prices. These are explored further in the White Paper on Transport, on the basis of the Effective Technology scenario (with low fossil fuel prices) of the Roadmap which shows a -61% reduction for the transport sector. The Transport White Paper6 presents the European Commission’s vision for the future of the EU transport system and defines a policy agenda for the next decade to begin to move towards a 60% reduction in CO2 emissions and comparable reduction in oil dependency by 2050. As part of this it defines ten aspirational goals as indicators for policy action. These goals can be categorised as developing and deploying new and sustainable fuels and propulsion systems; optimising the performance of multimodal logistic chains, including by making greater use of more energy efficient modes; and increasing the efficiency of transport and of infrastructure use with information systems and market-based incentives. Key goals are presented in Box 1.1. The Transport White Paper goals are underpinned by 40 concrete initiatives, and the various actions and measures introduced within the Paper will be elaborated on over this decade through the preparation of appropriate legislative proposals with key initiatives to be put in place. The actions aim to increase the competitiveness of transport while contributing to delivering the 60% reduction in GHG emissions from transport required by 2050, using the ten goal/targets as benchmarks. Both the 2050 Roadmap and Transport White Paper set the context within which this EU Transport GHG: Routes to 2050 II project has been undertaken, although this work was commissioned prior to their completion.

5 EC (2011a) A Roadmap for moving to a competitive low carbon economy in 2050, COM(2011) 112 final, European Commission. Brussels.

Available at: http://ec.europa.eu/clima/policies/roadmap/documentation_en.htm 6 EC (2011b) Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system, COM(2011) 144

final, European Commission, Brussels. Available at: http://ec.europa.eu/transport/strategies/2011_white_paper_en.htm

http://ec.europa.eu/transport/strategies/2011_white_paper_en.htm



Box 1.1: Goals from the 2011 Transport White Paper

EC Transport White Paper Goals (2011)

Halve the use of ‘conventionally-fuelled’ cars in urban transport by 2030; phase them out in cities by 2050; achieve essentially CO2-free city logistics in major urban centres by 2030.

Low-carbon sustainable fuels in aviation to reach 40% by 2050; also by 2050 reduce EU CO2 emissions from maritime bunker fuels by 40% (if feasible 50%).

30% of road freight over 300 km should shift to other modes such as rail or waterborne transport by 2030, and more than 50% by 2050, facilitated by efficient and green freight corridors. To meet this goal will also require appropriate infrastructure to be developed.

By 2050, complete a European high-speed rail network. Triple the length of the existing high-speed rail network by 2030 and maintain a dense railway network in all Member States. By 2050 the majority of medium-distance passenger transport should go by rail.

A fully functional and EU-wide multimodal TEN-T ‘core network’ by 2030, with a high quality and capacity network by 2050 and a corresponding set of information services.

By 2050, connect all core network airports to the rail network, preferably high-speed; ensure that all core seaports are sufficiently connected to the rail freight and, where possible, inland waterway system.

Deployment of the modernised air traffic management infrastructure (SESAR) in Europe by 2020 and completion of the European Common Aviation Area. Deployment of equivalent land and waterborne transport management systems (ERTMS, ITS, SSN and LRIT, RIS). Deployment of the European Global Navigation Satellite System (Galileo).

By 2020, establish the framework for a European multimodal transport information, management and payment system.

By 2050, move close to zero fatalities in road transport. In line with this goal, the EU aims at halving road casualties by 2020. Make sure that the EU is a world leader in safety and security of transport in all modes of transport.

Move towards full application of “user pays” and “polluter pays” principles and private sector engagement to eliminate distortions, including harmful subsidies, generate revenues and ensure financing for future transport investments.

The increasing political importance that is being attached to decarbonising transport reflects the fact that, of all the economy’s sectors, transport has made the least progress in terms of reducing its GHG emissions, despite significant potential at low cost. As mentioned earlier, since 1990, GHG emissions from transport, of which 98% are carbon dioxide (CO2), had the highest increase in percentage terms of all energy related sectors7 (even without non-CO2 impacts of aviation being included). Figure 1.2 shows the updated baseline based on PRIMES-TREMOVE, as implemented in SULTAN. This is consistent with the range of results from other models and tools, although many of these only project to 20308. The previous baseline based on TREMOVE (total combined GHG emissions, 2010) is also indicated in the figure (showing WTW/fuel lifecycle emissions). Whereas the 2010 baseline anticipated continued growth in the EU-27’s GHG emissions from transport, the updated baseline sees a decline in GHG emissions over the period to 2050. This is mainly due to a range of existing and planned policies being included in the new baseline, including the 2020 regulatory target CO2 emissions for passenger cars and vans, the IMO Energy Efficiency Design Index (EEDI) based improvement targets for maritime shipping and estimated impacts of including aviation in the EU ETS. Another factor is that it also includes impacts of the recession on transport sector GHG emissions, which affects mainly the 2010 starting point but also has some roll-on effects. Even a decrease in the order projected in Figure 1.2 for the updated baseline would leave transport’s WTW (fuel lifecycle) GHG emissions 17% higher in 2050 than they were in 1990 (when the sector’s

7 DG TREN (2000) Energy and transport in figures 2008-2009

8 See Appendix 19 SULTAN: Development of an Illustrative Scenarios Tool for Assessing Potential Impacts of Measures on EU transport GHG for

details of the assumptions used and approach taken in the SULTAN Illustrative Scenarios Tool to projecting business as usual GHG emissions; also see http://www.eutransportghg2050.eu



emissions were nearly 1,200 MtCO2e). This is a decline of 22% on 2010 GHG levels (which were around 32% above those in 1990). Large increases in emissions between 2010 and 2050 are projected for aviation and maritime without additional policy instruments (by 42% and 22% respectively, even after recent policy developments). Under the previous baseline scenario, road freight volume was projected to increase significantly, however, due to significantly reduced levels of demand growth in the new PRIMES Reference Scenario (and some additional modal shift), it is now projected to have slightly decreased by 2050. Whilst GHG emissions from cars are still projected to contribute the most to the sector’s GHG emissions in absolute terms in 2050, their emissions are projected to have declined significantly from 2010 levels, due to the impacts of the 2020 regulatory CO2 targets.

Figure 1.2: Business as usual projected growth in transport’s lifecycle GHG emissions by mode

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2010 2015 2020 2025 2030 2035 2040 2045 2050

Co

mb

ine

d (life

cy

cle

) e

mis

sio

ns

, M

tCO

2e

Total Combined (life cycle) GHG emissions, BAU-a

FreightRail

MaritimeShipping

InlandShipping

HeavyTruck

MedTruck

Van

WalkCycle

Motorcycle

PassengerRail

IntlAviation

EUAviation

Bus

Car

Total WP Targets

SULTAN 2010 BAU

Source: SULTAN Illustrative Scenarios Tool, updated for the EU Transport GHG: Routes to 2050 II project

Notes: Maritime shipping include estimates for the full emissions resulting from journeys to EU countries, rather than current international reporting which only include emissions from bunker fuels supplied at a country level (which are lower by around 18%). Previous SULTAN 2010 BAU included also international aviation on a similar basis. The new baseline has been developed to be consistent with the latest EC modelling reference scenarios and includes (a) the impact of the recession, (b) aviation based on bunkers, (c) includes additional policies and measures that were not in the previous baseline, including the 2020 Car CO2 regulatory targets, the new Energy Efficiency Design Index (EEDI) targets for maritime shipping, and the estimated impacts of including aviation in the EU ETS. The ‘Total WP Targets’ figure indicated includes both the goal of reducing maritime emissions by 40% by 2050, as well as the targets for the rest of transport in 2030 and 2050.

Despite the overall projected reduction in transport sector GHG emissions to 2050, this decline is not enough. If no action is taken to reduce these emissions, the EU will not meet the long-term GHG emission reduction targets that the European Council supports in 2030 and 2050.



Figure 1.3 demonstrates that on current trends, transport emissions could reach levels around 20% of economy-wide 1990 GHG emissions by 20509 if unchecked. This would also be equivalent to the budget total EU-wide GHG emissions for an 80% reduction target across all sectors. The figure also illustrates the 2050 Roadmap and White Paper targets for transport (54% to 67% reduction and 60% reduction in emissions compared to 1990 levels respectively for transport excluding maritime shipping, and the 40% GHG reduction goal for maritime transport from the White Paper). Whilst simplistic, in that it assumes linear reductions, the figure demonstrates that there is clearly a need for additional policy instruments to stimulate the take up of technical and non-technical options that could potentially reduce transport’s GHG emissions.

Figure 1.3: EU overall emissions trajectories against transport emissions (indexed)

0%

20%

40%

60%

80%

100%

120%

1990 2000 2010 2020 2030 2040 2050

EU

-27

GH

G e

mis

sio

ns

(1

99

0 =

10

0%

)

EU-27 transport BAU projection (SULTAN 2011)

EU-27 transport BAU projection (SULTAN 2010)

EU-27 transport

EU-27 all sectors

60 - 80%

80 - 95%

0%

5%

10%

15%

20%

25%

30%

35%

1990 2000 2010 2020 2030 2040 2050

EU

-27

GH

G e

mis

sio

ns

(1

99

0 =

10

0%

)

Transport BAU (SULTAN 2011)

Transport BAU (SULTAN 2010)

White Paper 2011 Target

2050 Roadmap (low transport)

2050 Roadmap (high transport)

EU-27 transport (historic)

2050 Roadmap: Transport -54 to -67% Reduction

Mainlyinclusion of additional

policies and measures, recession.

Source: EEA (2012)

10 and SULTAN Illustrative Scenarios Tool

11

9 The emissions included in this figure – for both the economy-wide emissions and those of the transport sector – include emissions from

international aviation and maritime transport, in addition to emissions from “domestic” EU transport. 10

Based on historic data from the EEA’s GHG data viewer, downloaded from EEA’s website 10/02/12: http://www.eea.europa.eu/data-and-maps/data/data-viewers/greenhouse-gases-viewer 11

Projections based on data from the SULTAN Illustrative Scenarios Tool (BAU-a scenario) and historic data from DG MOVE (2011) EU energy and transport in figures Statistical Pocketbook 2011 Luxembourg, Publications Office of the European Union, 2010.





1.3 Background to the project and its objectives

EU Transport GHG: Routes to 2050 II is a 15-month project funded by the European Commission's DG Climate Action and started in January 2011. The context of the project is still the Commission's long-term objective for tackling climate change. The scope of the first project was very ambitious, and the outputs from the project were very detailed and have already proved to be of great value to the European Commission and to industry, governmental and NGO stakeholders. However, there were a number of topic areas where it was not possible within the time and resources available for the team to carry out completely comprehensive research and analysis. In particular, as the project evolved, both the team and the Commission Services became aware that there were a number of themes and topic areas that would benefit from further, more detailed research. This new project is a direct follow-on piece of analysis to the previous EU Transport GHG: Routes to 2050? project, building on the investigations and analysis carried out for that project and complementing other work carried out for the Transport White Paper. In particular, the outputs from this new project should be useful to the Commission in prioritising and developing the key future policy measures that will be critical in ensuring that GHG emissions from the transport sector can be reduced significantly in future years. Therefore, the key objectives of the EU Transport GHG: Routes to 2050 II have been defined as to build on the work carried out in the previous project to:

- Develop an enhanced understanding of the wider potential impacts of transport GHG reduction policies, as well as their possible significance in a critical path to GHG reductions to 2050.

- Further develop the SULTAN illustrative scenarios tool to enhance its usefulness as a policy scoping tool and carry out further scenario analysis in support of the new project;

- Use the new information in the evaluation of a series of alternative pathways to transport GHG reduction for 2050, in the context of the 54-67% reduction target for transport from the European Commission's Roadmap for moving to a competitive low carbon economy in 205012;

As before, given the timescales being considered, the project has taken a quantitative approach to the analysis where possible, and a qualitative approach where this has not been feasible. The project has been structured against a number of tasks, which are as follows:

- Task 1: Development of a better understanding of the scale of co-benefits associated with transport sector GHG reduction policies;

- Task 2: The role of GHG emissions from infrastructure construction, vehicle manufacturing, and ELVs in overall transport sector emissions;

- Task 3: Exploration of the knock-on consequences of relevant potential policies;

- Task 4: Exploration of the potential for less transport-intensive paths to societal goals;

- Task 5: Identification of the major risks/uncertainties associated with the achievability of the policies and measures considered in the illustrative scenarios;

- Task 6: Further development of the SULTAN tool and illustrative scenarios;

- Task 7: Exploration of the interaction between the policies that can be put in place prior to 2020 and those achievable later in the time period;

12

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A Roadmap for moving to a competitive low carbon economy in 2050, COM(2011) 112 final. Available from DG Climate Actions website at: http://ec.europa.eu/clima/policies/roadmap/index_en.htm

http://ec.europa.eu/clima/policies/roadmap/index_en.htm



- Task 8: Development of a better understanding of the cost effectiveness of different policies and policy packages;

- Task 9: Stakeholder engagement: organisation of technical level meetings for experts and stakeholders;

- Task 10: Hosting the existing project website and its content;

- Task 11: Ad-hoc work requests to cover work beyond that covered in the rest of the work plan.

As in the previous project, stakeholder engagement has been an important element of the project. The following meetings have been held:

- A large stakeholder meeting was held in on 29th June 2011, at which this project was introduced to stakeholders, along with the presentation of interim results.

- A series of four Technical Focus Group meetings. The first two were held on 4th May 2011and the second two were held on 28th November 2011.

- A second large stakeholder meeting held on 23rd February 2012, at which the draft final findings of the project were presented and discussed.

As part of the project, a number of papers have been produced, all of which have been made available on the project’s website in draft and then final form, as have all of the presentations from the project’s meetings.

1.4 Background and purpose of the paper

The goals of this paper are to:

- explore and identify key risks and uncertainties associated with the achievability of relevant policies and measures, including lead times for policy implementation and time lags to the resulting impact on emissions, with particular focus on the risks and uncertainties that affect the net GHG emission reduction that is achieved;

- assess the extent to which key factors outside the transport sector will affect decarbonisation of transport;

- develop approaches to address those risks and uncertainties and to optimize feasibility of policy instruments and the targets they intend to achieve.

To this end the paper explores risks and uncertainties associated with policies promoting three options for realising sustainability in the time frame up to 2050:

1) Biofuels

2) Electricity and hydrogen in transport

3) Economic instruments, particularly usage pricing, with the potential to directly affect demand for transport

With this paper we aim to understand what the factors are that could cause the instruments discussed to not actually lead to the GHG reductions that many are assuming they will. Through understanding such mechanisms one can attempt to reduce those risks, consider how likely they are and see whether different strategies are needed to mitigate the identified risks. All three selected options can be considered transitions, i.e. structural changes to the transport system. In the case of the first two options, the transition focuses on the technologies used for propelling vehicles and providing energy to these vehicles. In the case



of economic instruments structural changes pertain to the fiscal system that is applied to transport. All three transitions, however, involve drastic technical, behavioural and organisational changes. Transitions are generally characterised by complexity, uncertainty and fragmentation. For that reason transitions, especially those that are intended to serve societal goals, require policies to promote the required changes, to manage the complexity, and to reduce uncertainty and fragmentation.



2 Exploration and selection of the main risks and uncertainties to be analysed for the three selected policies and instruments

Objectives:

The purpose of this section is to explore, identify and classify key risks and uncertainties associated with the achievability of relevant policies and instruments

- Biofuels

- Electricity and hydrogen in transport

- Economic instruments, particularly usage pricing

2.1 Approach to identification and categorisation of risks and uncertainties

In general, this paper sets out to identify the main risks and uncertainties that affect the likelihood that a policy strategy or instrument achieves the net GHG emission reductions it aims to achieve. In general, risks and uncertainties with respect to the implementation and impact of GHG reduction policies and measures will pertain to issues such as time, costs, quality, acceptance and impact. Concerning risks and uncertainties with respect to policies and measures, we discern the following processes:

- Risks and uncertainties related to the process of developing and implementing policy instruments. Risks relate for example to the validity of the assumptions underlying the policy strategy, the time and budget needed for its development and implementation, the quality (and resulting effectiveness) of the outcome of the process and the political and societal acceptance of new policies. Quality issues can be particularly crucial where a policy is breaking new ground and the scientific and academic basis is limited. In the policy making process two steps can be discerned:

o setting out the general direction and approach;

o development and implementation of concrete policy instruments;

- Risks and uncertainties related to the societal response to implemented policies. This societal response has several components which each have their own specific risks and uncertainties:

o technical responses, i.e. innovation and implementation of new technologies, which can be divided into incremental technologies and transitional technologies;

o behavioural responses, which can be divided into short term, long term and more structural behavioural responses.

The societal responses in the end determine the net GHG emission reductions as a product of the amount of technical or behavioural changes implemented and the net sustainability of the new technologies or behaviour. Changes in technologies and behaviour may also have other foreseen or unforeseen impacts that may affect the acceptance of the policy and therefore impact on the net GHG emission reduction that is achieved.



It is thus proposed that the net impact of a policy on GHG emissions is determined through the analysis of the 4 steps below:

1. Conception of the policy strategy

2. Implementation of the policy strategy by means of policy instruments

3. Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments

4. Other impacts, related to the sustainability or other aspects of the implemented technologies and behavioural changes, that become apparent during implementation and affect the likelihood that a policy strategy or instrument in the end delivers the intended GHG emission reductions

The first sections of this chapter further explain and illustrate the above four steps. The rest of this chapter selects the policies to be analysed further and then proceeds to preliminarily explore and identify the relevant risks and uncertainties, while the following chapters detail these risks and develop approaches to address them in order to optimize the feasibility of policy instruments and the targets they intend to achieve.

2.2 Conception of the policy strategy

The policy strategy defines the overall target setting and the main routes through which the target should be reached. These routes are generally conceptions of the options (technologies or behavioural responses) that can be used to meet the target and the desired or required level of uptake of these options. Both the target and the routes are, to a large extent, decided on the basis of actual evidence, ex ante assessments (based on evidence, insights and expectations available at that time) and opinions / beliefs regarding the feasibility, costs and sustainability of technical and other solutions that can contribute to meeting the target. Misconceptions, lack of knowledge or ignored evidence / indications may lead to targets that later on cannot be reached or routes that focus on the wrong solutions. This step is essentially about whether the fundamental assumptions underlying a policy or concept are correct or not. If they are not, the policy should be altered, but that doesn't always happen. Ex-ante assessments should but often do not include foreseeable knock-on consequences, based on known and quantifiable mechanisms.

2.3 Implementation of the policy strategy by means of policy instruments

Given a choice of target and the main means to achieve it, as laid down in the policy strategy, policy instruments need to be designed to promote the development and uptake of the desired technological solutions or the desired behavioural changes. This involves concrete target settings and detailed metrics to account for the extent to which various options contribute to meeting the target. Possible risks and uncertainties with respect to policy development and implementation include:

- acceptance of policies by stakeholders, incl. industry, transport sector, NGOs and Member States;

- time required for developing and implementing policies, including lead times for policy development and adoption and possibilities for delay tactics by various stakeholders

In particular, harmonised fiscal policies, requiring unanimous agreement in the Council, may take a long time to realise;



- time required for developing associated test or assessment procedures or for changing codes and standards;

- simplifications or political compromise leading to flaws, loopholes or other inconsistencies in the developed policy instrument;

- imperfect implementation of policies, including lack of enforcement, resulting in undesired impacts;

- changes in political landscape (e.g. elections leading to new parliaments and new governments / European Commission)

- lack of long term political consistency (e.g. with respect to subsequent tightening of emission standards or lowering emission ceilings under a cap & trade system).

Defining and implementing legislation inevitably involves the simplification of complex issues. The specific design of the policy instrument may contain flaws or loopholes that later on lead to a reduced effectiveness or undesired societal responses. An example of how flaws in the metrics can affect the net GHG impact is the CO2 legislation for cars13. Part of the flaws in respect of this relate to a test procedure that is insufficiently precise. Another flaw relates to the fact that WTW GHG emissions are ignored so that the implementation of zero CO2 emission vehicles on the type approval (TA) test may lead to a net increase of WTW (well-to-wheels) CO2 emissions relative to what would be the case if the target was achieved without zero CO2 emission vehicles. In this case the issue is about known flaws in metrics and the extent to which these are acknowledged (and possibly compensated for) in the design of the policy instrument. Foreseeable knock-on consequences should be taken into account in specific target settings.

2.4 Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments

Policy instruments may not have the desired effectiveness in the sense that they do not lead to the desired / required levels of implementation of technologies and behavioural changes. The implemented technologies and behavioural changes may also be different from what was expected. In this regard, knock-on consequences also need to be considered, specifically rebound effects insofar as they deviate from what was taken into account / foreseen in the design of the policy instrument. However, knock-on consequences are difficult to predict and specific elasticities are often not known. Furthermore, consumer responses are to a large extent irrational. This step is also about unforeseen ways in which the market may respond to find and exploit the known flaws in the implemented measures or find and exploit unforeseen flaws. In the case of the CO2 legislation for cars the apparently increasing gap between real-world (RW) and TA CO2 values and the increase of emissions in other parts of the life cycle of vehicles are examples of how implemented technologies may turn out less sustainable than initially believed. Some examples of risks and uncertainties related to technical and behavioural responses are listed below.

13

Regulation (EC) No 443/2009 of the European Parliament and of the Council of 23 April 2009 setting emission performance standards for new passenger cars as part of the Community's integrated approach to reduce CO 2 emissions from light-duty vehicles (23 April 2009), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0001:0015:EN:PDF

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0001:0015:EN:PDF



2.4.1 Risks and uncertainties with respect to technological changes

Aspects of risks and uncertainties with respect to societal responses through adoption of new or improved technology in general include for example the following:

- time required for developing technical innovations;

- uncertain outcome of R&D activities and product development, incl. compromises with respect to environmental performance;

- time required for implementing innovations, including model development cycles, fleet renewal rates (different in different sectors), S-curves for increasing market shares, etc.;

- time required for implementing new infrastructures;

- acceptance of new technologies by users and other stakeholders;

- resistance by vested interests of existing market leaders;

- institutional and legal barriers;

- the so-called “valley of death” for innovations: how to bridge the gap from early adopters and innovators to early majority?

- dependency on developments in other sectors, specifically the energy sector for providing appropriate and sustainably produced energy carriers as well as the associated infrastructure;

- lack of investment capital;

- uncertainties in cost development of new technologies, incl. the chicken and egg issue that costs only go down seriously when production volumes increase so that market formation is necessary to reduce costs;

- development of suitable business models and profitable business cases, and time required for setting up new types of business and services;

- uncertainties with respect to availability of resources (energy, materials, finance);

- incidents, leading to bad publicity for new technologies;

- economic development;

- development of energy prices;

- magnitude of foreseen and especially unforeseen 2nd order impacts (knock-on consequences, rebound effects)14;

- further improvements of conventional technologies, reducing the benefits of alternatives;

- possible synergetic developments in conventional technology that may also benefit the development of alternatives

2.4.2 Risks and uncertainties with respect to behavioural changes

For behavioural responses possible risks and uncertainties include for example:

- actual possibilities for changing behaviour available to actors, for example the possibility to work from home or opportunities to move closer to the work location in order to reduce commuting distance in response to road pricing of increased fuel taxes;

- time required for actors to change behaviour;

- time required for development of new logistical concepts and new mobility concepts;

- time required for structural changes in organisation of society;

- cultural aspects;

- quality / valuation of attributes of alternatives to original behaviour;

- knock-on consequences / rebound effects;

- acceptance of welfare impacts;

14

See also the Task 3 paper on “Exploration of the likely knock-on consequences of relevant potential policies”



- market trends;

- economic situation allowing actors to deal with costs associated with behavioural changes;

- interaction with myriad of other factors that determine organisation of society;

- lack of enforcement.

2.5 Other impacts, related to the sustainability or other aspects of the implemented technologies and behaviours

This step is about sustainability impacts that are not directly related to GHG emissions. These impacts become apparent during implementation and may affect for example the acceptance of the policy and thereby the likelihood that a policy strategy or instrument will actually deliver the intended GHG emission reductions. Even if the policy assumptions are valid, the implementation to achieve them is solid, the desired levels of uptake of technologies and behavioural changes are realized and there is little scope for market manipulation, it may turn out that a policy is socially or politically unacceptable or does not achieve the desired results for other reasons, even unrelated to GHG performance. Consideration of aspects other than GHG reduction may thus undermine the political acceptance of policies leading to discontinuation or weakening of the instrument. In terms of risks and uncertainties, changes in political climate also need to be mentioned here. In general the acceptance of policy strategies and instruments depends on a political weighting of various impacts. The desired GHG emission reductions may be considered to outweigh certain negative economic or social consequences at the time the policy is designed / implemented, but in a different political constellation, later on the same facts may be weighted differently.

2.6 Selection of policies and instruments

In close consultation with the European Commission, the following policies and instruments have been selected for an in-depth assessment of risks and uncertainties:

1) Biofuels

2) Electricity and hydrogen in transport

3) Economic instruments, particularly usage pricing, with the potential to directly affect demand for transport

The reasons for selecting these policies and instruments are as follows:

- All three of these instruments were shown in the previous work to be quite important in terms of the scale of their contribution to overall decarbonisation. They have all also been picked up in the transport White Paper as important measures.

- For biofuels and for electricity and hydrogen in transport one can already see big technical and cost challenges to be overcome. For biofuels, the main issue is how to get their GHG performance to the levels required for making significant GHG reductions in the time frame assumed. ILUC is a large question mark for now. For electric vehicles the question is how fast will battery costs decline and performance improve.

- The introduction of E10 in Germany has shown that, even if costs are not excessive and there is not a technical barrier, consumers may be reluctant to adopt a new measure.



- For economic instruments particularly, the question is whether there will be sufficient political support and popular acceptance to enable these measures to be put in place. If there are undesired consequences of the other two policies, will they also continue to enjoy political support? The various recent attempts and discussions on road user charging schemes are an important example.

- The other big policy measure of improving vehicle efficiency (CO2 legislation) is actually comprised of lots of small innovations and improvements. Even if one bit doesn't work out, there are a lot of others that will. In the case of the policies selected here that is less true. Although for biofuels it can be argued that there are a wide range of different processes under development, land/biomass availability is the main constraint for many.

- For biofuels in particular, expectations are high since, in principle, they can be deployed in all transport modes and it is hoped that they will deliver a large part of the required savings in aviation, shipping and HDV, where there seem to be less viable alternative options.

2.7 Biofuels

A number of key risks and uncertainties can be identified in relation to the future GHG reduction potential of the application of biofuels. These will be outlined here, while a more detailed discussion and recommendations regarding how to address those risks can be found in chapter 3. Conception of the policy strategy

The first step in the policy cycle, conception of the policy strategy, is probably the most crucial: if important issues are overlooked here, it can have very significant consequences for the GHG reduction that is achieved with biofuels in the future, and it can be very difficult to compensate or mend the effects later. Some of the main issues that may impact future biofuels GHG reduction at this stage are the following:

- The possible misconception that biofuels are carbon neutral, whereas biomass cultivation and biofuel production may lead to significant GHG emissions. For example, policy strategy should not only focus on biofuels volume, but rather (mainly) on GHG emission reduction.

- The strategy should be based on realistic expectations regarding biomass and biofuel supply, both in terms of potential volume and regarding GHG emissions. These expectations should take the potential impacts of this demand increase into account, for example on land use (and related potential impacts on biodiversity and GHG emissions) and food prices: are these impacts acceptable at the expected volumes? In the case where the expectations include growing biofuel feedstock on otherwise unused agricultural land, are these estimates realistic? This assessment should also consider the potential growth of biomass and land demand from other sectors such as food and feed, but also for electricity, heat, chemicals and materials production. Demand for biomass and/or agricultural land will increase for all these applications, and the chemicals and materials industries also expect biomass to significantly contribute to their future GHG reduction.

- Are potential cost increases to the transport sector assessed, are potential knock-on effects identified and addressed?

Building a strategy on too high expectations may lead to failure to meet the GHG reductions of the sector, to unacceptable cost increases (in the transport sector, but also in the other sectors that use biomass and land, such as food, electricity etc.) and/or significant negative impacts on global GHG emissions, biodiversity, etc.



Implementation of the policy strategy by means of policy instruments

Once a policy strategy is in place, policy instruments need to be designed and implemented, on various levels (global, EU, national and regional). The main risks that occur at this stage include the following:

- Lead times for implementation of biofuels incentives and sustainability criteria (incl. GHG emission savings, prevention of ILUC effects, etc.) may be longer than expected, both on a national and EU level.

- The policies that are implemented may be less effective than expected, regarding biofuel volume goals, GHG emission reduction and other sustainability issues. For example, GHG emissions are reduced less than expected (or even increase) if a GHG calculation methodology is chosen that does not fully capture actual GHG emissions, for example does not take ILUC into account properly, uses incorrect default values or uses a simplified GHG allocation approach rather than a more realistic (but also more complex) substitution approach.

- Policy incentives for specific types of biomass may have negative rebound effects. For example, the policy may provide specific incentives for biofuels produced from waste and residues, assuming that these are carbon neutral (or, at least, always lead to high carbon reduction). However, some of these feedstocks are already used for other purposes, for example in other industries or to improve agricultural management – the original users then need to switch to an alternative feedstock which may increase GHG emissions. Furthermore, using these feedstocks for other applications, for example for renewable electricity production, might achieve more GHG reduction (perhaps even at lower cost) than in transport.

- The policies may not take into account or underestimate potential knock-on GHG impacts through future oil price impacts: if oil demand reduces over time, the oil price may reduce which may increase oil demand again (either within the EU or globally).

- If the policy strategy includes biofuels use in marine shipping and aviation, policy implementation may require a more global approach, leading to risks related to lead times and effectiveness of the policies implemented.

Implementation of technologies and behavioural changes

Once the policies are implemented, the market may not respond as expected, resulting in less GHG emission reductions than envisaged. Policies may aim for a technological change which does not come about as expected, or, alternatively, the industry or consumers do not change their behaviour as expected, choosing not to invest in the low-carbon biofuels needed for the future or resisting low-carbon biofuel uptake. The key issues that may occur in this phase of the biofuel transition include: - The tendency of the market is to obtain fuels at the lowest costs from all around the

world rather than aiming to use the most sustainable variants. This may lead to different choices than envisaged, reducing the actual GHG reduction achieved.

- Lead times for ramping up production capacity of low-carbon biofuels may be longer than expected, as production costs reduce slower than expected, feedstock costs increase or scaling up of new technology takes longer than expected.

- Specific issues with GHG emissions of biofuels may become apparent only after the policy instruments are implemented. For example, emissions due to land use change may be found to be more severe than expected.

- Problems with compatibility of biofuels in existing vehicles and engines may hamper their uptake, for example due to lack of flex fuel or biomethane (CNG/LNG) vehicles in the fleet, incompatibility of biofuels with aviation engines and conditions, etc.

- Expectations regarding biofuels from waste, residues, ligno-cellulosic or algae biomass may not be realized if the production technologies, that can convert these non-food biomass feedstock to biofuels which can be readily used in the current car and airplane



fleets, are not successfully scaled up and made competitive. This may result in continued dependence on agricultural commodities for a large part of biofuel production and associated GHG emissions and other environmental, social and economic risks.

- Investors may be reluctant to invest in new technologies, for example because of the financial crisis or because of risks associated with the dependence of the biofuels market on government policies.

- The marine shipping sector may not convert to biofuels at the scale that was expected, but partly rather continue to use fossil bunker fuels (from non-EU countries).

- Public concerns regarding potential (technical) risks of biofuels use in their vehicles or regarding the sustainability of biofuels may prove to be a barrier to biofuels uptake. If the biofuels strategy requires use of high-blend vehicles or modified engines there is a risk that reluctance to buy these vehicles may hamper the uptake as well.

Other impacts, related to the sustainability or other aspects of the implemented technologies and behaviours

It is important to take into account the possibility that increased use of biofuels may also impact on other sustainability issues such as biodiversity and on socio-economic developments. In addition, economic impacts of biofuels policies may be significant, as their costs are likely to remain higher than that of fossil fuels. The following points provide an overview of the key potential impacts in these categories: - Increasing food and agro commodity prices and higher land prices may cause socio-

economic impacts. Note that these may be both positive (for farmers and producers), and negative (especially for low income groups).

- Negative impacts on biodiversity (on both a global and regional scale) may occur, in particular due to direct or indirect land use change but also due to agricultural intensification.

- There is a risk of negative social impacts due to large scale land conversion and biomass plantations.

- Environmental and socio-economic impacts from use of water for irrigation can be significant in some regions.

- There is also a risk of economic impacts on transport cost and industry. o Biofuels cost may increase due to the sustainability criteria (as they limit the

availability/supply of suitable feedstock), increasing demand from other users and/or insufficient biofuel production capacity. Production costs of 2nd generation biofuel may also remain high.

o Decreasing cost of fossil fuels will also make biofuels more costly. o Increasing fuel cost may increase the cost of the transport modes that use

biofuels, with potentially wider impacts on the economy, modal split and environment.

o Increasing cost of biomass feedstock may also impact on the food sector, electricity production, chemistry and materials. These higher costs may harm EU industry, if non-EU industry continue to use (cheaper) fossil fuels.

o Additional uncertainties are related to cost fluctuations due to annual and seasonal changes in agricultural yield, and economic and political stability in biomass producing countries.

- Another type of risk are the financial risks that investors in R&D, biofuel production capacity, biomass production etc. are faced with.

2.8 Electricity and hydrogen in transport

Vehicles running on electricity and/or hydrogen are important options for achieving a sustainable transport system in the longer term. Both technologies offer relatively energy efficient vehicles that are able to run on an energy carrier that can be produced from an increasingly sustainable mix of primary energy sources. Electric vehicles in this context



include battery-electric or full-electric vehicles as well as plug-in hybrid (PHEV) and range extender electric vehicles (RE-EV). In order for electric and hydrogen-fuelled vehicles to contribute significantly and effectively to meeting longer term GHG emission reduction goals, the following conditions must be met:

1. Policies must be developed and implemented which promote the installation of the appropriate energy infrastructure and the purchase and use of electric and hydrogen-fuelled vehicles. This is at least necessary in the first stages of market introduction. Whether longer lasting incentives are necessary depends on the development of costs and market attractiveness of these new vehicles. In addition policies will be needed which further increase R&D activities necessary to provide solutions to technical and other problems that may hinder the technical and economical maturation of these technologies;

2. Electric and hydrogen-fuelled vehicles need to reach significant market shares;

3. The environmental impact of the applied electric and hydrogen-fuelled vehicles must be such that it leads to a significant net reduction in GHG emissions.

All three conditions are not automatically met. Risks and uncertainties are associated with the effective realisation of these conditions. These risks and uncertainties may be subdivided into main determining aspects according to the four steps outlined in the introduction. The lists below contain examples of issues that will be discussed in more detail in chapter 4: Conception of the policy strategy

- The question of whether or not a choice has to be made between electricity and hydrogen in general or to use one of the two in different applications;

- Assumption of carbon neutrality because no tailpipe emissions or because of low average CO2 emissions per kWh from present / future national grid;

- Assumption of carbon neutrality because electricity generation is in EU-ETS; - Assumptions regarding decarbonisation of electricity, use of low-carbon / renewable

electricity by electric vehicles; - Failure to look at broader lifecycle impacts for example on embedded emissions in

vehicles; - Assumption that electric vehicles will be needed or cost effective at storing surplus wind

electricity; - Predictions of possible future cost reductions being accepted as fact. Implementation of the policy strategy by means of policy instruments

- How to account for real GHG intensity of electricity? o average or marginal emissions, relation with EU-ETS?

- Ignoring knock-on GHG impacts through for example oil price impacts; - Ignoring consequences for CO2 emissions of conventional cars through the CO2

legislation. Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments

- Longer lead times for availability of technologies or for required cost reductions; - Which vehicles are replaced by electric vehicles? Will there just be more cars produced

as families have an electric and a real car? - Will electric and fuel cell vehicles be accepted by consumers and reach the necessary

levels of penetration? - Will consumers drive further because they believe their driving is GHG neutral, or

because the cost per km is cheaper due to lower electricity costs? Will electric vehicles be cool or seen as second best?



- Will drivers of PHEVs and RE-EVs maximise the share of electric driving? If use of these vehicles is stimulated through fiscal measures for company cars, there is a serious risk that users will not care about electric driving.

- Unforeseen knock-on GHG impacts through for example oil price impacts. Other impacts, related to the sustainability or other aspects of the implemented technologies and behaviours

- Mineral demand, leading to scarcity with possible negative economic impacts on other sectors or even geopolitical consequences;

- Environmental and social impacts in countries where materials are mined or batteries produced;

- Need for road side charging putting stress on the limited availability of parking space in densely populated urban areas;

- Perception of safety if they are seen as too quiet, or bad press related to safety incidents;

- Perk for the rich if cars stay expensive but energy use is untaxed. Other various aspects include factors outside the transport sector that will affect possibilities for decarbonisation of transport. In Chapter 4 these various aspects are further decomposed into concrete examples of risks and uncertainties that may be relevant for the implementation of vehicles running on electricity and hydrogen.

2.9 Economic instruments, particularly usage pricing

Section 5 focuses on the risks and uncertainties associated with the use of economic instruments that could be put in place to charge drivers to use roads. Whilst it is possible to apply user charges of some format to other modes of transport, for example see van Essen et al, 201015, this paper focuses on roads. On the one hand, this subject is different to the other two issues assessed in this report. The other two issues for which the associated risks and uncertainties are assessed are both technical options for reducing transport’s GHG emissions, whereas the subject of Section 5 is the risks and uncertainties associated with the implementation of a type of policy instrument. As with the other two issues covered in this report, the risks and uncertainties relating to the use of economic instruments targeting transport demand were identified as an issue in the final report of the previous Routes to 2050? project (see Skinner et al, 2011)16. However, Section 5 is also about options to reduce transport’s GHG emissions, although in this case these options are non-technical. In this respect, the introduction of user charging could stimulate the uptake of the following non-technical options:

Improving the efficiency of vehicle use by increasing the efficiency of transport movements, for example by improving logistics or increasing the occupancy levels of passenger transport.

Improve the efficiency of vehicle use by improving flow.

Reducing transport use. Whether user charging is designed to simply improve the efficiency of vehicle use, or reduce transport use, is a high level policy choice that depends on the overall aims of the policy. Such a choice will be made at the conception of the policy strategy. At this stage, it would also be considered whether user charging should be introduced instead of, or in addition to,

15

van Essen, H., Blom, M., Nielsen, D. and Kampman, B. (2010) Economic Instruments Paper 7 produced as part of contract ENV.C.3/SER/2008/0053 between European Commission Directorate-General Environment and AEA Technology plc; see website www.eutransportghg2050.eu 16

Whilst it is possible to apply user charges to other modes of transport, e.g. see van Essen et al (2010), this paper focuses on roads.

http://www.eutransportghg2050.eu/



existing fuel taxes, for example. From the perspective of reducing transport’s GHG emissions, the strategy that is conceived will depend on the extent to which user charging needs to reduce GHG emissions in line with wider strategic objectives. The choice of strategy brings political risks, associated with the public’s and business’s acceptance of the proposed approach, which is in turn linked to their preconceptions about the potential impacts of the policy. These risks can increase as the demands on the policy in terms of the extent of GHG emissions reductions required, and therefore its potential impact on mobility, increase. The risks and uncertainties associated with the policy conception stage are discussed further in Section 5.3. Once the overall policy strategy has been identified, the details of the way in which the instrument will be implemented must be developed. In relation to user charging, this could include considerations relating to the level of the charge, the type of users to which the charge should be applied, the area to which the charge should be applied, as well as any exemptions that might be introduced. Consideration should also be given to whether the policy should be revenue-neutral, or whether it can be used to raise revenues. Some of these considerations are linked to the political risks associated with acceptability, and therefore could even be used to mitigate some of the risks associated with the policy conception stage. In this respect, “user charging” could actually be one of a package of policy instruments that are introduced in parallel to deliver a balanced set of instruments that, as a minimum, aim to mitigate any potential adverse impacts of user charging, or at best contribute to the delivery of a range of environmental, social and economic policy objectives. The risks and uncertainties associated with the policy implementation stage are addressed in Section 5.4. The aim of introducing user charging, either on its own or as part of a wider set of instruments, is clearly to change behaviour. In designing the instrument, attention will have to be paid to the behavioural changes that might occur in response to the introduction of user charging. These could include a number of different responses, including travelling less, which could be a concern if this resulted in adverse social and/or economic impacts, or travelling differently. If an assessment of such behavioural changes is undertaken at the ex-ante stage, the results can be used to contribute to the design of a package of instruments that reduce some of the political and acceptability risks associated with the conception of the policy. If undertaken ex post, they could be used to amend the design of the instrument. The risks and uncertainties associated with the potential behavioural responses are discussed further in Section 5.5. Finally, there are other risks and uncertainties that are not associated either with the conception of the policy, its implementation or the behavioural responses, which are discussed in Section 5.6.



3 Biofuels

Objectives:

Explore and identify key risks and uncertainties associated with the achievability of Biofuels-related policies, including lead times for policy implementation and time lags to the resulting impact on emissions



Summary of Main Findings

There are significant risks and uncertainties related to the four conditions that need to be met if the full potential of GHG reduction with biofuels is to be realised: the availability of low-carbon biomass and biofuels, their sustainability and the GHG reduction they actually achieve, their cost and market uptake and biomass demand from other sectors.

In the coming years, realistic policy strategies should be developed for biofuels use in transport. These strategies should be part of a broader strategy on the most effective use of biomass, assessing how to optimise the supply and use of non-food biomass for the various potential applications in a sustainable future: transport, electricity, heat, materials and chemicals.

Policy implementation should focus on effective implementation and improvement of the biofuels GHG emission reduction and other sustainability criteria. Prevention of negative impacts of ILUC is key in this development. Research into new (2nd generation) biofuels production processes and a diverse and reliable supply of biomass that does not cause negative impacts should be promoted, to ensure a diverse biomass supply in the future, prevent competition with the food sector and reduce negative impacts from land use change.

Market response to policies and the outcome of technological developments may differ from what was envisaged. The effects and broader impacts of the policy strategy and measures should therefore be monitored critically, and policies should be adapted when necessary.

In parallel, efforts should also be put into global initiatives that can reduce land use change and biodiversity loss due to biomass cultivation for biofuels, for example within the IPCC and CBD (Convention on Biological Diversity) framework.

3.1 Introduction

Biofuels are an important part of the current effort to decarbonise the transport sector. Biofuels consumption was 4.7% of the transport fuels in 2010 based on energy content (EurObserv’ER, 2011), and demand is growing. The main driver for the current developments in this sector in the EU is the EU Renewable Energy Directive (EC, 2009a), which sets a renewable energy target for the transport sector in 2020, of 10%. In addition, the Fuel Quality Directive (EC, 2009b) defines a target for GHG emissions savings in the life cycle of transport fuels, obliging fuel suppliers to reduce these emissions by at least 6% between 2010 and 2020.



Biofuels are considered to be one of the key contributors to both these targets, as can be derived from the National Renewable Energy Action Plans that Member States submitted to the EC. Most Member States have implemented targets, policy incentives and obligations to promote their use. However, the GHG emission reductions that are achieved in practice have proven to be disappointing, according to various studies and reports (see, for example, (EC, 2010)(IFPRI, 2011)), mainly because of ILUC effects. Net GHG impacts are found to differ significantly between biofuels, depending on many variables such as the type of feedstock, energy use of conversion processes, etc. Some achieve significant GHG savings, while others do not achieve any savings, or cause more emissions than the fossil fuels that they replace. The recent scientific and political debate about biofuels sustainability and ILUC effects illustrate the complexity of the topic, and the difficulties and risks that policy development in this area is faced with. Potential benefits, mainly GHG savings but also benefits regarding security of supply, economic development etc., may be large, but significant risks are also conceivable, such as:

- Economical risks, in the case where future biofuel costs are higher than expected because of feedstock scarcity, limited production capacity etc.

- Social risks and uncertainties, in particular related to large scale biomass cultivation and potential food price increases but also to public support for the biofuels policies.

- Environmental risks, mainly due to direct and indirect land use change – this may lead to significant GHG emissions and impacts on biodiversity, local and regional water management, etc.

- Technical risks. These can occur in road transport, where the current fleet cannot drive on high blends of the main types of biofuel used today (FAME and bioethanol). Another potential technical problem is that most of the current biofuels are not compatible with the engines and extreme conditions encountered in aviation.

Looking at all these risks, it can be concluded that if biofuels are to achieve their full potential with respect to sustainable GHG reduction in transport, four conditions need to met:

- the availability of biofuels; - their sustainability and actual GHG reduction; - their technical compatibility; and - public support.

A broad overview of what these risks and conditions may mean for the policy strategy, policy measures and policy implementation was provided in section 2.7 of this report. These issues will be discussed in more detail in the following sections. The focus of this analysis is on achieving the GHG reduction potential of biofuels, but the other risks and uncertainties are also addressed. A review of the literature on which some this assessment is based can be found in Annex A.


Designing a biofuels policy strategy that is both realistic and effective is quite a complex and challenging task, but is crucial to progress towards further GHG reductions in transport. Most, if not all, scenario studies that look at long term GHG emission reduction in the transport sector rely heavily on biofuels to achieve significant GHG emission reduction in the sector. Typically, these biofuels are presumed to achieve large GHG reductions, at reasonable cost. However, in recent years it has become more and more clear that producing large volumes of biofuel may have very significant negative impacts, on both GHG emissions and on other environmental, economic and socio-economic issues. Competition



for feedstock with other sectors will also be an increasingly important issue, potentially limiting the availability of biofuels that achieve significant GHG reductions in the future. An aspect that should not be overlooked is that the move to more advanced types of biofuels is generally assumed to be accompanied by the use of biomass for process heat. While this is assumed to lower GHG emissions, it means that the amount of biomass needed is higher. Such types of biofuel processes can require some 3 times as much energy in biomass as is available in the final fuel17. In parts of the transport sector, in particular light duty road transport and rail transport, significant GHG savings could also be achieved with a switch from the current fossil fuels to electricity from low-carbon or renewable energy sources. However, other transport modes, namely aviation and maritime transport, and probably also a large part of heavy goods road transport, have few alternative, low-carbon energy sources. Further successful development and deployment of sustainable biofuels that can achieve significant GHG reductions thus seems to be especially important for these modes – and perhaps also for part of light duty transport, if electric driving does not prove to be a viable and attractive alternative. As shown in section 2.7, there are quite a number of issues that may hamper the future supply and uptake of biofuels and impact on their contribution to GHG emission reduction in the sector. These issues should be addressed during conception of a policy strategy. First of all, biofuels should not be considered to be carbon neutral, but the policy strategy should take into account that biomass cultivation and biofuel production may lead to significant GHG emissions. Biomass cultivation and processing may cause significant GHG emissions (as any agricultural and industrial activity may do). These emissions depend on the type of crop that is cultivated, on local conditions, agricultural practices and the specifics of the biofuel production process. A key driver for GHG emissions are both direct and indirect land use changes (DLUC and ILUC) caused by the increasing demand for biomass. It has become clear in recent years that the impact of LUC can be very significant, and only a limited share of the current biofuels from agricultural commodities actually reduce GHG emissions. Any biofuels strategy should thus take this into account, and aim only for biofuels that do not cause these land use change GHG emissions. From a strategic point of view, this leads to a question as to what expectations would be realistic with regard to future biomass supply, in terms of potential volume, GHG emissions and cost. In many sustainable transport scenarios, biofuels seem to be used to ‘fill the gaps’ between emissions and targets: transport volumes are estimated, the share of electricity and hydrogen is determined, and the rest of the target is met with biofuels. Converting these results to actual biofuels volumes, and then biomass demand and potential land use, typically leads to the conclusion that very significant volumes of biomass and land are needed to meet these expectations. Whether these volumes are realistic then needs to be critically assessed, addressing the following types of questions. What types of biomass and biofuels could be used?

This analysis should identify the types of biofuel and biomass that can achieve significant GHG reduction from well to wheel, taking into account both direct and indirect GHG emissions including land use change effects. A distinction should be made between technology that is already mature and potential future technologies (e.g. biofuels from algae, Biomass-to-Liquid processes, etc.). Potential realistic timelines for development of the latter and risks and uncertainties regarding their successful development should be identified. Furthermore, potential compatibility problems with vehicles and engines should be identified and addressed (see section 3.4).

17

See WTT appendix 1 of JEC Well to Wheel study: http://ies.jrc.ec.europa.eu/uploads/media/WTT_App_1_010307.pdf



How much biomass volume would be realistic, where would these volumes come from, and what are alternative applications?

If the biomass is cultivated: how much land would be required, where can it be cultivated, what would the land use change impacts be? Are the assumptions regarding yield per hectare and the potential for cultivation on otherwise unused (degraded, marginal) agricultural land realistic? These questions should be addressed, also taking the continuing increase of global food and feed (i.e. land use) demand into account. Note that not only agricultural commodities need to be cultivated but also woody biomass, if large volumes are required. If the biofuel feedstock is waste and residues: What are realistic estimates of their potential? What alternative uses are there? What is the impact on other sectors? Many waste and residues are already in use, for example to improve soil, for electricity or heat production or as a chemical feedstock (e.g. for the cosmetic industry). Various life cycle analyses show that in general, using residues as a feedstock for biofuel production will only achieve GHG reductions if the residues were not used elsewhere. A related issue is that the biomass volumes needed for transport should also be put into the context of demand from other sectors. Biomass is also a feedstock for the chemical and materials industry, and for renewable electricity and heat production. Demand from these sectors can also be expected to increase significantly in the future18, and for example the European Commission has recently issued a strategy and action plan for a bioeconomy (EC, 2012). What are realistic expectations regarding the well-to-wheel GHG reduction potential?

This assessment should take into account any direct and indirect emissions and effects, including that of land use change, potential shifts of feedstock from a different application etc. What would the broader impact be?

A policy strategy for biofuels should explicitly address its global impact on land use, agriculture, food prices, forestry and other potential competitors for this biomass. The feedstocks used for biofuels production can be very diverse, with equally diverse and often complex, global impacts, especially at the volume levels required to significantly contribute to future GHG transport goals. There may also be knock-on consequences working in adverse directions, for example in relation to demand for fossil fuel (Rajagopala, 2011). Economic impacts: how will biofuels impact transport cost, can potential knock-on effects be identified and addressed?

Economic impacts of a biofuels strategy on the transport sector depend on the cost of the biofuels, in comparison with the cost of alternative GHG emission reduction policies. Biofuels cost, in turn, depends on the cost of the feedstock and of the production process (including transport and logistics). In particular, the future feedstock cost may be quite uncertain, and depends on a large number of drivers including the potential competing feedstock demand from alternative applications. In view of the land use change issue, the growing demand for food and feed and the expectation that other sectors such as heat and chemicals will also need to (partly) switch to biomass in the future, the feedstock cost might increase rather than decrease in the future.

18

Member State National Renewable Energy Action Plans foresee about 10% of EU energy being supplied by biomass by 2020.




The biofuels debate and research of the past few years has clearly shown that EU biofuels policies have complex and global effects. Designing sound policies in this field therefore require careful assessments of the mechanisms that they bring about and their impacts. The first issue is the lead time for policy implementation. In the EU, there are two key policies that currently drive GHG emission reductions with biofuels: the Renewable Energy Directive (RED) (EC, 2009a) and the Fuel Quality Directive (FQD) (EC, 2009b). These are not yet implemented in all detail in the Member States, and it may take some time before that is achieved (although it seems reasonable to expect that implementation will progress in the coming years). From a GHG emission point of view, a crucial omission of the current directives is that they do not yet take into account GHG emissions from ILUC. The Commission is working on a proposal to address this, a development that could be an important step towards ensuring that these policies indeed lead to significant GHG emission reduction. Once this proposal is agreed on, it will no doubt take some time again before the implementing policies are then in place. Furthermore, if the proposal is only a first step in addressing ILUC emissions, more policy development and implementation cycles will be required in the future. As both directives set targets for 2020, policies for the period after 2020 are not yet in place and have to be developed in the coming years. If industry first has to invest in R&D for new biofuels processes and improve biomass cultivation or conversion (e.g. for algae) and then has to build large scale production capacities, lead times of 15 years are not unusual. Secondly, and probably most importantly, the implemented policies can be less effective than expected when designing the strategy. This may lead to less biofuels than envisaged and to less GHG emission reduction per volume of biofuel. Quite a number of risks and uncertainties can be identified that may impact the GHG emission reduction of biofuels in the future transport system (see the previous section). Therefore, effective policies are a prerequisite to ensure that the well-to-wheel effects of these fuels are positive – but they are not easy to implement as many of these effects are found to be indirect, global and involve other sectors. As mentioned above, including ILUC effects into policies can be considered to be a crucial step to ensuring that biofuels policies indeed achieve significant GHG reductions. According to a broad scope of recent scientific literature, ILUC can lead to GHG emissions that are in the order of the GHG emissions saved by reducing the use of fossil fuels. Various studies have concluded that this effect is so large that the current biofuels policies in the EU will only lead to relatively limited GHG emission reduction in 2020 (IFPRI, 2011)(EC, 2010). This effect depends on a number of variables and conditions, but mainly on the type of land that is being converted, and on the crop that is being cultivated19. Notably, ILUC may also have a positive impact in some cases, for example if marginal land with low carbon stock is converted to agricultural land with higher carbon stock, but there is little evidence that this occurs on any significant scale in practice. ILUC may also lead to impacts on other environmental parameters such as biodiversity, eutrophication and water pollution – these impacts are also important risks to prevent or limit. These indirect effects are difficult (if not impossible) to relate to specific biofuel batches, but at aggregate level they can be included in GHG calculations of biofuels20. However, as the impact is so large, it is very important to implement policies to reduce these effects. Due to the global and indirect nature of these impacts, efforts should also be put into global

19

Which also relates to the type of biofuel: ILUC emissions are typically much higher for biodiesel (FAME/HVO) produced from vegetable oil than for bioethanol produced from wheat, maize, sugar cane or sugar beet (IFPRI, 2011) 20

This is already implemented in the US EPA and CARB requirements and is under consideration by the European Commission



initiatives that can reduce land use change and biodiversity loss due to biomass cultivation for biofuels, for example within the IPCC and CBD framework. Another reason why policies can be less effective than desired is that the policy does not capture the complexity of the biofuels impacts. It is often impossible to design policies that capture all details of the mechanisms that occur whilst still being practically feasible. One example is the treatment of by-products in the GHG calculation methodology: in the RED and FQD, emissions are allocated to by-products according to their energy content. Life cycle analyses that use the more realistic but also more complex methodology of substitution lead to different results. This will thus reduce the effect of the policy. Another example is the assumption in the current methodology that biofuels from waste and residues always result in high GHG savings, and should be promoted (by double counting for the RED target). In practice, some of these waste and residues are already in use by other industries, which now have to resort to other, possibly fossil feedstocks. This effect is not included in the current GHG calculation methodology. Other unintended effects that may occur are that the policies that aim to ensure that the GHG emissions are indeed reduced lead to a shift in the market, rather than to actual improvements in global GHG emissions. This can be expected in the case where only direct sustainability criteria are defined: the EU will then use the biofuels that do not lead to direct LUC effects, whereas biofuels with direct LUC are exported to countries that do not have these criteria. Another example would be that low-carbon fertilizers that are already being produced may be used for EU-biofuels rather than for other products, and these other products will shift to high-carbon fertilizers. Thirdly, the policies may not take into account knock-on GHG impacts, for example due to unintentional rebound effects. For example, if the biofuels policies lead to a reduced demand for fossil fuels (which is, of course, intentional), the crude oil and fossil fuel price can be expected to reduce. This may lead to increased use of oil and fossil fuels both in the EU and on a global scale. The effects within the EU may be addressed by the EU, for example with a CO2 tax or by specific policies in all transport sectors. The effects outside of the EU may not be controlled, potentially leading to an increase of GHG emissions on a global scale. Lastly, it should be realised that effective biofuels policies in the international transport modes (aviation and maritime shipping) will even be more difficult to achieve than in the intra-EU modes (road and rail). In these modes, the same considerations apply that are mentioned above. The EU may implement policies for bunker fuels and jet fuel that is sold in the EU (provided that this is legally feasible), but especially in shipping the resulting impact on GHG emissions may be significantly reduced due to a shift of bunkering, from EU ports to non-EU ports. A global approach might then be required. Note that this may be quite a significant barrier to achieving future GHG emission reduction targets because, as previously highlighted, various future transport scenarios conclude that biofuels will be an important GHG mitigation option in shipping and aviation due to the fact that there are insufficient other means to reducing GHG emission to the levels desired for the future (see also the EC White Paper, COM(2011) 144 final, in which one of the goals is ‘Low-carbon sustainable fuels in aviation to reach 40% by 2050’).


Once the policies are implemented, the market may not respond as expected, resulting in less GHG emission reduction than envisaged. Technological developments may be different



from what was expected, or the industry or consumers may react differently and the behavioural changes that are needed do not occur. First of all, there are a number of risks related to the biofuel market and industry developments. The tendency of the market is, of course, to obtain fuels at the lowest costs from anywhere in the world rather than aiming to use the variants that achieve the highest GHG reduction. This may lead to different choices than envisaged, reducing the actual GHG reduction achieved. The policies discussed earlier are designed to provide the right boundary conditions, but the complexity of the system makes it difficult to achieve a watertight policy system. Part of the future biofuels outlook depends on the successful development and use of technologies that are not yet mature, such as bioethanol from lignocellulosic biomass, the Biomass-to-Liquid process (BTL, also known as Fisher Tropsch diesel) and biodiesel from algae. Expectations regarding biofuels from non-food biomass may not be realized if these production technologies are not successfully scaled up and made competitive. Lead times for R&D, and then ramping up production capacity of low-carbon biofuels may be longer than expected, due to technical problems with scaling up of the processes, because production costs are found to reduce slower than expected or due to increasing feedstock cost. Investors may be reluctant to invest in new technologies, because of a financial crisis or because of risks associated with the dependence of the biofuels market on government policies. These effects may result in continued dependence on agricultural commodities for a large part of biofuel production and have associated GHG emissions and other environmental, social and economic risks. A different type of risk is that specific issues with GHG emissions of biofuels or biomass availability may become apparent only after the policy instruments are implemented. For example, emissions due to land use change may be found to be more severe than expected, or the amount of suitable waste and residue streams is found to be much less than assumed (e.g. because alternative users make much more use of them than expected). Problems with compatibility of biofuels in existing vehicles and engines may hamper their uptake, and thus the total GHG emissions that biofuels can reduce. This may be due to a lack of flex fuel or biomethane (CNG/LNG) vehicles in the fleet, incompatibility of biofuels with aviation engines and conditions etc. The extent of these problems depends on the type of biofuel, as some do not pose any compatibility problems. Looking at the current situation, compatibility is especially an issue with biodiesel (FAME) in road transport (especially as emission standards tighten), with high-blend bioethanol (which require flex fuel cars) and with aviation. A specific risk is related to the marine shipping sector, which may not convert to biofuels at the scale that was expected, even if policies are implemented at EU level. Due to the higher cost of these fuels, part of the bunkering will shift from EU to non-EU countries, reducing the potential GHG reduction effect. Public concerns regarding potential (technical) risks of biofuels use in their vehicles or regarding the sustainability of biofuels may prove to be a barrier to biofuels uptake. If the biofuels strategy requires use of high-blend vehicles or modified engines there is a risk that reluctance to buy these vehicles, for example because of higher cost, lack of knowledge or interest, may hamper the uptake as well.

3.5 Other impacts

In the literature review in Annex A, a number of other impacts are identified that are related to the broader issues of sustainability and economic impacts. Biofuels may also impact on



biodiversity and socio-economic developments, and cause significant economic impacts in both the transport sector and other sectors. The sustainability impacts mainly depend on the types of biomass used, the demand for each of these types and on the demand growth. Economic impacts depend on biomass, biofuel and oil prices, on the design of the biofuel policies and on the other potential users of the biomass. Increasing biofuels demand may cause significant negative effects on biodiversity (on both a global and regional scale), in particular due to direct or indirect land use change but also due to agricultural intensification. In additional, large scale land conversion and biomass plantations are often reported to have negative social impacts for the local communities, especially in non-OECD countries. In some regions, environmental and socio-economic impacts may result from use of water for irrigation. These impacts are directly related to biomass cultivation, and may not occur if wastes and residues are used – provided that this use does not lead to a shift of feedstock from residues to cultivated biomass in a different sector, as discussed previously. If biofuels demand for biomass increases food and agro commodity prices and perhaps also land prices, this may also cause socio-economic impacts. Note that these may be both positive (for farmers and producers), and negative (especially for low income groups that spend a large part of their income on food) There is also a risk of various economic impacts on transport cost and industry. As the cost of biofuels is currently higher than that of fossil fuels, increasing the use of biofuels will thus increase transport cost. This can be prevented, for example by a CO2 tax on fossil fuels or tax reductions for biofuels, however, this will merely result in shift of the cost to a different actor. Future biofuels cost developments are uncertain, but depend on - the impact of sustainability criteria (as they limit the availability/supply of suitable

feedstock); - increasing demand from other users; - cost of feedstock and of the biofuel production itself;21 - the availability of biofuel production capacity. Decreasing the cost of fossil fuels may also make biofuels policy more costly, as the cost differential will increase. On the other hand, it may also reduce global biofuels demand and reduce production cost. Note that for the same reason, an increasing cost of fossil fuels does not automatically mean that biofuels cost will become competitive: high oil prices are found to lead to a global increase of biofuels demand, as countries are trying to reduce their oil dependence, furthermore they increase the energy cost of the biofuel production chain. Additional cost uncertainties that are introduced to the market when switching from fossil fuels to biofuels are related to cost fluctuations that are specific to biomass: annual and seasonal changes in agricultural yield and economic and political stability in biomass producing countries. These increasing fuel costs may increase the cost of the transport modes that use biofuels, and have potentially wider impacts on the economy, modal split and environment. One of these potential effects is a reduction of transport volume and fuel use (as any fuel price increase may do) which would have a (secondary) effect on GHG emissions. Increasing the cost of biomass feedstock may also impact on alternative users of the feedstock or, in the case of cultivated biomass, of the land: the food sector, forestry and the paper and pulp industry, electricity producers and consumers, chemistry and materials industries. These higher costs may potentially harm the EU industry that is affected, if non-EU industry continue to use (cheaper) fossil fuels.

21

Note that cost of 2nd

generation biofuels may not be lower than that of current biofuels (@ref IEA)).



A somewhat different economical risk is the type of financial risks that investors in R&D, biofuel production capacity, biomass production etc. are faced with. The EU and global biofuels market are still quite dynamic, and investors may be reluctant to accept the risks involved.

3.6 Conclusions

Biofuels are expected to contribute significantly to the future GHG emission reduction in the transport sector, as there is a large global potential (at least in theory) and they do not require a completely new infrastructure or engine technology. However, there are still quite a number of risks and uncertainties related to actually achieving this potential. Firstly, a robust biofuels policy strategy should be developed. This should take into account the complexity of the issues and arrive at realistic estimates for biofuels supply and GHG emission reduction which can be achieved in the future. This strategy should take into account land use and its impacts on GHG emissions and other sustainability issues and also consider alternative uses of the biomass. The latter is not only important for agricultural commodities, it is also important for waste and residues: these are often in use for other purposes. Shifting them towards the biofuels sector will cause a shift to other, perhaps less sustainable feedstocks in the other sectors. The biofuels strategy should thus not only be looking at transport, but it should be positioned in the larger context of increasing global food and feed demand, and take into account that other industries are also aiming to switch to low-carbon energies in the coming decades. The strategy then requires policy instrument design and implementation that should address the same issues that are mentioned above. Crucial to the success of the strategy are those policies that concentrate on reducing GHG emissions. To this end, it is very important to take into account ILUC effects. Given the significance of ILUC emissions and the large volumes of biofuel foreseen, this means that there will be a substantial expansion of productivity beyond that already foreseen, or that biomass will be sourced from otherwise unusable land. Furthermore, GHG assessments should also take into account indirect effects that may occur in the industries that may also use the feedstock. In parallel, efforts should be put into global initiatives that can reduce land use change and biodiversity loss due to biomass cultivation for biofuels, for example within the IPCC and CBD framework. Research and development of new (2nd generation) biofuels production processes needs to be promoted and incentivised, to ensure a diverse biomass use in the future that does not compete with the food sector nor lead to significant negative impacts from land use change. Potential compatibility problems of the biofuels with existing vehicles or engines may need to be addressed. In addition, policies need to be developed for biofuels use in aviation and maritime shipping, two sectors that have to operate in a global context and thus may require implementation of global biofuels (or rather renewable energy) policies in the longer term. Once the policies are implemented, the effects should be monitored critically, as the market may respond differently than expected. Apart from GHG effects, there are a number of other impacts that should be addressed in the various steps of policy development. Examples are impacts on fuel and food costs, economic impacts on the transport sector but also on other sectors that either depend on transport or also use the biomass, and impacts of the biofuels policies on biodiversity and socio-economic developments.



3.7 References

EC, 2012 Innovating for Sustainable Growth: A Bioeconomy for Europe COM(2012) 60 final February 2012 EC, 2010 Report from the Commission on indirect land-use change related to biofuels and bioliquids COM(2010) 811 final Brussels, 22.12.2010 EC, 2009a Directive 2009/28/EC of the European Parliament and of the Council On the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC April 2009 EC, 2009b Directive 2009/30/EC of the European Parliament and of the Council amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC April 2009 EurObserv’Er, 2011 Biofuels Barometer 2010 EurObserv’ER 2011 IFPRI, 2011 Assessing the Land Use Change Consequences of European Biofuel Policies Final Report David Laborde (International Food Policy Institute, IFPRI) October 2011 Rajagopala, 2011 Indirect fuel use change (IFUC) and the lifecycle environmental impact of biofuel policies D. Rajagopala, G. Hochmanb, D. Zilbermanc, Energy Policy Volume 39, Issue 1, Pages 228–233 January 2011



4 Electricity and hydrogen in transport

Objectives:

Explore and identify key risks and uncertainties associated with the achievability of electricity- and hydrogen-related policies, including lead times for policy implementation and time lags to the resulting impact on emissions




The implementation of electricity and hydrogen as GHG reduction options for the transport sector is a transition that involves drastic and structural changes in both the transport and the energy sector and that will take several decades to start up, roll out and complete.

Governments and stakeholders in the market need endurance and a long term vision to manage this transition in an effective way. Mitigating risks and taking away uncertainties is an important and unavoidable part of that.

Proactive steps are required in the short term in laying the ground work for longer term policy instruments, in early market formation and in setting up and managing a process that timely delivers the insights that are necessary to develop a suitable dominant design for the energy distribution infrastructure.

Important risk and uncertainties that require short term action relate to:

- Impact of zero-emission vehicles under the CO2 legislation in combination with the need for a methodology on how to account for the GHG intensity of energy carriers. Determining appropriate metrics is essential to make sure that post 2020 targets provide the right incentives to manufacturers and energy suppliers.

- Uncertainty about the business case. This issue is closely linked with the development of costs of vehicles and infrastructure, consumer acceptance and the role of supply and demand oriented policy measures in the business case.

- Interaction with the energy system. This issue partly concerns developing a more mature view on the dominant design of the charging infrastructure for electric vehicles in interaction with grid-related developments at a the local and regional scale, but also concerns interaction on a (trans)national level with regard to how electric and hydrogen-fuelled vehicles on the one hand require decarbonisation of the energy supply system and on the other hand influence investments in the generation of infrastructure which may or may not be consistent with the need for decarbonisation.

4.1 Introduction

Vehicles running on electricity and/or hydrogen are important technical options for achieving a sustainable transport system in the medium and longer term. Electric vehicles in this context include battery-electric or full-electric vehicles as well as plug-in hybrid and range extender electric vehicles. Hydrogen vehicles may include vehicles with internal combustion engines, but for the longer term fuel cell powered vehicles are expected to prevail.



In order for electric and hydrogen-fuelled vehicles to contribute significantly and effectively to meeting longer term GHG emission reduction goals, the following conditions must be met:

1. Policies must be developed and implemented which promote the installation of the appropriate required energy infrastructure and the use of electric and hydrogen-fuelled vehicles;


3. The environmental impact of the applied electric and hydrogen-fuelled vehicles must be such that it leads to a significant net reduction in GHG emissions.

All three conditions are not automatically met. Risks and uncertainties are associated with the effective realisation of these conditions. These risks and uncertainties may be subdivided into determining aspects as follows: - Policy development and implementation, e.g.:

o uncertainty about long term targets o lead time for policy development o availability of appropriate test and valuation procedures o quality of the policy instruments

- Market development, e.g.:

o vehicle technology and cost development o infrastructure development o energy cost development o impact of supply and demand oriented policy measures on the business case o availability of resources o "sustainability" of stakeholder attitudes and interests

- Net GHG impact and other environmental impacts, e.g.:

o timely availability of sufficient low CO2 / renewable energy o complex interaction with the energy system o rebound effects / knock-on consequences o LCA-aspects of vehicle manufacturing and decommissioning (embedded

emissions) Obviously there is significant interaction between the different aspects. Policies and technology development influence the costs of these options, and costs are an important determinant for market demand. Various aspects also include factors outside the transport sector that will affect possibilities for decarbonisation of transport. In the next paragraphs these various aspects are further decomposed into concrete examples of risks and uncertainties that may be relevant for the implementation of vehicles running on electricity and hydrogen. To provide more focus on issues that relate to the design and implementation of policy instruments the four aspects as discerned in section 2.1 will be used to structure this chapter on risks and uncertainties associated with the use of electricity and hydrogen in transport:

1. Conception of the policy strategy;

2. Implementation of the policy strategy by means of policy instruments;

3. Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments;

4. Other impacts related to the sustainability or other aspects of the implemented technologies and behavioural changes, that become apparent during implementation and



affect the likelihood that a policy strategy or instrument in the end delivers the intended GHG emission reductions.

A review of the literature on which some this assessment is based can be found in Annex B.


The decision to promote certain technological options for the reduction of GHG emissions is motivated by available knowledge, insights, indications, assumptions, visions and/or beliefs regarding for example:

- the possible positive impact of these technologies on the GHG emissions of certain activities;

- overall environmental performance of technologies;

- the cost development of technologies and the related economic benefits or opportunities resulting from for example reduced costs for existing activities, added value or the enabling of new activities and competitive advantages.

Knowledge, however, develops over time and what are believed to be valid facts and insights at the time of conception of a policy may turn out to be invalid when experience with the impacts of the policy provides new knowledge. Also, in political processes, knowledge, facts, certainties and uncertainties are not always objectively presented and/or valued. The above is mainly about risks associated with choices made in policy strategies with respect to desired solutions. An important element of a policy strategy is also that it sets out short term policy actions with a long term perspective. A failure to set long term targets, or setting insufficiently challenging long term targets, is also an origin of risk and uncertainty. The question of whether or not a choice has to be made between electricity and hydrogen in general or to use one of the two in different applications

Both electricity and hydrogen offer the opportunity to use renewable energy from a wide range of sources in the transport sector. Both electric and fuel cell vehicles have zero local emissions. Given the range limitations it is likely that electricity will be used more for short to medium distance trips in urbanised areas, while hydrogen could be more suited for applications where a larger range is required. One of the challenges in the promotion of these technologies is whether there is a need to make a priori choices for one technology or the other, or if both are applied with respect to preferred applications. This choice is difficult to make at a time when neither is mature. This uncertainty creates a risk of wasted or duplicated investments. The converse is that if it were possible to make the right choice, the transition could presumably be quicker since the investment would be concentrated in the right technology. Assumption regarding the GHG emission impact of electric and hydrogen vehicles

Electric and hydrogen vehicles are often marketed as zero-emission vehicles. This misconception is further enhanced by the fact that the type approval test only measures tailpipe emissions so that the result of this test is indeed 0 gCO2/km. Zero tailpipe emissions, however, do not imply carbon neutrality. Depending on the origin of the primary energy used for generation of electricity or hydrogen, the use of these energy carriers does produce GHG emissions in the energy production chain. And even low average CO2 emissions per kWh from present / future national grid do not guarantee that electric vehicles lead to net GHG emission reductions. That is governed by marginal rather than average emissions and depends on how the (use of the) electricity system changes in response to the implementation of these vehicles. If the additional demand is met by investments in for



example coal-fired power plants the introduction of electric vehicles may lead to a net increase in GHG emissions. One could reason that the use of electricity or hydrogen is carbon neutral because the CO2 emissions from electricity generation as well as from large hydrogen production plants are governed by the EU-ETS. If the production of additional electricity or hydrogen leads to additional GHG emissions these need to be compensated elsewhere under the ETS-system. But the validity of such reasoning depends on how watertight the ETS is, as well as on the robustness of future emission ceilings. Regarding the first point, in particular, the net impact of JI/CDM credits are a concern. Joint Implementation and the Clean Development Mechanism are the two project-based mechanisms which feed the carbon market. JI enables industrialized countries to carry out joint implementation projects with other developed countries, while the CDM involves investment in sustainable development projects that reduce emissions in developing countries. Both mechanisms generate emission rights that can be used and traded under ETS. The in some concern about the extent to which such credits lead to a net reduction in CO2 emissions. There may be double counting with reduction targets in the countries where the projects take place, and moreover such projects might also have been realised without the additional funding generated from selling ETS-credits. The issue of robustness of future ceilings is about future governments keeping their backs straight when the electricity sector calls for higher ceilings because of the fact that they, by then, also cater for the energy supply of part of the transport sector through electric and/or hydrogen vehicles. The use of renewable electricity by electric vehicles is also not a guarantee for net GHG emission reductions. At the moment, the supply of green electricity is larger than the demand from consumers and industry. However, if buying green electricity for electric vehicles does not lead to net investments in additional renewable energy production, the marginal emissions from driving electric vehicles are not zero. The general assumption is that the electricity generation sector will decarbonise in the next decades, so that even based on average emissions per kWh, future electric vehicles will have low WTW GHG emissions. The examples provided here, however, show that the net GHG impact of electric and hydrogen vehicles depends not only on policies to promote these vehicles, but also on the characteristics of policies that are intended to promote the decarbonisation of the energy sector. Assumption that electric vehicles will be needed or cost effective at storing surplus wind electricity

For various actors an important driver for promoting the implementation of vehicles running on electricity and/or hydrogen is the fact that they can serve as a buffer that can help future energy systems to better match demand and the intermittent supply from renewable sources such as wind and solar. Some grid operators see electric vehicles as a key technology for the realisation of smart girds. It should first of all be noted that hydrogen vehicles could play a similar role. Excess renewable electricity can be converted to hydrogen for use in stationary applications (e.g. by mixing it into the natural gas grid) or mobile applications. While it is probably undisputed that electric and hydrogen vehicles can play this role in the future energy system, whether they will do so is highly uncertain. There is no blueprint yet for the architecture of the future energy generation system, and even if substantial storage capacity is needed, it is uncertain whether electric and hydrogen vehicles will by that time offer the most cost effective and practical solution. In particular charge-discharge cycles currently degrade batteries which generally offer a limited number of duty cycles over their useful life. The high cost of batteries coupled with this limited number of duty cycles implies



that such a use, with the accompanying degradation, might make the costs outweigh the benefits.

This example and the previous one show that policy instruments aimed at decarbonising the energy sector need to be an integral part of a policy strategy aimed at promoting the use of electricity and hydrogen in transport for the purpose of GHG emission reduction.

Failure to look at broader lifecycle impacts for example on embedded emissions in vehicles

Technologies that reduce vehicle energy consumption and GHG emissions in the use phase may lead to increased energy consumption and GHG emissions elsewhere in the life cycle of the vehicles, specifically in the production phase and the decommissioning and recycling phase. Recent reviews have shown that in case of electric vehicles the additional GHG emissions associated with the production of these vehicles is non-negligible in comparison to the benefits in the use phase22. The difference in embedded emissions between conventional and electric vehicles can be largely attributed to the production of batteries. IPCC rules require countries to monitor GHG emissions within their own borders. GHG emission reduction policies are also generally aimed at reducing domestic emissions. If components for new vehicle technologies are imported, the embedded emissions tend to be ignored by national policies. Assumptions with respect to economic aspects of electric and hydrogen vehicles Predictions of possible future cost reductions are often being accepted as fact. It is often assumed that in future electric and hydrogen will be cheaper to operate than conventional vehicles running on fossil fuels. This, however, is by no means certain and depends not only on the cost development of these technologies, which in turn depends on economies of scale and the uncertain future innovations in product and production processes. It also depends, among other things, on development of the costs of conventional vehicles and of fossil fuels. Uncertainties related to cost development are further explored in section 4.4. Besides assumptions on costs. visions of economic opportunities also motivate policies at local, national and EU-level to promote electric and hydrogen vehicles. Production and use of sustainable vehicles is believed to lead to economic growth and new jobs. These opportunities first of all depend on whether alternative vehicle technologies in the end do or do not provide a profitable business case. But whether a region, country or Europe as a whole can benefit economically from such a transition also depends on whether a region, country or Europe is able to grasp a significant share in the value chain of these products. This for example depends on where critical components for these vehicles are manufactured. If, in the future, the production of batteries is concentrated in China or countries with large lithium resources, the economic benefits for Europe may be limited. Electric vehicles may even be a means for countries like China to become serious competitors for European manufacturers on the EU-market.

This example shows that, in order to harvest possible people, planet and profit synergies, industry policies and broader economic policies need to be aligned with a policy strategy aimed at promoting the use of electricity and hydrogen in transport for the purpose of GHG emission reduction.

22

See e.g. chapter 17 of the report “Support for the revision of Regulation (EC) No 443/2009 on CO2 emissions from cars”, Service request #1 for Framework Contract on Vehicle Emissions (Framework Contract No ENV.C.3./FRA/2009/0043), available from: http://ec.europa.eu/clima/policies/transport/vehicles/cars/docs/study_car_2011_en.pdf



Uncertainty about long term targets

The level of long term GHG emission targets for the transport system strongly determines the need for truly zero-emission vehicles. In particular, when electric and hydrogen vehicles do not achieve a profitable business on their own, industry will depend on ambitious climate policy to invest in widespread implementation of these technologies. In that case, besides ambitious targets, regulation and/or economic instruments will be necessary to promote implementation or to create a profitable business case. As the introduction of electric and hydrogen fuelled vehicles constitutes a transition in both the mobility and energy system that will take several decades to complete, one has to start now with the first pilots and early market developments in order to have the technologies technically and economically mature as soon as their large scale application is required to meet longer term targets. Timely setting of long term targets helps to convince the market that the first steps on the S-curve need to be made in the coming years. In its recent White Paper, the European Commission has defined a target for the transport sector of 60% GHG emission reduction in 2050 compared to 1990. Long term targets tend to be quite robust, but the more short to medium term targets derived from that are more susceptible to change as a result of fluctuations in the political climate. Stakeholders with vested interest in existing technology have large influence on politics. Especially in economically more dire periods, vested interests motivate politicians to have a preference for achieving short term economic goals over long term sustainability goals. For electric and hydrogen vehicles, future developments in existing EU policies such as the EU-ETS and the renewable energy directive (RED) may be relevant. These policy instruments determine the pace at which decarbonisation of the energy supply takes place. This would become especially relevant if vehicles were to be assessed on the basis of WTW emissions (current CO2 legislation is on TTW basis). But even apart from this, the development of real WTW emissions associated with electric and fuel cell vehicles will be important for sustained acceptance of the options by various stakeholders. The acceptance of ambitious GHG reduction targets depends on the perception of their achievability. This in turn depends on the short and longer term sustainability of vehicles running on electricity, hydrogen or other alternative energy carriers. Real or perceived uncertainty about the sustainability undermines the legitimacy of policy for sustainable mobility. The increasing evidence for ILUC effects of biofuel production has put biofuel policies largely on hold in many countries. Doubts about the short term sustainability of electric vehicles, for example through possible adverse impacts on composition of the electricity generation system as described in [T&E, 2009], could do the same for electric vehicles. In the discussion about environmental impacts of electric vehicles questions are also raised concerning impacts associated with the production and decommissioning of vehicle components. As long as these cannot be answered convincingly, these concerns cast a shadow over the public perception of electric vehicles as a solution for sustainable mobility. More on this subject can be found in section 4.5.


After defining the policy strategy, which sets out the main goals and determines the focus in general terms with respect to the preferred instruments and desired societal responses, one needs to design and implement specific policy instruments that effectuate the strategy. This process incurs lead times, risks and uncertainties that may erode the effectiveness of the policy instrument for reducing GHG emissions.



Policy instruments often contain flaws and loopholes leading to undesired effects that counteract the required impact on GHG emissions. Such flaws and loopholes can result from errors in design but more often are introduced through amendments to the legislation that have been adopted as part of the political negotiation process. Due to limitations in knowledge and modelling capabilities, such undesired effects cannot always be foreseen, so their possible existence contributes to the risks and uncertainties associated with the policy making process. An aspect to be taken into account in the design of policy instruments which promote the use of electricity and hydrogen in transport is the possible interaction with other policy instruments which have an impact on net incentives for and net sustainability of electric and hydrogen fuelled vehicles. Examples include the interaction of electric vehicle policies with (future development of) the EU-ETS and the CO2 legislation for light duty vehicles. Lead times for policy development

Lead times for development and implementation of policy instruments at EU and Member State level can be of the order of 5 to 10 years. The case of the current CO2 legislation for passenger cars is a good example of how long it can take to define and implement policy instruments. It started with the signature of the voluntary agreement between ACEA and the European Commission in 1998. When the voluntary approach turned out to be not sufficiently successful, preparations for a regulatory approach started in 2002. The final legislation was approved at the end of 2008 and will start to have legal impacts by 2012, with the phasing in of the target leading to a sales average CO2 emission of 130 g/km in 2015. In the longer term, new fiscal systems may be needed that provide a level playing field for different technological options and that reward these options as much as possible on the basis of their real impact on GHG emissions. At Member State level fiscal stimulation can be developed and implemented quite fast, but this tends to lead to very different fiscal systems in different Member States, resulting in a market fragmentation that is not beneficial for the widespread introduction of electric and hydrogen-fuelled vehicles. Developing harmonised fiscal policy at EU level, however, requires unanimity and is generally difficult. Moreover, the use in transport of energy carriers that are also used in other sectors makes it difficult to implement specific energy taxation for transport applications. Without such specific taxation, increased use of electricity and hydrogen in transport will lead to reduced fuel excise duty revenues. This may cause reluctance at Member State level which may delay the process of developing and implementing new policy instruments at the EU level. An alternative for fiscal instruments or regulation is the possible integration of transport in an emission trading system. Inclusion of transport in EU-ETS has severe drawbacks with respect to realising GHG emission and energy independence goals within the transport sector in the short to medium term. Setting up a separate trading system for transport is complex due to the large number of actors. All in all, if a cap and trade system would be preferred, the lead time for establishing this is probably also significant. Fragmentation of policy development

From the perspective of the system innovation theory an important risk is the fragmentation of policy development at different government levels and in different geographical regions. The European Commission can to some extent avoid this by creating an overall framework and incentives, but, in the end, Member States and cities are the main players in promoting transition at the local level.



Impacts of zero counting of electric and hydrogen vehicles under EU CO2 vehicle legislation

If regulation is used to promote the introduction of electric and hydrogen-fuelled vehicles, appropriate CO2 or energy efficiency standards are needed that are able to deal with the mix of conventional and alternative technologies that is foreseen for the longer term future. Under the present CO2 legislation for cars and vans, electric and hydrogen-fuelled vehicles count as zero-emission. This creates a leverage for these vehicles compared to conventional ones that certainly in the short term may not be fully justified. For every EV sold under the 130 g/km target 130 conventional vehicles are allowed to emit 1 g/km more. Due to super credits this leverage is further magnified in the years up to 2015. But as the WTT emissions of electricity production are not zero, this compensation of TTW emissions by conventional vehicles leads to a net increase in the average WTW GHG emissions of all new vehicles sold. Discussions are on-going on how future regulation may be defined to treat conventional and alternative vehicles in a more balanced way, but so far no convincing proposals have been made. How to account for real GHG intensity of electricity and hydrogen?

To make a policy instrument which is intended to promote GHG reduction in transport by means of the use of electricity or hydrogen, specific and accountable, a methodology is required that defines how much the use of electric and hydrogen vehicles contributes towards meeting GHG reduction goals. A starting point for this is the ability to determine the GHG emissions associated with the use of electric and hydrogen vehicles. If the number of vehicles, their annual mileage and their energy consumption per kilometre are known, the main parameter of interest is the assumed GHG intensity of electricity and hydrogen. At this point in time there is no scientific consensus on the method for attributing GHG emissions from production of electricity or hydrogen to electric and hydrogen vehicles. Attribution can for example be based on average emission factors for the national generation system or marginal emissions determined at different system levels. The issue is furthermore complicated by the interaction with the EU-ETS. The Fuel Quality Directive23 states that “Suppliers should, by 31 December 2020, gradually reduce life cycle greenhouse gas emissions by up to 10 % per unit of energy from fuel and energy supplied. This reduction should amount to at least 6 % by 31 December 2020, compared to the EU-average level of life cycle greenhouse gas emissions per unit of energy from fossil fuels in 2010, obtained through the use of biofuels, alternative fuels and reductions in flaring and venting at production sites. Subject to a review, it should comprise a further 2 % reduction obtained through the use of environmentally friendly carbon capture and storage technologies and electric vehicles and an additional further 2 % reduction obtained through the purchase of credits under the Clean Development Mechanism of the Kyoto Protocol.” The methodology to calculate the contribution of electric road vehicles towards this target is currently being developed. Such a methodology is, in the first instance, necessary to enable energy suppliers to report annually to the authority designated by the Member State on the greenhouse gas intensity and amount of different energy carriers supplied to the transport sector within that Member State. The way the methodology is defined will largely determine the net incentive provided by the FQD for energy suppliers to invest in promoting the use of electric vehicles. The case of the FQD already reveals some complexities. The first one concerns for example the way in which one can determine the amount of electricity that is supplied to electric vehicles. Electricity supplied through charging poles can be monitored, but the amount of electricity taken up by electric vehicles through home charging is more difficult to measure.

23

DIRECTIVE 2009/30/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009 amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC



The second issue relates to monitoring the carbon intensity. The formal definition of carbon intensity (in gCO2-equiv./MJ) of all energy carriers used for transport in a country is:

GHG intensity =

In the above formula GHGi is the carbon intensity of energy carrier i (in gCO2-equiv./MJ) and

Ei the amount of energy of type i used in transport (in MJ). In this definition the replacement of fossil fuels by electricity may lead to an increase in the GHG emissions per MJ, even when the assumed gCO2/MJ for electricity is such that electric vehicles would provide a net gCO2/km reduction compared to conventional vehicles. This is due to the fact that electric vehicles are much more energy efficient on a tank-to-wheel basis than conventional vehicles. In order for the FQD to provide a net incentive for promoting the use of electric vehicles, the above formula thus needs to be adjusted to correct for the difference in energy efficiency of conventional and electric vehicles. This, however, moves the formula away from a formal definition of carbon intensity, and requires introduction of one or more correction factors of which the value is debatable and affects the impact of the policy instrument. The above issues are not solved by making sure that all electric cars use green electricity. Currently the supply of green electricity still exceeds the demand from consumers. As long as buying green electricity for electric vehicles does not lead to increased investments in generation capacity (which may be the case if the overall targets for share of renewable energy keep exceeding the specific demand), counting all electricity used in cars as low carbon / renewable leads to a reallocation rather than a net reduction of GHG emissions. The above considerations apply equally to electricity and hydrogen.

The GHG intensity targets of the FQD and the CO2 legislation for cars and vans are intended as complementary measures that together induce a net reduction of GHG emissions from transport by, on the one hand, decarbonising the energy used by transport and, on the other hand, reducing energy demand by making vehicles more efficient. Both instruments not only reduce emissions from vehicles running on fossil fuels, but also provide incentives for the increased use of electricity and hydrogen in the transport sector. Proper tuning of the metrics and target settings used in both instruments is necessary to avoid loopholes or conflicting incentives. To fully manage achievement of a net reduction in GHG emissions from transport additional policy is also needed to control the growth of vehicle kilometres.

Ignoring knock-on GHG impacts through for example changed driving behaviour or oil price impacts

Especially in setting emission targets or limits at a vehicle level it should be acknowledged that the net effect on GHG emissions is not always proportional to the relative reduction of emissions per vehicle km at the vehicle level. Second order impacts, or knock-on consequences, may significantly affect the net impact of a policy instrument. This subject is further explored in Task 3 of this project24. The focus in the Task 3 paper is on possible knock-on consequences on vehicle purchasing and driving behaviour associated with the possibly higher purchase costs of fuel efficient vehicles (due to the application of efficiency improving technologies) and the lower fuel costs per km.

24

See website: http://www.eutransportghg2050.eu/cms/reports/



A different knock-on consequence occurs at a higher system level. Over the coming decades the oil price is expected to increase due to increasing demand on the one hand and supply side limitations on the other hand. Policies that effectively reduce the demand for oil in for example passenger cars and vans will have a dampening effect on the increase of the oil price. This not only affects the cost effectiveness of reduction measures taken in the targeted sector, but may lead to increased consumption in other sectors. This increased consumption constitutes a rebound effect on the net impact of the specific GHG reduction policy.

Knock-on consequences cannot easily be avoided. But they can be taken into account in the design of a policy instrument through appropriate modelling in ex ante assessments. In the case of electric and hydrogen vehicles, however, purchase models may be less accurate due to the fact that the technology is new and the models need to be determined on the basis of stated rather than revealed preference information.

Availability of appropriate test and valuation procedures

The effective implementation of policy instruments often depends on the availability of appropriate test and valuation procedures that are required to assess the sustainability of products. The time taken to develop appropriate procedures may thus contribute to lead times for policy development. An example is the development of the Worldwide Harmonised Light-Vehicle Test Procedures (WLTP25). This new test procedure for light duty vehicles took over 5 years to develop and implement. And after that it takes some more time to adapt existing legislation to the new procedures. The WLTP is crucial for making sure that the next steps in reducing vehicle emissions work out similarly in the real-world as they do on the type approval test. Of particular importance is the degree to which flexibilities enable vehicle manufacturers to alter vehicle test conditions so that they are far removed from those which vehicles will experience in real-world driving. Appropriate regulatory test and valuation procedures may also be necessary to enable development of long term fiscal systems that provide a level playing field and technology-neutral incentives for sustainable vehicles. Provided that the WLTP process delivers a test cycle that is sufficiently representative for real-world driving, the issue of availability of appropriate test procedures may not be pressing anymore for battery-electric and hydrogen fuelled vehicles. These vehicles do not produce tailpipe emissions and the test procedure as such for measuring energy consumption is fairly straightforward. For plug-in hybrid and range extender electric vehicles the situation is somewhat different. The procedures for measuring electricity and fuel consumption as such are not problematic, using one test starting with a full battery and a second test starting with an empty battery. But the current provisions in the test procedure for determining the overall fuel consumption and CO2 emissions based on these two separate tests do require improvement in order to be able to deliver more meaningful and representative results. The value of this combined test result not only shapes expectations on the potential contribution of plug-in hybrids and range extender electric vehicles to meeting GHG reduction goals, but is crucial for how these vehicles are treated by CO2-based fiscal systems in comparison to conventional vehicles on the one side and pure electric vehicles on the other side. An issue that is currently raising attention in the context of the CO2 legislation for cars and vans is the extent to which flexibilities in various parts of the current type approval test procedure provide room:

- for a downwards manipulation of the measured CO2 emission value without applying technical changes to the vehicles or

25 Worldwide harmonized Light-duty Test Procedures (WLTP): activity under UNECE-GRPE aiming to establish a worldwide test procedure to

measure light duty vehicle emissions and energy consumption



- for maximising of the measured CO2 benefit of applied technologies on the type approval test to levels that cannot be reproduced under real-world driving circumstances.

Both effects undermine the real-world impact of the regulation on GHG emissions from passenger cars and vans.


4.4.1 Risks, uncertainties and lead times associated with market development

Lead times for large scale market uptake

As far as lead times for large scale market uptake are concerned a back-casting exercise may be enlightening. If we are to achieve GHG emission reduction in transport of 60% or more by 2050, the lion’s share of the fleet by then must consist of very efficient vehicles driving on renewable / low-CO2 energy. Given finite fleet renewal rates and the finite speed at which production capacity can be increased that means that start of the roll-out of sustainable options need to happen by 2030 the latest. That gives us 20 years between now and 2030 to make conventional cars more efficient (in order to already achieve significant GHG emission reductions before more sustainable alternatives are ready to do so) and to:

- test the various alternatives in pilots and niche applications;

- bring suitable options to technical and economical maturity, in part by creating first markets through pilots, niches, and early adopters; and

- create a context that supports a large scale roll-out by means of appropriate policy instruments, (growing) availability of infrastructure and increasing production of low CO2 / renewable energy.

This process can be sped up but it is governed by supply and demand side limitations. On the supply side vehicle and component manufacturers need to be willing to invest in development and marketing of electric and hydrogen-fuelled vehicles, while energy companies need to invest in the required new energy infrastructure. On the demand side alternative technologies need to be accepted by consumers. Hybrid vehicles are broadly accepted now, but this has taken 15 years since the production of the first Prius in 1997. And their market share is still fairly small and, in many countries, largely dependent on tax incentives. The Prius and other comparable, charge sustaining, hybrids are in essence only very efficient variants of vehicles on conventional fuel. Selling large quantities of vehicles that require charging through a plug and that have range limitations is a far bigger challenge. "Sustainability" of stakeholder attitudes and interests: the “valley of death”

There is currently a lot of hype around electric vehicles. This was also the case in the early 1990's while towards the end of that decade there was more interest in hydrogen vehicles. This attention and favourable attitude towards new technologies tends to be temporary and may fade away for various reasons. At the moment we are only at the very beginning of the S-curve for electric vehicles. Although some large-scale pilots exist, the market introduction of hydrogen vehicles still has to start. For both technologies, the development of a mass market requires a well-managed process of creating early markets, based on early adopters and innovators, scaling up to larger niches and finally, development of the early majority market.



In every step production volumes increase, costs go down and investments in product quality and production efficiency increase. A "valley of death" in the market introduction may occur when, after serving the "innovators" and "early adopters" segments in the market, the price and characteristics of electric or hydrogen fuelled vehicles have not yet developed to a level that is considered acceptable by the "early majority" segment of the market. Consistent policy creating a stable investment climate and entrepreneurs with determination, endurance and stamina are required to bridge this "valley of death".

Figure 2.1: Market share of new technologies develops along S-curve: initial scale-up phase may suffer from the "valley of death" when, after serving the "innovators" and "early adopters" segments in the market, the price and characteristics have not yet developed to a level that is considered acceptable by the " early majority" segment of the market.

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Even without the "valley of death" the time required to fully develop the market for electric and hydrogen fuelled vehicles will span several decades, which is much more than the timescales required by industry for return of investment nowadays. The willingness of investors to support the roll-out of electric and hydrogen fuelled vehicles and the associated infrastructure, through this time-consuming process of creating, maintaining and scaling up early markets, depends on a wide range of factors. The economic “climate” is one of them. The willingness and ability to invest on the basis of a long term vision is another. In the sections below various aspects that influence the speed at which electric and hydrogen fuelled vehicles can replace conventionally fuelled vehicles, are explored in more detail. Uncertainties related to development of vehicle technology and costs

Purchase costs for electric and hydrogen fuelled vehicles are currently still high. It is certain that costs will go down over time, but it is not absolutely certain that, in the end, electric and hydrogen fuelled vehicles will be cheaper to produce or have lower total cost of ownership than conventional vehicles. The costs of electric and hydrogen fuelled vehicles will change substantially as a function of the scale of application (economies of scale and learning effect) and time (innovation). This cost development, however, is difficult to predict for the following reasons:

- Future innovations and their impacts are by definition unpredictable;

- The theory of learning curves in principle provides a methodological framework for

modelling costs as a function of cumulative production, but has many uncertainties;

- Investments in R&D and therefore the innovation rate will depend on government policies

and expectations regarding future customer demand. If, for example, the CO2 emissions



of new cars are regulated, and the CO2 standard is reduced in the coming decade, car

manufacturers will increase their efforts to develop cars with lower CO2 emissions that

are still attractive for customers. This will speed up the learning curve and increase the

potential and lower the costs of mitigation options, compared to the situation in which

there is less pressure on the parties involved. Learning curve theory is an empirical theory which describes the development of the costs of a given product as a function of the cumulative production26:

with n the cumulative production, Cn the cost of the nth product, C1 the cost of the 1st product

and S the learning rate. The learning rate S is equal to the factor by which the costs fall when cumulative production is doubled. Learning rates are usually between 1 and 0.8, with values

in the range of 0.95 to 0.85 most commonly used. A low value for S corresponds to a strong

decrease of costs as a function of cumulative production. The size of learning effects depends strongly on the characteristics of the technology. If product and production process improvements can be used to eliminate expensive materials or production steps, costs can go down strongly with the scale of production and the cumulative production. For example in catalytic converters a large share of the costs stems from the application of expensive precious metals. Reducing the amount of precious metals used in a catalyst has had a high leverage on the price so that innovation in this respect has

led to a low learning rate S (i.e. well below 1 meaning that costs fall sharply with cumulative production). In the case of electric machines or lithium batteries, however, a large reduction of the use of an expensive material is probably not an option to reduce costs so that learning effects have to come more from improved production processes rather than from improved

design. This may result in a higher value for the learning rate S.

Figure 2.2: Learning curve theory applied to the price of compact class passenger cars on hydrogen [HYWAYS 2007]

26

For more information on learning curve theory see e.g. [DAU 2006], [IEA 2000] and [NASA 2007]



The cost development of electric and hydrogen fuelled vehicles is uncertain due to uncertainties with respect to technological breakthroughs which are required to improve performance and reduce costs of electric and fuel cell vehicles. The main components requiring cost reduction are batteries, electric motors, fuel cells, and H2 storage systems. An additional but important factor in the development of component costs is the cost of materials. Even though lithium may not be a scarce resource, the price of this essential material for batteries may go up significantly when investments in production capacity are not able to match increasing demand. Rare earth metals and some other materials for electric motors and electronics may become scarce in the coming decades, leading to higher component costs. The chances for a successful large-scale market for electric vehicles would greatly benefit from the development of alternatives for lithium-based batteries with equal or better performance. Battery developments not only allow cost reductions, but can also be used to increase range, thus expanding the possible applications of EVs. As well as high costs, the business case for electric and hydrogen fuelled vehicles is also affected by component performance and lifetime issues. This is especially the case for batteries. Battery degradation determines whether the battery needs to be replaced during the vehicle’s lifetime and whether batteries used by electric vehicles may still have residual value associated with possible applications in other markets (e.g. stationary energy storage). Uncertainty about the business case

New technologies generally have high costs in the early stage of production. When production increases, costs go down. With increasing market size, investments in product improvement will increase, leading to further cost reductions. The combination of added value offered by the new technology and an acceptable cost level in the end define whether the business case for such new technologies is profitable. The same logic applies to sustainable products such as electric and hydrogen fuelled vehicles, perhaps even to a larger extent, as sustainable products are designed to have benefits at the societal level but do not necessarily provide direct added value for the users. Development of profitable business cases for users and suppliers thus depends on development of technology costs, energy prices and fiscal regimes. In the short term, establishing an acceptable residual value for vehicles with new technology is an important issue. In addition, the market development for electric and hydrogen fuelled vehicles is governed by a chicken-and-egg problem with respect to infrastructure. A crucial question for the market of electric and hydrogen fuelled vehicles is whether the applied technologies will allow production of better cars with added value to consumers. If electric and hydrogen fuelled vehicles provide added value to users, they can be sold for what they are worth rather than for what they cost. This added value could come from better performance and comfort, but also from possibilities for utilising the characteristics of new propulsion technology to create new vehicle designs or new functionality. Electric and hydrogen fuelled vehicles have to become an attractive proposition in comparison to the existing conventional technology and relative to competing alternatives. The advent of a new technology, however, usually spurs further improvements of the competing conventional and alternative technologies. As such the conventional car is a "moving target", in terms of costs, quality and environmental impacts. By way of example, in the 1990’s the “threat” of EVs in California as a result of the ZEV-mandate greatly accelerated the application of exhaust after treatment in ICEVs.



Impact of supply and demand oriented policy measures on the business case

The above considerations largely relate to autonomous developments impacting on costs and the business case. The business case at the user level, however, is determined not only by costs but also by the applicable tax regime. As such, changes to the tax regime can be used to influence the business case from a user perspective, either temporarily to overcome high initial costs in the early stages of market introduction, or more structurally, to make sure that options with structurally positive GHG abatement costs at the societal level become an attractive proposition at the user level, due to lower costs from a user perspective compared to non-sustainable options. Economic instruments such as CO2 taxation or a cap & trade system can serve the purpose of a demand oriented measure tilting the business case at the user level in favour of sustainable alternatives. An alternative for these economic instruments can be found in supply oriented measures such as CO2 regulation which basically demands vehicles to meet certain sustainability standards. Electric and hydrogen fuelled vehicles can be "forced" into the market by standards that can only be met by such vehicles or by selling a large share of these vehicles. In the context of a policy based on economic instruments, the use of regulatory instruments can still be useful and justified. Vehicle based standards can help to make sure that technologies are effectively brought to the market which may help consumers to respond to the price incentives provided by the fiscal / economic instruments. Will electric and fuel cell vehicles be accepted by consumers and reach the necessary levels of penetration? Will electric vehicles be cool or seen as second best?

Policy instruments to promote the use of electric and hydrogen-fuelled vehicles can stimulate manufacturers to develop and market these vehicles and can help to make them economically attractive for various types of users. However these policy instruments cannot force consumers or companies to buy these vehicles. The vehicles need to be accepted by consumers and professional users. This starts with accepting their possible limitations compared to conventional vehicles with respect to for example range and/or charging times. Perceptions of safety and reliability are also important. Acceptance is also dependent on real and perceived added value. In this regard, flanking policies with respect to for example parking or access to city centres may help. Therefore, even with strong incentives from policy instruments, the uptake by the market of electric and hydrogen vehicles is uncertain and this poses a risk with respect to the GHG emission impact of the policy. Infrastructure development

The timely roll-out of appropriate energy infrastructure is a prerequisite for the successful implementation of both electric and hydrogen fuelled vehicles. This dependence creates risks and uncertainties for the implementation of these technologies. At the same time, there are a number of risks and uncertainties that influence the chances for a successful realisation of the required energy infrastructure. For both electricity and hydrogen, the current situation with respect to infrastructure is characterised by a lack of dominant design. Lots of choices are still to be made, e.g.:

- for electric vehicles: - slow vs. fast charging, conductive vs. inductive charging, public or private charging

spots, battery swapping, inductive charging “from the road” - combinations of various charging options

- for hydrogen vehicles: - energy sources for production of hydrogen



- distribution in gaseous or liquid form - storage in compressed or liquid phase, metal hydrides or other options for distribution

and storage of hydrogen In particular with respect to electric vehicles, the dominant design is not just about technical choices but also about business models and payment systems. In terms of hydrogen vehicles, the business model and payment system is expected to resemble that of conventional vehicles. In the longer term the infrastructure for electric and hydrogen fuelled vehicles cannot be seen as separate from developments in other sectors. What is needed in fact, is a co-evolution of changes in mobility and energy systems. Electric vehicles, along with a range of other developments in electricity consuming devices for example decentralised energy production, will have a large impact on the required capacity of the distribution grid. Increased demand can be met by "more copper" or by "smart grids". The first option is expensive, but the business case for the second is as yet far from clear. Provided that "smart grids" are the way to go, electric vehicles may even provide a solution for managing increased local demand and matching local demand with local production of electricity. Electric vehicles could potentially play a role as decentralised storage capacity for matching supply and demand in a future energy system with a large share of intermittent renewable energy production. But this vision also requires more substantiation. In any case it will require development of agreed standards for vehicle-to-grid interaction. One of the challenges for smart grids is the development of suitable and user-friendly spot market arbitrage systems. For hydrogen it also makes a difference whether it will be used in other sectors or not. If it has wider use in the energy system, the development of production and distribution capacity for transport may profit from investments made for other applications of hydrogen. Furthermore, there appears to be a larger risk of underutilisation of the infrastructure required for hydrogen vehicles in the early stages of market development than for electric vehicles. In the initial stages the charging infrastructure for electric vehicles can possibly be better matched with the number of vehicles on the road. Due to the limited range, these vehicles are expected to be used in a limited geographical area near the main charging point. Hydrogen vehicles are expected to be used in applications with longer driving distances, and even with small numbers of vehicles on the road may need a network of filling stations with sufficient coverage over a wide geographical area. For electric vehicles the risk of underutilisation is more specifically associated with fast charging facilities that may be installed to reduce drivers' range anxiety and improve vehicle utilisation. In various experiments it has been shown that the presence of fast charging stations does encourage EV drivers to also use their vehicles for longer trips, even though the fast charging infrastructure is actually hardly used. For both types of infrastructure the timely development of appropriate standards is a prerequisite and thus also an uncertainty. Further risks and uncertainties for the successful roll-out of charging or hydrogen infrastructure are institutional and legal barriers. Pilots programmes are extremely useful in finding these barriers and in motivating stakeholders to find solutions for removing them. Energy cost development

The business case for electric and hydrogen fuelled vehicles is relative to conventional, fossil-fuelled vehicles. As such it is not only determined by cost developments in the



alternative technologies but also by the costs of the conventional technology. Developments in the latter are dominated by the price development of fossil energy, specifically oil. To maximise the GHG benefits of electric and hydrogen fuelled vehicles they need to run on energy produced from renewable resources. The cost development for the production of sustainable energy carriers, however, is highly uncertain. As with the vehicles it depends on innovation, technological breakthroughs and learning effects. In the costs of renewable energy the costs of additional provisions for dealing with the intermittent nature of for example wind and solar energy should also be included. Furthermore it should be noted that the price of sustainable energy carriers is partly determined by production costs but also by demand and competition for sustainable energy from other energy-consuming sectors. Development of energy efficient and cost-effective technologies for sustainable production of hydrogen is a challenge. The energy chain that converts low-CO2 / renewable electricity to hydrogen by electrolysis and on-board conversion of hydrogen back to electricity in a fuel cell is a relatively inefficient way of getting low-CO2 / renewable energy to the wheels (e.g. compared to direct use of low-CO2 / renewable electricity in pure electric vehicles). More efficient ways of producing low-CO2 hydrogen may improve not only chain efficiency but, above all, costs. The business case of vehicles running on (low-CO2) electricity and hydrogen is more profitable when the oil price is high. But as already explained in section 4.3 the successful large scale introduction of these alternatives may have a dampening effect on the oil price. In addition, electricity prices may become more closely linked to oil prices as has been seen to happen in food commodity markets despite biofuel production accounting for a relatively small share of crop production. This detailed balance poses a risk for investors and thus creates uncertainties as to whether implemented policies will reach the desired level of GHG reduction.

4.4.2 Risks and uncertainties associated with knock-on consequences

Which vehicles are replaced by electric vehicles? Will there just be more cars produced as families have an electric and a real car?

The net GHG impact of electric and hydrogen vehicles is determined by which vehicles they replace and whether or not they replace existing conventional vehicles at all. First of all it should be noted that electric and hydrogen vehicles do not replace old, inefficient conventional vehicles. They are an alternative for users that want to buy a new car, and thus should at any point in time be compared with the latest generation of conventional vehicles. The net GHG reduction impact then depends on whether they replace petrol or diesel vehicles and on whether they replace vehicles with average efficiency or the more energy efficient models/variants within a given segment. The typical annual mileage of the vehicle is also important. If electric vehicles are used to replace small conventional vehicles with predominantly urban driving and low annual mileage, their absolute GHG emission impact is smaller than when vehicles with higher annual mileage are replaced. But especially in the case of electric vehicles, some vehicles may not even replace conventional vehicles at all. Strongly depending on price development, fiscal treatment, parking policies and availability of charging infrastructure, electric vehicles may be used as additional vehicles in households, where the electric vehicle is used for short commuter trips,



shopping, etcetera, while the conventional vehicle remains to be used for longer trips for example for leisure purposes. Will consumers drive further because they believe their driving is GHG neutral, or because the cost per km is cheaper due to lower electricity costs?

Rebound effects related to lower operating costs have already been discussed in the context of design and implementation of the policy instrument. But even when knock-on consequences with respect to purchase and driving behaviour have been acknowledged and taken into account in ex ante policy assessments and the design of the policy instrument, the real effects may turn out to be different from what was expected. Ex ante modelling is usually limited to cost-related behaviour. Changes in consumer perceptions are difficult to forecast, especially with technologies that are very different from what we have now. Ex post monitoring is necessary to improve our knowledge of consumer responses to the incentives posed by policy instruments as well as to the characteristics of new vehicle technologies. Will drivers of PHEVs and RE-EVs maximise the share of electric driving?

Plug-in hybrids and electric vehicles with range extenders may play an important role in the transition from conventional fossil fuels to the use of full electric vehicles. But their net GHG emissions strongly depend on how they are used. Driving patterns and consumer behaviours with respect to charging the battery and driving electric or powered by the combustion engine, determine the net GHG emissions of these vehicles. Given that the average daily driven distance of most cars is smaller than the electric range of typical plug-ins, the potential for driving a large share of the kilometres in electric mode is large. But if the use of these vehicles is e.g. stimulated through fiscal measures for company cars, there is a serious risk that users will not care about maximising electric driving. Drivers of company cars generally have a tank pass and are fairly insensitive to fuel costs. Through monitoring and proper steering measures, leasing companies may stimulate drivers of PHEVs and RE-EVs to maximise electric driving. Unforeseen knock-on GHG impacts through for example oil price impacts

As discussed also in the context of design and implementation of the policy instruments, the use of electric and hydrogen vehicles may have rebound effects resulting from a dampening impact on the oil price. This may lead to increased consumption inside and outside the transport sector. Also in this regard, the complexity of the mechanisms governing the oil price limits the extent to which 2nd order impacts can be accounted for in ex ante assessments and thus in the design of the policy instrument. Monitoring and adjustments of policy instruments will be necessary to manage and minimise these after the implementation of the policy.

Monitoring is an important means to assess whether a policy instrument has the desired first order impacts and to see whether undesired second order impacts (knock-on consequences) occur. Ex-post evaluation can help to increase knowledge on the effects of policy instruments, to identify flaws and loopholes and to determine ways of improving the policy instrument’s effectiveness. These insights should be used in a plan-do-check-act cycle in which policy instruments are amended whenever deemed necessary to obtain the desired impacts. Setting up an appropriate monitoring mechanism should thus be an essential ingredient of every policy instrument. At the same time the possibilities for ex-post assessment of the effects and cost-effectiveness of policies should not be overestimated. Especially in the car



market, it is generally difficult to distinguish between the impacts of policy instruments and the impacts of a multitude of other drivers that govern the behaviour of suppliers and consumers in this market.

4.4.3 Interaction with the energy and vehicle production systems

Timely availability of sufficient low CO2 energy

Electric and hydrogen fuelled vehicles can only realise their full environmental potential if the energy mixes used to produce electricity and hydrogen contain a sufficiently large share of renewables or other low-CO2 sources. The transition of the energy system from its present fossil-based state to a more or fully sustainable state has its own set of risks and uncertainties that through electric and hydrogen fuelled vehicles influence the chances that transport can meet long term sustainability goals. For renewable or low-CO2 energy production, aspects such as cost development, finite rate of production increase and scarcity of resources, also play a role. For solar, wind and biomass energy, availability of land is one of these scarce resources. All in all the extent to which electric and hydrogen fuelled vehicles are able to realise a significant net contribution to reducing GHG emissions will be influenced by the success of European policies and sector initiatives aimed at decarbonising the energy sector. Interaction with the energy system

The introduction of electric and hydrogen fuelled vehicles in itself may have impacts on the structure and sustainability of the energy system. In the case of electric vehicles, load management, leading to increased electricity demand at night and thereby flattening the overall demand pattern for electricity, would increase the demand for and profitability of cheap power, for example coal-fired base load power. This could deteriorate the environmental performance of electricity production instead of speeding up its decarbonisation. At the same time the implementation of electric vehicles could be managed in such a way that it creates synergies with the simultaneous implementation of increasing amounts of renewable / low CO2 energy. Actual GHG impacts from vehicle manufacturing and decommissioning

In section 4.2 it was already argued that a failure to acknowledge wider LCA-related or embedded GHG emissions from vehicle manufacturing and decommissioning may lead to unjustified expectations of the GHG reduction potential of electric and hydrogen-fuelled vehicles in the development of policy strategies. But even if embedded emissions are taken into account in the policy development phase, specific action is needed to monitor and improve these impacts in the implementation phase. As mentioned in section 4.2 a significant share of these emissions take place outside the EU. Chain management practices need to be implemented to make sure that manufacturers have incentives and mechanisms to control these emissions. Embedded emissions other than GHG emissions are not only of relevance from an environmental point of view. Information on undesired environmental impacts (other than GHG emissions) of vehicle production and decommissioning may undermine the public acceptance of vehicles on electricity or hydrogen and in that way indirectly affect their market penetration and the GHG reduction that is realised through their implementation. This is discussed in the next section.



4.5 Other impacts, related to the sustainability or other aspects of the implemented technologies and behaviours

Availability of resources

In the longer term the large-scale, world-wide application of electric and hydrogen fuelled vehicles may be limited or hindered by the finite resources of materials for alternative powertrain and vehicle components. These materials include lithium, rare earth metals, and other metals such as copper and platinum. In the short and medium term scarcity of these materials is not or not only related to finite resources but also to the speed at which production capacity can be increased. A lagging production capacity for, for example lithium batteries, electric machines or fuel cells, that is unable to meet the growing demand may lead to strong price increases in the short and medium term. This may hamper the cost reductions which are required for generating a positive business case at the user level. In light of the above, resources of various materials become strategic assets. As a consequence, political developments in countries with large resources will influence price. In this way scarcity may have possible negative economic impacts on other sectors or even geopolitical consequences. Availability of resources not only applies to materials for the production of vehicles, but also to the development over time of sufficient (sustainable) production capacity for electricity and hydrogen for use in transport. As mentioned above, this includes adaptations in generation and distribution infrastructure necessary for dealing with the intermittent nature of various renewable resources. Different economic sectors will be competing for possibly scarce renewable / low CO2 energy. This drives up prices and may reduce the speed with which ambitious GHG emission reductions can be realised in the transport sector. Different routes for providing transport may already create competition, as for example biomass can be used as a source of renewable electricity or hydrogen or for direct usage in vehicles as biofuel. Environmental and social impacts in countries where materials are mined or batteries and other components are produced

The production of components for electric and hydrogen fuelled vehicles and the mining and production of materials for these components will, to a significant extent, take place in developing economies and low wage countries. Environmental and labour standards in these countries may not be at the level that is applied to the same types of industry in Europe. The increased need for materials may also lead to land-use issues and social impacts in other countries. As industrialised countries are promoting the use of electricity and hydrogen largely for societal goals, i.e. to mitigate climate change, it would be unacceptable if large-scale application of these technologies would lead to adverse environmental and social impacts elsewhere. Information about such adverse impacts may harm the green image of electric and hydrogen-fuelled vehicles, undermine acceptance and as a consequence hinder the large scale market uptake and reduce the GHG emission reduction achieved by policies intended to promote these technologies.



The solution to this is chain management. Vehicle and component manufacturers, as well as energy suppliers, need to take responsibility for the complete production chain that supplies their business and need to make sure that feedstocks, intermediate products and subcomponents for their products and services are manufactured according to standards with respect to the environment, labour conditions and social impacts that are consistent with the environmental and societal goals that industrialised countries are aiming to achieve with the promotion of electric and hydrogen-fuelled vehicles.

Perception of safety if electric and hydrogen-fuelled vehicles are seen as too quiet, or bad press related to safety incidents

Not only is the "sustainability" of the motivation of investors an issue. The development of public acceptance and consumer attitudes and preferences is an equally important risk or uncertainty. The acceptance of electric and hydrogen fuelled vehicles depends in part on the real or perceived added value of these technologies. Favourable attitudes towards these vehicles are easily destroyed by incidents leading to bad publicity. From a technical point of view safety is currently not always seen as a risk or uncertainty and does not need to be an issue. But incidents such as burning lithium batteries or hydrogen explosions are certain to happen now and then, and if incorrectly managed can lead to bad press. Incorrect claims of negative environmental impacts of electric and hydrogen fuelled vehicles may also undermine the legitimacy of policies promoting the application of these vehicles. A striking example has been the “Hummer vs. Prius - study”27, proven scientifically incorrect28 but still popping up regularly in discussion on hybrids and EVs. The low noise levels of electrically driven vehicles are perceived as unsafe by many people. Whether this is a valid argument is debatable, as conventional cars are also becoming increasingly silent at low speeds. Many road users, especially pedestrians and cyclists, now rely partly on sound to detect approaching vehicles. Even without large scale introduction of electric vehicles they will have to learn to rely more on visual information again. But moreover, the noise impacts of traffic will remain a persistent problem with serious health impacts for the next decades. So rejecting new technologies because they are too quiet is not an option. Furthermore this problem can be easily solved by equipping silent vehicles with a warning signal. Another acceptance issue, which is related to price development, could be that vehicles on electricity or hydrogen may be perceived as a perk for the rich if they remain expensive but their energy use is untaxed or at least taxed at a lower level than is currently the case for petrol and diesel. Need for road side charging putting stress on the limited availability of parking space in densely populated urban areas;

An issue that may already affect the public acceptance of electric vehicles at relatively low levels of implementation is the competition for scarce parking space in urban areas. EVs require a charging facility. Especially in inner cities but also in many suburban residential areas, most houses do not have a garage or private parking space. In these cases road side charging poles are required. In order to make sure that EVs can actually use these when necessary these charging poles need to be combined with parking spaces that are reserved for EVs. Residents owning a conventional car may not accept it if neighbours obtain parking privileges when they buy an electric vehicles. When larger shares of electric vehicles need to be catered for the implementation of road side charging infrastructure and the resulting consequences for parking space will also become a nightmare for city planners.

27

http://cnwmr.com/nss-folder/automotiveenergy/DUST%20PDF%20VERSION.pdf 28

see e.g. http://www.pacinst.org/topics/integrity_of_science/case_studies/hummer_vs_prius.pdf



4.6 Summary of lead times, risks and uncertainties associated with applying electricity and hydrogen to reduce transport’s CO2 emissions

Table 2.1 Overview of lead times, risks and uncertainties associated with applying electricity and hydrogen to reduce transport’s CO2 emissions

Lead times, risks and uncertainties EVs

PHEVs / EREVs

FCEVs Overall relevance

Conception of the policy strategy

Assumption regarding GHG emission impact

xx xxx xxx +

Assumption that electric vehicles will be needed or cost effective at storing surplus wind electricity

xxx x xx ++

Failure to look at broader life-cycle impacts

xxx xx xx ++

Assumptions with respect to economic aspects

xx xx xx ++

Uncertainty about long term targets xx xx xx ++

Implementation of the policy strategy by means of policy instruments

Lead times for policy development xxx xx xxx +

Fragmentation of policy development xxx xx x +

Impact of zero counting under EU vehicle CO2 legislation

xxx xx xx +++

How to account for real GHG intensity? xx xx xx +++

Ignoring knock-on consequences xxx xx x +

Availability of appropriate test and valuation procedures

x xxx x ++

Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments

Uncertainties with respect to development of vehicle technology and costs

xxx xx xx ++

Uncertainty about the business case xxx xx xx +++

Impact of supply and demand oriented policy measures on the business case

xxx xx xx +++

Consumer acceptance xxx xx x +++

Infrastructure development xxx xx xx ++

Energy cost development xx x xxx +

Rebound effects xxx x x +

Timely availability of sufficient renewable or low-CO2 energy

xx x xxx ++

Interaction with the energy system xxx x x +++

Actual GHG emissions from vehicle manufacturing and decommissioning

xxx xx x ++

Other impacts Availability of resources xxx x x ++

Environmental and social impacts “elsewhere”

xxx xx xx ++

Perception of safety / safety incidents xxx xx xxx +

Pressure on parking space in urban areas

xxx xx +



Table 2.1 summarizes the main lead times, risks and uncertainties identified in the sections above for vehicles running on electricity and hydrogen. Indicative scores are given to differentiate the relevance of the different issues for different vehicle types. In the last column an overall ranking or prioritisation of risks and uncertainties among each other is attempted. In the scores the urgency for short term action and the extent to which the European Commission can act on these issues are given more weight relative to issues that are relevant from a more general and long term perspective. The overall ranking identifies the following issues as most important for immediate action:

- Impact of zero-emission vehicles under the CO2 legislation in combination with the need for a methodology on how to account for GHG intensity of energy carriers. Determining appropriate metrics is essential to make sure that post 2020 targets provide the right incentives to manufacturers and energy suppliers.

- Uncertainty about the business case. This issue is closely linked with development of costs of vehicles and infrastructure, consumer acceptance and the role of supply and demand oriented policy measures on the business case.

- Interaction with the energy system. This issue partly concerns developing a more mature view on the dominant design of the charging infrastructure for electric vehicles in interaction with grid-related developments on a local and regional scale, but also concerns interaction on a (trans)national level regarding how electric and hydrogen-fuelled vehicles on the one hand require decarbonisation of the energy supply system and on the other hand influence investments in the generation of infrastructure that may or may not be consistent with the need for decarbonisation.

4.7 Possible strategies for managing and reducing risks

4.7.1 Conception of the policy strategy

Assumption regarding GHG emission impact

Through appropriate communication stakeholders can be made aware that zero tailpipe emissions does not equal zero well-to-wheel GHG emissions. But explaining to stakeholders what the true GHG emission impact of electric and hydrogen-fuelled vehicles really is, is a more complex matter. There is no scientific consensus on the method for attributing GHG emissions from the energy system to these vehicles, and in the European case, EU-ETS is complicating matters further. Estimation of GHG emissions in impact assessments in support of policy (strategy) development should be done using tools that are able to adequately model the complex interaction between the transport system and the energy generation system and should work with scenarios to cater for different future developments in both. Assumption that electric vehicles will be needed or cost effective at storing surplus wind electricity

More research is needed into the design of the optimal architecture for future electricity grids with high shares of locally and centrally generated renewable energy. The use of electric and hydrogen vehicles as storage capacity for excess renewable energy needs to be compared to other technical options. Lab and field testing is necessary to ascertain that having electric vehicles play a role in grid power management is not detrimental to battery health and lifetime.



Furthermore this issue and the previous one show that policy instruments aimed at decarbonising the energy sector need to be an integral part of a policy strategy aimed at promoting the use of electricity and hydrogen in transport for the purpose of GHG emission reduction. Failure to look at broader life-cycle impacts

In impact assessments and other policy studies on electric and hydrogen-fuelled vehicles life-cycle impacts are often excluded due to a lack of available data and a lack of budget. As a result life cycle aspects tend to be ignored in strategy and policy design. This omission can only be overcome if sufficient information and insights are made available. It is therefore advised that the European Commission invests in life cycle impact assessments for electric and hydrogen fuelled vehicles that not only map the current situation with respect to manufacturing, decommissioning and recycling but that also identify options for improvements that can be implemented through for example regulation or chain management. Given the industry’s responsibility for the latter, and given the fact that such assessments can only be done if sufficiently detailed information on industrial processes is made available, industry involvement in such studies is essential. Assumptions with respect to economic aspects

Proper insights in the possible economic impacts of the transition to electric and hydrogen-fuelled vehicles could be obtained from assessments of the current and possible future value chains for manufacturing and using conventional vehicles versus electric and hydrogen-fuelled vehicles. Such analyses should reveal whether and to what extent intrinsic economic advantages at the EU, national and local level may arise from the transition and what kind of flanking economic and other policies might be necessary to increase the European economy’s share in the value chain for these vehicles and maximise economic benefits or to avoid that the transition leads to adverse economic impacts. In order to harvest possible people, planet and profit synergies, industry policies and broader economic policies need to be aligned with a policy strategy aimed at promoting the use of electricity and hydrogen in transport for the purpose of GHG emission reduction. Uncertainty about long term targets

Early definition of long term climate goals helps to create clarity with respect to the future development of various climate policy instruments. These targets can be made more binding to future governments for example by anchoring them in "climate laws". To increase acceptance of ambitious long term targets it helps if convincing evidence can be provided of the achievability of these targets. This requires adequate techno-economic assessments including more detailed knowledge of cost reductions that are achievable for different technologies. Finally it is essential to make sure that the targets for transport and for energy sector are consistent.

4.7.2 Implementation of the policy strategy by means of policy instruments

Lead times for policy development

Given the difficulty of establishing (changes in) fiscal and other economic instruments, the European Commission and Member States should now start developing and creating acceptance for policy instruments necessary for supporting the large scale roll-out of electric



and hydrogen vehicles and other sustainable transport options. In particular, if harmonised European tax policies are required, the design of these policies should start early. Fragmentation of policy development

The European Commission can to some extent help to avoid fragmentation of policy development at different government levels and in different geographical regions by creating an overall framework and incentives. Impact of zero counting under EU vehicle CO2 legislation

For the short term, fixes are conceivable that reduce the impact of zero counting of electric and hydrogen-fuelled vehicles under EU vehicle CO2 legislation. For the longer term a consistent methodology should be developed that allows future CO2 or energy efficiency legislation as well as fiscal instruments to deal with electric and hydrogen vehicles and other alternatives in an adequate and balanced way, taking account of well-to-wheel energy and GHG emission impacts. Alternative metrics should be investigated to establish whether these can provide a level playing field for different alternative technologies. How to account for real GHG intensity?

The GHG intensity targets of the FQD and the CO2 legislation for cars and vans are intended as complementary measures that together induce a net reduction of GHG emissions from transport by, on the one hand, decarbonising the energy used by transport and, on the other hand, reducing energy demand by making vehicles more efficient. Both instruments not only reduce emissions from vehicles running on fossil fuels, but also provide incentives for the increased use of electricity and hydrogen in the transport sector. Proper tuning of the metrics and target settings used in both instruments is necessary to avoid loopholes or conflicting incentives. Ignoring knock-on consequences

Knock-on consequences cannot be easily avoided. But they can be taken into account in the design of a policy instrument through appropriate modelling in ex ante assessments. In the case of electric and hydrogen vehicles, however, purchase models may be less accurate due to the fact that the technology is new and the models need to be determined on the basis of stated rather than revealed preference information. To fully manage achievement of a net reduction in GHG emissions from transport additional policy is also needed to control the growth of vehicle kilometres. Combining regulation with respect to vehicle efficiency and carbon intensity with economic instruments is an option. Availability of appropriate test and valuation procedures

In general it is advisable to develop the necessary test and valuation procedures well before technologies are ready for (a next step in) market uptake. The European Commission or Member States should invest in sufficient testing and evaluation of developed test and valuation procedures to be able to identify and repair design flaws well before the procedures are necessary to support large-scale roll-out of the new technologies. Specifically, improvements are necessary in the procedures for assessing CO2 emissions from plug-in hybrid and range extender electric vehicles.

4.7.3 Implementation of technologies and behavioural changes in response to incentives provided by the policy instruments

Uncertainties with respect to development of vehicle technology and costs

EU, Member States and industry should focus R&D investments on innovations that use features of sustainable propulsion systems to create vehicles with added value. Furthermore



R&D is needed with particular focus on product and production process innovations which will reduce costs of (critical components for) electric and hydrogen fuelled vehicles. Investments in R&D aimed at development of alternatives for lithium-based batteries with equal or better performance will help to increase the material resource base for electric vehicles. In order to create a favourable climate for investments in R&D, product development and production capacity, it is important to develop and implement consistent policies with a longer time horizon. Besides long term goals and opportunities, it is necessary to develop short term policies for early market formation. Demand from pilots, early adopters and innovators leads to increased production volumes and increased investments that both accelerate cost reductions and product improvements. Uncertainty about the business case

Consistent and stable short, medium and long term policies are required to provide an investment climate that allows stakeholders in the market to bridge the "valley of death". The policy package may involve supply side measures (e.g. regulation) that oblige manufacturers to invest in new technologies but should also, especially for more transitional technologies such as electric and hydrogen-fuelled vehicles, involve demand side measures that create and increase a ‘sustainable’ consumer demand for these vehicles. In this respect it is advisable to prepare and implement (generic) economic instruments that improve the business case of sustainable options and also enable market introduction when options do not become sufficiently competitive compared to conventional vehicles on their own. Impact of supply and demand oriented policy measures on the business case

A combination of supply and demand oriented policy instruments can be used to make sure that sustainable options are developed and marketed on the one hand and adopted by consumers on the other hand. Demand oriented policy measures may include temporary subsidies or fiscal incentives but should preferably involve more generic economic instruments that make the business case for sustainable vehicles structurally more profitable compared to that of conventional vehicles. A harmonised approach at the European level to develop such tax policy reforms may be necessary to avoid fragmentation of the European market through inconsistent or even conflicting incentives in different member states and to make sure that these policy instruments are less susceptible to the political and economic climates in Member States. To increase political acceptability and improve robustness, new economic instruments should preferably be designed in such a way that increased use of electricity and hydrogen in transport will not lead to structural reductions in excise duty revenues. Consumer acceptance

If they have the choice, consumers will only buy electric and hydrogen-fuelled vehicles if these offer cost advantages or specific added value, compared to conventional cars, that outweigh possible drawbacks of these new technologies such as limited range, long charging times etc. Furthermore consumers need to have a positive perception of these vehicles with respect to for example safety, reliability etc.



To increase and maintain consumer acceptance of electric and hydrogen-fuelled vehicles, the European Commission and Member States can implement policies to for example:

- increase consumer awareness of the positive aspects, and create clarity about the environmental and other benefits;

- avoid or manage safety-related and other incidents that may lead to bad publicity;

- create a stable fiscal treatment that makes owning and driving clean and efficient vehicles more financially attractive;

- provide additional benefits, e.g. through reserved parking spaces or access to environmental zones in inner cities;

- remove institutional barriers for the use of these vehicles and implementation of the associated energy infrastructure.

Infrastructure development

In order to facilitate and accelerate the development of an appropriate dominant design, large scale field tests can be set up to experiment with different options for the design of future energy infrastructures for electric and hydrogen fuelled vehicles. In different pilot regions, different options for the dominant design can be tested. As well as the technical aspects of the dominant design, large scale field tests should also experiment with business models and payment systems. Development, testing and application of alternatives for conductive slow charging should be promoted. To overcome investment hurdles, governments and industrial stakeholders could together develop a suitable strategy for sharing the burden of underutilisation of specific energy distribution infrastructure in the early stages of market introduction of electric and hydrogen fuelled vehicles. Energy cost development

Increases in the price of renewable / low carbon energy resulting from competition over scarce supplies should be avoided by means of appropriate industry policy and geopolitical policy. Investments are needed in R&D on more efficient ways of producing renewable / low carbon energy, in particular on energy-efficient methods for the low cost production of hydrogen from renewable / low carbon sources. Rebound effects

Monitoring is an important means to assess whether a policy instrument has the desired first order impacts and to see whether undesired second order impacts (knock-on consequences) occur. Ex-post evaluation can help to increase knowledge on the effects of policy instruments, to identify flaws and loopholes and to determine ways of improving the policy instrument’s effectiveness. These insights should be used in a plan-do-check-act cycle in which policy instruments are amended whenever deemed necessary to obtain the desired impacts. Setting up an appropriate monitoring mechanism should thus be an essential ingredient of every policy instrument. At the same time the possibilities for ex-post assessment of the effects and cost-effectiveness of policies should not be overestimated. Especially in the car market, it is generally difficult to distinguish between the impacts of policy instruments and



the impacts of a multitude of other drivers that govern the behaviour of suppliers and consumers in this market. Timely availability of sufficient renewable / low carbon energy

Future developments of the RED and EU-ETS should be tailored to ensure that increasing amounts of renewable / low carbon energy can be supplied to the transport sector to enable GHG reduction through application of electric and hydrogen fuelled vehicles. Additional policies may be necessary to ensure that the demand from electric and hydrogen fuelled vehicles for renewable / low carbon energy is met by additional supply capacity rather than by shifting delivery of existing renewable/ low carbon energy supply from one sector to another. Interaction with the energy system

When load management for charging electric vehicles leads to flattening of the demand curve, strict application of an EU-ETS cap or additional policy is necessary to avoid an increase in the carbon intensity of electricity production. Provided that further research shows that electric or hydrogen-fuelled vehicles are a cost effective means to provide storage capacity for excess renewable energy, appropriate policies should be implemented to maximize the synergies between implementing renewable energy and electric or hydrogen-fuelled vehicles. These could for example entail removal of institutional barriers hindering the implementation of smart grids and promote new business models for delivering electricity and grid-related services. Actual GHG emissions from vehicle manufacturing and decommissioning

More research is urgently needed to identify the main sources of GHG emissions from production and decommissioning of electric and hydrogen fuelled vehicles. Based on results of that research, mitigation measures, specifically in the realm of chain management, can be developed and implemented before large investments in production and recycling infrastructure are made. A monitoring mechanism should be implemented to regularly check progress in reducing GHG emissions from vehicle manufacturing and decommissioning.

4.7.4 Other impacts, related to the sustainability or other aspects of the implemented technologies and behavioural changes

Availability of resources

In view of the scarcity of renewable / low carbon energy in the coming decades, technological R&D for electric and hydrogen fuelled vehicles should be aimed at developing cost effective means to reduce energy consumption at the vehicle level. At the same time, the development of renewable / low carbon energy generation capacity needs to be managed so that it matches the increased demands from the transport sector. In view of the scarcity of specific materials in the coming decades, technological R&D should be aimed at developing components based on alternative, more abundantly available materials. A joint European foreign policy may be necessary to assure the availability of scarce materials to the European industry. The growth of production capacities may need to be actively managed at an international level to avoid the situation where such a scarcity leads to increased prices which slow down the market uptake of electric and hydrogen fuelled vehicles.



Environmental and social impacts “elsewhere”

More research is urgently needed to identify possible problems with the life-cycle environmental impacts of electric and hydrogen fuelled vehicles so that mitigation measures, specifically in the realm of chain management, can be developed and implemented before large investments in production and recycling infrastructure are made. Through chain management, vehicle and component manufacturers, as well as energy suppliers, need to take responsibility for the complete production chain that supplies their business and need to make sure that feedstocks, intermediate products and subcomponents for their products and services are manufactured according to standards with respect to the environment, labour conditions and social impacts that are consistent with the environmental and societal goals that industrialised countries are aiming to achieve with the promotion of electric and hydrogen-fuelled vehicles. Perception of safety / safety incidents

Transition management by governments has a strong role in avoiding unnecessary incidents or other causes for bad press for electric and hydrogen fuelled vehicles. Pressure on parking space in urban areas

Local government should avoid a situation where reserving parking spaces for the charging of electric vehicles leads to increased scarcity of parking spaces for conventional vehicles at a level that is not tolerated by citizens. Pressure on parking spaces can be alleviated by investing in a sufficiently dense network of fast charging stations. To this end fast charging must become mature technology and must be available at acceptable costs.

4.8 Managing the transition

The above sections 4.7.1 to 4.7.4 contain specific recommendations for actions that can be taken to avoid or manage risks and uncertainties through optimising the existing policy making process, for example through regulation or economic instruments. Alternative approaches can be developed by recognising that electric and hydrogen-fuelled vehicles constitute a transition that needs to be managed. The risks and uncertainties with respect to technical responses apply most prominently to such transitional innovations, i.e. new technologies causing or requiring structural changes in the transport system and other associated systems (e.g. energy system or ICT). As opposed to incremental innovations, which generally represent improvements of existing systems and therefore require little adaptation and will be easily accepted, transitional innovations are generally characterised by higher uncertainties with respect to costs and added value and will receive more opposition from both users and stakeholders with vested interests in the existing systems. The considerations below are developed around the case of electric and hydrogen-fuelled vehicles but obviously have much wider validity for other sustainable transitions.

4.8.1 Dynamics of creating a market for innovations

When first brought to the market, new technologies are generally expensive and suffer from insufficient technical maturity. Early market formation is necessary to induce the product improvements and cost reductions that are required for successful implementation in mass markets. The pace of product and cost improvements is difficult to predict and will be different for different innovations.



Figure 2.3: Solving the chicken and egg problem of costs and demand

As well as cost development, the pace of market uptake of a new technology is also determined by the added value that subsequent consumer groups attribute to the innovation. As discussed earlier sustainable products do not evidently pose added value to the user. As a result, the business prospects for stakeholders who need to make investments is also less clear or certain. This is the main reason why transitions that are needed for environmental / sustainability reasons require more transition management than “normal” transitions. A "valley of death" in the market introduction occurs when, after serving the "innovators" and "early adopters" segments in the market, the price and characteristics (translating into a perceived added value) have not yet developed to a level that is considered acceptable by the "early majority" segment of the market (see Figure 2.1). Regardless of the incremental or transitional nature of the sustainable mobility innovations, it is clear that with electric and hydrogen-fuelled vehicles we are looking at examples of sustainable products and services that replace existing products and services. The pace of introduction in a replacement market is generally limited by fleet renewal rates, which in turn depend on vehicle lifetime and overall fleet growth. The development of the market share of new products is generally governed by S-curves. In order to reach long term climate change goals by 2050, the lion’s share of the fleet must be energy efficient vehicles driving on sustainable (i.e. renewable or low CO2) energy carriers. The main options for such sustainable vehicles are biofuels in ICEVs, electricity in EVs or plug-in HEVs and hydrogen in FCEVs. In order to reach the desired fleet penetration, the share of sustainable vehicles needs to be ramped up from 2030 onwards. Between now and 2030 the main steps to be taken are:

- Experimenting with different options

- Bringing options to technical and economical maturity o meeting user needs o cost reduction

- Create a context in which scale-up can take place:

o structural policy instruments o infrastructure

In the coming decade various options for sustainable mobility will need to be put to the test in different niche applications, and will need to undergo further improvement in terms of performance and costs. Choices should not be made too early. We will need more than one technology to make all transport applications sustainable, and success is not guaranteed for all options.



Market introduction of sustainable vehicles needs to start now to achieve 80 to 100% share in the fleet by 2050. Early market formation will trigger investments in R&D and in production capacity, and will this lead to product improvement and cost reduction. When costs have gone down sufficiently and the product has been further developed to meet user needs, mass market introduction will take off. To overcome the “valley of death” the following are necessary:

- robust stimulation policies - determined investors and early users (innovators and early adopters) with stamina /

endurance to create, maintain and scale up early markets - profitable niche applications

4.8.2 The nature of transitions

As an example of the above the graph below indicates some of the different forces and aspects that influence the implementation of, in this case, electric vehicles. Innovation system theory deals with the dynamics of these interactions and can be used to identify levers by which governments and other stakeholders can stimulate the development and particularly the implementation of innovative technologies and services.

Figure 2.4: Forces and other aspects that influence the implementation of system innovations, in this case electric vehicles

lack of dominant

design and standards

competing options /

technologies

co-evolution of energy

and mobility system

new stakeholders

and actors

vested interests

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scales/levels:

- geographical

- governance

- time scales

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vehicles as

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lack of dominant


competing options /

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and mobility system

lack of dominant


competing options /

technologies


and mobility system

new stakeholders

and actors

vested interests

new stakeholders

and actors

vested interests

different

scales/levels:

- geographical

- governance

- time scales

different

scales/levels:

- geographical

- governance

- time scales

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new business

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new business

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mediaunexpected

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Transition processes are generally characterised by:

- Complexity:

o different time scales for technological development o unpredictable behaviour of users o competing alternative technologies incl. improvements in the existing conventional

technology that may be spurred by the advent of alternatives o interdependence with other domains, for example within the mobility system or with

the energy system o resistance from stakeholders with vested interests o unpredictable impacts on government income o open markets => impact of policies and developments in other countries / regions

- Uncertainty and change:



o lack of knowledge or insufficient application of available knowledge o development of new insights over time o unexpected events o development of prices of energy and materials o policy development and longevity of existing policies, political changes o social acceptance of new technology

- Fragmentation:

o insufficient governance and coordination o (potential) players remaining outside of the process (e.g. as they are not recognised

or accepted by existing stakeholders, or themselves are not aware of their potential contribution to the transition)

o parallel technological development paths that could strengthen each other but are not organised to do so

4.8.3 Transition management required to manage risks and uncertainties

A major purpose of transition management relates to the avoidance, reduction, mitigation, and management of risks. This involves the following aspects:

- risk avoidance though proper design of the policy framework, e.g.: o designing policy instruments to have intrinsic certainty of meeting the target o appropriate combination of specific and generic policy instruments o include flanking policies to remove barriers (e.g. market failures) hindering the

response to the main policy instruments o redundancy in (number and potential of) technical and behavioural responses

promoted by policy instruments i.e. "bet on more than one horse" to be available for meeting the target

- management of the policy making process, specifically with respect to stakeholder involvement

- monitoring of responses to implemented policies to assess effectiveness and possible barriers hindering the desired societal response

- creating room to adjust policies on the basis of observed responses - management of the transition process on the basis of an insight into innovation systems

and system innovations. In transitions three phases can be discerned:

- Pre-development → Experimentation phase - Take-off → Pre-implementation phase - Acceleration → Implementation phase

The acceleration phase may be managed by traditional policy instruments such as regulation and economic instruments, but especially in the pre-development and take-off phase a different policy approach seems necessary to get transitions going. This approach is generally based on close interaction / cooperation between governments and a wide range of involved stakeholders. This allows policy makers to closely monitor and solve the main problems that various stakeholders experience in marketing and/or adopting new technologies.

4.8.4 Innovation system theory provides tools for the management of risks and uncertainties

Innovation System Analysis (ISA) theory discerns 7 functions of the innovation system that need to be fulfilled for a transition to be successful (Suurs 2009):



1. Entrepreneurial activities, for example actors setting up innovative projects to exploit (commercial) opportunities.

2. Knowledge development: research and development creates variations and is thus an important prerequisite for innovation.

3. Knowledge dispersion / dissemination: the typical structure of an innovation system is that of a network. This network facilitates exchange of knowledge.

4. Guidance / direction in the search process: This system function provides the selective pressure that is necessary to make innovations develop in a desired direction.

5. Market formation: At the start of an innovation, market demand for the new technology is generally limited or non-existent. Creating “artificial” market conditions is usually necessary to generate the first demand.

6. Mobilising means and capacities: to enable all developments and changes. Financial, material and human ‘resources’ need to be mobilised.

7. Lobby: support from interest groups. Introduction of new technologies usually leads to resistance from vested interest. New actors need to organise themselves in order to combat this resistance.

Creating synergy between these innovation functions can strongly enhance the dynamics of the innovation process. Analysis of these innovation functions for specific transitions can help in the design of effective policy instruments for promoting the desired transitions, in particular, the options for managing risks and uncertainties. Based on the 7 functions of the innovation system, specific government roles can be identified for managing the transition.

4.9 Conclusions

The success of using electricity and hydrogen as a means to drastically reduce GHG emissions of the transport sector by 2050 depends on a multitude of factors. In as far as these factors are exogenous to the transport sector, or endogenous but unpredictable or difficult to manage, they constitute risks or uncertainties or cause undesired long lead times. Risks, uncertainties and lead times can be categorized as pertaining to three main conditions that must be fulfilled in order for electric and hydrogen fuelled vehicles to have the desired impact on GHG emissions:

1. Effective policies must be developed and implemented which promote the installation of the appropriate required energy infrastructure and the use of electric and hydrogen-fuelled vehicles;


3. The environmental impact of the applied electric and hydrogen-fuelled vehicles must be such that it leads to a significant net reduction in GHG emissions. This relates to the WTW GHG emissions associated with energy use and probably, to a lesser extent, the embedded GHG emissions associated with vehicle manufacturing and decommissioning.

An important part of the first risk / uncertainty relates to the choice between the two options either resulting in a risk to pick the wrong one, or a risk to invest in both unnecessarily. The main identified uncertainties pertain to:

- Developments of costs for critical components of electric and hydrogen fuelled vehicles and the resulting possibilities for creating a favourable business case without subsidies or fiscal stimulation;

- Availability of critical materials, including the feasibility of scaling up mining and production activities fast enough to keep the pace up with developing demand;

- Development of the prices for fossil and renewable / low carbon energy;



- Timely availability of sufficient quantities of renewable / low carbon energy. The following factors have been identified as significant risks:

- Unforeseen loopholes in policy instruments reducing the effectiveness of the policy or the net GHG impact;

- The possible occurrence of a "valley of death" in the market introduction when, after serving the "innovators" and "early adopters" segments in the market, the price and characteristics of electric or hydrogen fuelled vehicles have not yet developed to a level that is considered acceptable by the "early majority" segment of the market;

- High costs per vehicles in the early stage of market entry due to underutilisation of energy supply infrastructure;

- The (lack of) endurance of the current favourable attitude of governments, investors, consumers and other stakeholders towards electric vehicles.

Substantial lead times are caused by:

- the time to develop and implement required policy instruments at the European level;

- the finite rate of fleet renewal;

- the slow, iterative process of early market formation through subsequent niches. All in all, the implementation of electricity and hydrogen as GHG reduction options for the transport sector is a transition that involves drastic and structural changes in both the transport and the energy sector and that will take several decades to start up, roll out and complete. Governments and stakeholders in the market need endurance and a long term vision to manage this transition in an effective way. Mitigating risks and taking away uncertainties is an important part of that. Proactive steps are required in the short term in terms of laying the ground work for longer term policy instruments, in early market formation and in setting up and managing a process that timely delivers the insights that are necessary to develop a suitable dominant design for the energy distribution infrastructure.

4.10 References

HYWAYS, 2007 Socio / Economic Analysis, deliverable D 3.22 (Final Report) of Phase II of the HYWAYS project, www.hyways.de Suurs, 2009 Suurs, R.A.A. Motors of Sustainable Innovation, PhD Thesis, 2009 T&E, 2009 How to Avoid an Electric Shock Electric Cars: From the Hype to the Reality, T&E 2009



5 Economic instruments, particularly usage pricing

Objectives:

The purpose of this sub-task was to:

Explore and identify key risks and uncertainties associated with the achievability of economic instrument-related policies, including lead times for policy implementation and time lags to the resulting impact on emissions




If road usage charging is to be introduced, it should take place in addition to, rather than instead of, fuel taxation.

At the strategic, or conceptual, level, the main risks relate to the acceptability by the public and business of the introduction of road user charging, and the associated political risk.

These strategic risks are linked to, and based on, a number of other economic, social and environmental risks. These include business concerns about the impact on trade or costs, and the social concerns relating to the impact on mobility, particularly for the poorer sections of society.

Some of the risks are perceived, but many are real, and could be addressed either in the design of the charging scheme, or by the introduction of complementary policy instruments (which could even be introduced in advance of the charging scheme itself).

5.1 Introduction

As was discussed in Section 2.9, this section focuses on the risks and uncertainties associated with the use of economic instruments that could be put in place to charge users to use roads. User charging clearly has a potential role to play in relation to reducing transport’s CO2 emissions, but it has not yet been implemented that widely and its implementation still proves to be controversial. While there are other economic instruments that have a potential role in reducing transport’s CO2 emissions, notably the differentiation of purchase and circulation taxes, the implementation of these is becoming increasingly common. For this reason, within this project it was considered to be more appropriate to examine other issues associated with the implementation of vehicle taxes, such as their knock-on consequences (see Smokers et al, 2012), rather than any risks and uncertainties associated with their implementation. Hence, this section focuses on the risks and uncertainties associated with the introduction of user charging. All Member States already have a crude form of road user charging in place in the form of fuel taxation. Existing fuel taxes bring in significant revenues for national administrations and were originally seen as a means of raising revenue, rather than as transport policy instrument. Fuel taxation has a number of benefits as a revenue-raising instrument as the



level of income is relatively predictable and reliable; it is also generally considered to be progressive, as those on higher incomes generally drive more, and it is simple and easy to administer. However, in recent years fuel taxation has been used as an instrument of transport policy, either being raised above inflation to reduce CO2 emissions or being differentiated to encourage cleaner fuels (Ekins and Potter, 2010). Fuel taxation is considered to be a crude means of user charging as there are better ways of charging vehicles to reflect their wider impacts, for example air pollution and congestion, which would be fairer, make the transport system more efficient and could influence behaviour in particular locations. Introducing user charging by adopting a marginal cost pricing approach in which the external costs of the wider impacts of transport are internalised, i.e. included in the price of transport, is considered to be the first, best and most economically efficient approach, as was noted in the first EU GHG Transport 2050 project (see Section 3.2 of Skinner et al., 2010). User charging is also a more flexible instrument than fuel taxation, as it can be used to target particular modes, for example heavy goods vehicles, particular areas, for example city centres, or particular infrastructure, for example motorways, whereas a general increase in fuel taxation is not an option for this purpose. Hence, there is a rationale for introducing user charging as an alternative to fuel taxation, but it could also be introduced in addition to fuel taxation. It is currently possible to estimate and internalise some of the external costs of transport, for example air pollution, noise, congestion, accidents and climate change, as well as the costs associated with the maintenance, operation and even the construction of roads, and use these as the basis of user charging. However, there are other external costs, such as those imposed on ecosystem services and biodiversity and the scarcity of space on infrastructure, that are more difficult to evaluate and are rarely included in the assessment of the external cost pricing of transport. For example, the IMPACT study reviewed estimates of external costs associated with biodiversity, but did not include biodiversity in its subsequent policy analysis (CE Delft et al., 2008a and b, respectively). On the other hand, TEEB (2009) highlighted the value of ecosystems and biodiversity and recommended that this value be recognised in sectoral policies, such as those of the transport sector. The impact of road user charging is also dependent on the time and location of its use, as noted above. Hence, replacing fuel taxation with user charging would lead to reduced demand at certain times and places, for example peak travel in urban areas, but to increased demand elsewhere, for example off-peak in rural locations. The net impact on demand, and therefore on CO2 emissions, of replacing fuel taxation with road user charges would therefore depend on the total impact on demand in all of these areas. However, from the perspective of applying user charging as an instrument to reduce transport’s CO2 emissions, emissions reductions would only be achieved if there is a reduction in the overall demand for transport, i.e. if the introduction of user charging leads to increased costs of use. As the purpose of this paper is to look at the risks and uncertainties associated with selected options and policy instruments for reducing transport CO2 emissions, in the remainder of this section, it will be assumed that road user charging is introduced in addition to, rather than instead of, fuel taxation. Such an approach can be justified (often referred to a “second best” from the economic perspective), as:

- It is often not possible to internalise all external costs, as noted above;

- External cost pricing on its own is often not sufficient for meeting wider policy objectives;

- Pricing incentives that are higher than can be justified on the basis of external cost pricing are often needed to change behaviour to deliver wider policy objectives; and

- Additional revenues are often needed to, for example, improve transport infrastructure more generally, including for modes not covered by charging.



Hence, of the options for reducing GHG emissions to which the introduction of user charging could contribute, which were set out in Section 2.9, the discussion in this section focuses on applying user charging to reduce demand. However, it is worth noting that applying user charging will also act to improve the efficiency of vehicle use (both from the perspective of increasing the capacity of vehicles and improving flows). The remainder of this section is structured along the lines set out in Section 2.1, i.e. first focusing on the risks and uncertainties associated with the conception of the policy (Section 5.3), followed by those relating to its implementation and behavioural responses (Sections 5.4 and 5.5, respectively), before discussing other risks (Section 5.6). A review of the literature on which some this assessment is based can be found in Annex C. First, however, an overview of the policy context is provided.

5.2 The policy context

At a European level, existing legislation already sets the framework for tolls and user charges that might be faced by heavy goods vehicles (HGVs) in the so-called Eurovignette Directive (1999/62/EC). This allows some environmental characteristics to be taken into account in such charges, and an amendment of the Directive that was approved in 2011 enables Member States to calculate and vary tolls on the basis of the external costs of road freight transport in terms of air pollution, noise and congestion. As long as any tolls or user charges are consistent with the requirements of this Directive, then Member States are permitted to introduce tolls and charges on their road transport infrastructure. Hence, there are currently no European policy barriers that present Member States introducing user charging, as long as the scheme is consistent with the Eurovignette Directive, as amended. In the 2011 transport White Paper, the Commission signalled its intention to further develop EU policy on user charging for transport. As part of one of the 40 initiatives included in the White Paper, the Commission stated its intention to phase in mandatory user charging for heavy duty vehicles by 2016, instead of the voluntary Eurovignette, to cover the costs of infrastructure damage, noise and local air pollution. Additionally, the Commission plans to develop guidelines for the application of user charging of other road vehicles, including cars, in order to cover the associated costs of congestion, local pollution, noise, accidents and possibly CO2 (depending on whether the proposal to introduce a CO2 element in transport fuel taxes is included in the final version of the revised Directive on the taxation of energy products). A second phase, to be implemented by 2020, would move towards mandatory internalisation of external costs, including noise, air pollution and congestion, for all road modes. It is possible that the deadlines set out in the White Paper might not be met, and indeed that the contents of the revised legislation might not be as stringent as envisaged by the Commission. However, delays with the development of mandatory charging legislation at a European level need not prevent the implementation of user charging in Member States. Some Member States have already implemented road user charging schemes, for example urban road user charging schemes in London, Stockholm, Rome, Bologna and Milan (May et al., 2010) and HGV road user charging in Germany, Austria, the Czech Republic and Slovakia (Significance and CE Delft, 2010). Generally, these have been successful, although as noted by May et al. (2010) a number of proposed schemes have been abandoned prior to implementation, for example schemes in Edinburgh and Manchester, as well as national scheme for the Netherlands and an HGV charging scheme for the UK. The rejections of these schemes, the first two of which were by local referenda, highlight the problems concerned with public and political acceptability of user charging schemes (see Section 5.3). The implementation of a successful user charging scheme takes time. For example, in London the scheme took nearly three years from conception to implementation. Transport for London, the organisation responsible for transport in the UK’s capital, was asked by the



Mayor of London to investigate the options for a Central London charging scheme in July 2000. The Mayor gave the go-ahead for the scheme in February 2002 with a planned start date of one year later. The public consultation process itself lasted 18 months (Dix, 2002). Apart from the potential timescales between the conception and implementation of charging schemes, there is also the possibility that national legislation will need to be amended in order to allow local or regional authorities to implement road user charging schemes. This was the case in the UK where national legislation was needed in order to first allow London and then to allow other cities to implement congestion charging schemes (Snape and de Souza, 2005). Where such national legislation is required, it is likely that a few additional years will be required before local or regional schemes can be implemented.


When an administration is considering the introduction of a strategy to reduce the demand for transport use (even if it is not presented in this way), there will inevitably be resistance. This is likely to come both from those who currently benefit from being able to use infrastructure to travel, as well as those who hope to be able to benefit more at some point in the future. As this applies to the general public and to business, there is clearly a significant risk associated with the introduction of transport demand reduction strategies. Such strategies could include forms of regulation, for example the prevention of access or the reduction in the available infrastructure, but these are likely to be blunt (and potentially inefficient) instruments in most cases, apart from in selected circumstances, for example the pedestrianisation of urban centres. Hence, important elements of such traffic reduction strategies will be economic instruments. As noted in the previous section, fuel duty is a comparatively blunt instrument, particularly compared to user charging. Hence, user charging is likely to be an important element of strategies to reduce transport demand. However, as a result of the likely resistance of the public and business to the introduction of road user charging, there are significant political risks associated with the introduction of user charging (ICCT, 2010; UK ERC, 2009). Such resistance often leads to reluctance on the part of the public and business to consider, let alone support, the introduction of road user charging. Some of these risks can be anticipated and overcome in the design of the policy or, for example where it is not possible to mitigate adverse effects through design, compensating some of those adversely affected, for example through welfare payments or lower business taxes (see Section 5.5). There are wider political risks associated with the way in which the introduction of user charging is presented. As noted in Section 5.1, from an economic perspective it is best to base user charging on the concept of external cost pricing, perhaps even instead of fuel taxation. However, in order to ensure that road user charging would deliver CO2 reductions, it was argued that user charging should be used in addition to, rather than instead of, fuel taxation. Applying road user charging in this way risks the argument being made for user charging to be based on external cost pricing, as some people would consider that existing fuel taxes already cover the external costs of, at least some modes of, transport, including their impacts on climate change. Whereas some forms of user charging, for example congestion charging in urban areas, are easier to justify on the basis of external pricing, as it is more difficult to conclude that the costs of congestion are covered by fuel taxation, justifying other types of user charging is more difficult once the link is made to external cost pricing and the charge will be additional to existing fuel taxation. In the longer-term, such a link might make the introduction of charging, say to meet other policy objectives, more difficult. Finally, there is a risk that if Member States develop their own respective charging schemes without any coordination, then there will be a proliferation of charging schemes that could



potentially inhibit the free movement of goods and people within the European Union. However, as has been shown with the agreements on the Eurovignette Directive, it is often difficult to reach an agreement at a European level with respect to the common elements of even voluntary charging schemes. The risks discussed in this section at the stage of the conception of the policy strategy are summarised in Table 5.1.

Table 5.1 Potential risks and uncertainties associated with the conception of road user charging policy

Type of risk/uncertainty: Description of risk/uncertainty Business acceptability - Opposition from (local) business resulting from concerns over

potential economic impact in areas where user pricing increases price of use

Social and public acceptability - Opposition from public due to potential impacts on personal mobility (and therefore accessibility to economic opportunities and social interactions) in areas where user pricing increases price of use

Political - Difficulties caused by economic and social concerns, in locations where user prices increase

- Risks of linking user charging to external cost pricing - Difficulties of agreeing taxation/charging policies at the

European level (e.g. subsidiarity)


It is possible to address the political risks associated with the acceptability of road user charging by the general public and business. A number of reports have reviewed the implementation of the existing urban user charges and HGV charges which have been implemented in the EU to date and have identified important elements of the implementation of these policies. In a report produced as part of the IMPACT project, CE Delft et al (2008) concluded that successful pricing instruments which internalise costs have a number of identifiable elements. First, instruments should give users means of opting out of the charge, which could be by adopting technological alternatives, for example alternative fuels, or alternative means of transport, for example public transport. Other important elements include a cap on the maximum charge that can be levied in order to prevent over-pricing and the recycling of revenues to investment in transport infrastructure, particularly other modes. Both of these elements can also help to increase the public acceptability of the scheme. The report also noted that beneficial and adverse effects of the system should be monitored in order to identify whether there is a need for adjustments to charging. They argue that the initial focus of user charging schemes should be on travel where the gap between charges/taxes and costs is largest, where travel alternatives exist or can be provided, where the potential to use other measures is limited and where, consequently, public acceptability will be highest. Examples include roads in urban and sensitive areas, congestion charging and HGV charging. Finally, they noted that pricing strategies should not replace successful non-market instruments, but be used to complement these instead. In this respect, the need for pricing to be part of a wider climate change strategy was noted, which could include a range of other polices, such as vehicle efficiency standards and vehicle taxation and incentives. The need to enable people to opt out of the charge, as noted above, further underlines the need for a range of complementary measures in support of the central charging instrument. May et al. (2010), based on the European-funded project CURACAO that evaluated the implementation of various urban road charging schemes in the EU, identified a number of recommendations for the introduction of successful schemes. Most of the recommendations



focused on cities and regional authorities that want to implement successful urban road user charging schemes. They begin by suggesting that the respective authorities state clearly, briefly and simply the objectives of the scheme and to adhere to these consistently. Subsequently, authorities should adopt a flexible and dynamic approach in developing their scheme, whilst ensuring that the scheme will be as effective as possible. They argued that it was important to address issues relating to acceptability from the beginning of the process, which should include a demonstration of the serious nature of the problem that user charging is attempting to address, explain why an instrument that some might consider to be as drastic as user charging is needed, as well as the fact that it is likely to work. In this respect, all positive and negative impacts must be clearly identified and effectively communicated. Careful attention should be paid to the implementation process with the aim of obtaining a consensus among key stakeholders, as far as is possible. The paper also noted that authorities should be cautious about holding referenda, unless there is an obligation to do so, as the public acceptance of user charging tends to increase once the scheme is operational, for example in London and Stockholm approval increased by 15% after the first year. Finally, they note that the design of the scheme should not be technology-driven and that the technology and administrative systems should be selected with costs in mind. Resources should also be allocated for establishing the baseline conditions and for monitoring of performance against the stated objectives. In line with the conclusions of CE Delft et al. (2008), May et al. (2010) also note that the use of revenues is important and that road user charging schemes should not be designed or implemented in isolation, but introduced in the context of wider complementary instruments. Indeed, they conclude that the way in which revenues are used is critical in determining both the acceptability and the effectiveness of the scheme. Recommendations for national administrations focused on the need to develop clear national strategies that outline the rationale behind road user charging and which should be part of a wider transport strategy. National authorities should also ensure that appropriate legislation exists to allow local and regional authorities to plan and implement charging schemes, as well as ensuring that these authorities can put in place the necessary governance structures to implement road user pricing and the necessary complementary measures. To assist with this process, the European Commission should develop guidance for authorities and offer relevant financial support. In a report looking specifically at the potential social and distributional impacts of potential policies to reduce transport’s CO2 emissions, Skinner et al. (2011) identified a number of recommendations for policy makers, such as the need to:

- Understand the type, scope and geographical location of the disadvantaged groups that might be affected by user charging.

- Engage with such groups, or at least their representatives, to understand their concerns, particularly with respect to accessibility and affordability. Take such concerns into account when designing policies, and communicate to disadvantaged groups how their concerns have been met.

- Focus on the potential impacts on low income drivers, particularly those who have a lack of viable alternatives to the car at the times at which they need to drive, or to the locations to which they need to drive.

- Consider the use of exemptions or concessions when addressing the concerns of disadvantaged groups.

- Take account of the alternatives to travel, and potentially improve, these, as a means of addressing the concerns of potentially disadvantaged groups.



- Ensure that the resulting reductions in transport’s CO2 emissions are maintained, i.e. that complementary demand management measures are needed to ensure that the CO2 benefits of user charging are “locked in”.

- Take account of, and communicate, the wider benefits of such policies for transport users and non-users in the course of developing policies, for example improvements in air quality and reduced noise levels, severance and road traffic accidents, that result from less traffic.

- Monitor the impact of policies on different groups over time in order to ensure that the benefits are maintained and that additional measures are taken to address any erosion of the CO2 or other benefits.

Such considerations can act to increase the acceptability of road user charging amongst both the general public and amongst business, and thus reduce the political risks associated with the introduction of road user pricing. Other implementation risks are associated with the complexity of road charging systems as these are, by their nature, more complex policy instruments than, for example, fuel taxation. In this respect, they are likely to need more complex technical and administrative systems (e.g. Akyelken, 2010). However, from an economic perspective, it is important not to make the design of the system too complicated to the extent that the costs of operation and enforcement risk outweighing the benefits or costing too large a proportion of the additional revenue raised. The systems also need to be designed to take account of people’s concerns about privacy, as any system that charges by time and/or location has to monitor the movements of vehicles. Finally, in implementing a road user charging scheme, there is always the possibility that the subsequent behaviour will not correspond to theory. This could occur for a number of reasons, including that the response to the financial incentives is smaller than expected based on known elasticities. This could be related to an overestimation of the role of financial considerations in decisions by consumers or other actors, or by an underestimation of the barriers that inhibit actors to respond to the financial incentives. This underlines the importance of monitoring the implementation of a scheme, as noted above, and in amending the scheme in light of the results of any evaluation of monitoring information. Careful design of the road user pricing strategy and parallel instruments can also help to address risks associated with the behavioural response of users (Section 5.5) and wider impacts (Section 5.6). The risks and uncertainties discussed in this section are summarised in Table 5.2.

Table 5.2 Potential risks and uncertainties associated with the implementation of road user charging instruments

Type of risk/uncertainty: Description of risk/uncertainty Economic (micro) - Delivering overall benefits by balancing benefits with costs

associated with implementation and monitoring Environmental - Not delivering the anticipated reductions in GHG emissions Privacy - Charging according to time and location of travel requires

knowledge of movements, which potentially lead to privacy issues

Technical and administrative - Need to develop, potentially complex, technical and administrative systems to administer road user charging



5.5 Behavioural changes in response to incentives provided by user charging

As noted in Section 5.1, in this paper we are considering the introduction of road user charging to reduce demand in order to reduce GHG emissions. As was noted in Section 5.3, there are political risks and uncertainties associated with the introduction of road user charging linked to the acceptability of introducing such charges amongst the public and business. These acceptability issues relate to the behavioural responses that might occur as a result of the introduction of road user charging.

Local businesses are often concerned about the economic implications of the loss of passing trade. Such concerns can often lead to local business opposing the introduction of congestion charging. However, ex post assessments, for example of London’s congestion charge, have not revealed any adverse economic impacts. Indeed, there is an argument that local businesses should benefit from lower congestion, which would help to improve access and lead to more reliable delivery times (e.g. ICCT, 2010). Businesses are also often opposed to road user charging on inter-urban routes, as a result of a perceived increase in costs. However, similarly, if flows improve, costs for business would decline, so the net impact is not necessarily negative.

From a social perspective, there are often concerns about the impacts on personal mobility of increasing charges for using transport. In this respect, it is often argued that road user charging is progressive, as richer people tend to drive more. However, many people, particularly those on lower incomes who rely on their car use for access to services and employment, will have genuine concerns about the impacts on their personal mobility resulting from the introduction of road user charging (Skinner et al., 2011). Additionally, in many countries there is a widespread perception that drivers already pay enough for their car use. As a result of these various concerns, the public is often reluctant to accept the introduction of road user charging, either locally in the form of congestion charging or more widely. In this respect, complementary policy instruments, which could be directly funded from the charging revenues, are important, such as the prior improvements to buses that were introduced in London prior to the introduction of congestion charging (e.g. UK ERC, 2009). Using revenues to address potential adverse social impacts, or to improve conditions for the less well-off sectors of society, can also increase the acceptability of introducing road user charging, whereas other uses of the revenue, for example for the general budget, might be less acceptable to the general public. On the other hand, the acceptability of the introduction of charges on the part of business might increase if revenues funded improvements in transport infrastructure.

These risks, which are summarised in Table 5.3, underline the importance of following the recommendations for the implementation of user charging, which were discussed in Section 5.4.

Table 5.3 Potential risks and uncertainties associated with behavioural responses to road user charging

Type of risk/uncertainty: Description of risk/uncertainty Economic (micro) and business acceptability

- Local concerns that passing trade would be affected where user prices increase, e.g. in a particular charging zone

- Opposition from business resulting from concerns over increased costs, more generally

Social and public acceptability - Potential social impacts from increased traffic levels where charges are not applied due to some traffic avoiding the charging zone or infrastructure

- Distributional impacts, e.g. particularly short-term impacts on those on low incomes who have no alternative to using their cars in areas where user prices increases

Political - Risks of being seen to use additional revenues in an appropriate manner



5.6 Other impacts, related to the sustainability or other aspects of the policy instrument

Finally, there are some other risks associated with the implementation of user charging, which are indirectly related to the behaviour of users. From an environmental perspective, reductions in CO2 emissions will be guaranteed by introducing user charging in addition to, rather than instead of, fuel taxation (see Section 5.3). In the charged area, or on the charged infrastructure, other environmental impacts linked to vehicle use, such as air pollution and noise, are also likely to decrease. However, there is the possibility, depending on the design of the scheme, for non-charged zones or infrastructure near to the charging area to experience increased traffic levels (as some traffic avoids the charged area), which could lead to increased levels of adverse environmental and social impacts in these areas. However, it is possible to minimise such effects through the design of the scheme, for example traffic calming or restricted access to such areas. The macro economic impacts of introducing road user charging will depend on the net impact of the costs imposed on users, be they road hauliers or private car users, and the benefits to society of reducing the external costs of transport, in terms of reduced levels of air pollution, congestion and other externalities, including, of course, transport’s contribution to climate change. As noted in the previous section, some studies suggest that the impact on hauliers and the wider economy from the introduction of road charging focusing on these users might be significant (e.g. the ProgTrans study), whereas others suggest that once the benefits have also been taken into account, then these outweigh the costs to hauliers (e.g. JRC, 2010). It is also worth underlining that additional revenue raised from the introduction of road user charging will be used elsewhere in the economy and so be more widely beneficial (as noted by JRC, 2010). More generally, there is a risk of wider economic impacts if transport is overpriced (CE Delft et al., 2008b). Again, the recommendations for the implementation of user charging, which were discussed in Section 5.4, are potentially relevant for addressing these risks, which are summarised in Table 5.4.

Table 5.4 Other potential risks and uncertainties associated with road user charging

Type of risk/uncertainty: Description of risk/uncertainty Economic (macro) - Potential effect on wider economy of applying road user

charging - Potential impacts on competitiveness position of

(national/EU) economy Environmental - Some environmental impacts, e.g. air pollution, noise, could

increase, e.g. where charges not applied due to traffic avoiding charged area/route

5.7 Conclusions

This section has argued that, if road user charging is to be implemented to reduce transport’s CO2 emissions, it should be introduced in addition to, rather than instead of, fuel taxation. At a European level, there is currently little in the way of barriers to implementing road user charging, as long as the schemes are consistent with the Eurovignette Directive. While the Commission has indicated that it intends to phase in mandatory charging (to cover at least some external costs) by 2016 for heavy goods vehicles and by 2020 for all road modes, in the meantime Member States are still able to implement road user charging schemes. In Member States, there might be a need for additional national legislation before national, regional and local authorities are able to implement road user charging. This could add a couple of years to the lead time in some countries before the relevant legislation is in place.



Once permitted, it could take the relevant authorities a number of years, perhaps up to three, to design the scheme, engage the public, business and other stakeholders and make the scheme operational. When (or if) a mandatory charging framework is put in place at a European level, all national, regional and local schemes would potentially have to be redesigned in order to be consistent with the respective EU framework. However, EU legislation usually gives Member States a number of years to make national policies consistent with EU legislation. However, a number of economic, social, environmental and political risks and uncertainties exist. Many of these are linked. For example, the two main risks of relevance to road user charging are public acceptability and the associated political risks. Unless these can be overcome, then successful road user charging schemes will not be implemented. However, the political and acceptability risks are often based on the other economic, social and environmental risks that relate to the potential behavioural responses from road transport users to the introduction of road user charging. These include the potential adverse impacts on local businesses and poorer road users in the charging area, as well as the potentially adverse environmental impacts on those just outside the charged area. Some of these risks and uncertainties are more perceived than real, whereas others are genuine. Hence, taking steps to improve the acceptability of any proposed user charging scheme is fundamentally important, and should be the number one priority of policy makers, so as to reduce the risks associated with a lack of acceptability amongst the public and business. In this respect, perceived and real risks need to be identified and addressed in the implementation of the policy, particularly in its rationale, design and communication. In order to reduce the risks of acceptability, it is important that complementary policy instruments (which could even be introduced in advance of the charging scheme itself) are implemented in order to address concerns or demonstrate benefits. This could include, for example, the recycling of revenues to improve conditions for the poorer parts of society, or by investing in modes, such as buses, that these sectors of society are more likely to use.

5.8 References

Akyelken, N (2010) Policy Analysis for Sustainable Freight Transport and Economic Growth in UK and Ireland. University of Oxford. Working paper N° 1047. Transport Studies Unit School of Geography and the Environment. CE Delft, INFRAS, Fraunhofer-ISI, IWW and the University of Gdansk (2008a) Handbook on estimation of external costs in the transport sector Produced within the study Internalisation Measures and Policies for all external cost of Transport (IMPACT) – Deliverable 1 CE Delft, INFRAS, Fraunhofer-ISI, IWW and the University of Gdansk (2008b) Internalisation measures and policies for the external cost of transport Produced within the study Internalisation Measures and Policies for all external cost of Transport (IMPACT) – Deliverable 3 Dix (2002) The Central London Congestion charging Scheme – from Conception to Implementation Paper prepared for the second seminar of the IMPRINT-EUROPE Thematic Network: “Implementing Reform on Transport Pricing: Identifying Mode-Specific issues”, Brussels, 14th/15th May 2002 European Commission (2011) White Paper: Roadmap to a Single European Transport Are – Towards a competitive and resource efficient transport system COM(2011) 144, Brussels 28.03.2011



Ekins P and S Potter (2010) Reducing Carbon Emissions Through Transport Taxation: Briefing Paper 6 for the Green Fiscal Commission; see http://www.greenfiscalcommission.org.uk/images/uploads/gfcBriefing6_PDF_ISBN_v7.pdf ICCT (2010) Congestion Charging: Challenges and Opportunities JRC 2010 Impacts of proposed Eurovignette amendment May A, Koh A, Blackledge D and M Fioretto (2010) “Overcoming barriers to implementing urban road user charging schemes”, European Transport Research Review, 2:53-68, Springer Significance and CE Delft (2010) Price sensitivity of European road freight transport – towards a better understanding of existing results, a report for Transport & Environment Skinner I, van Essen H, Smokers R and Hill N (2010) Towards the decarbonisation of EU’s transport sector by 2050 Final report produced under the contract ENV.C.3/SER/2008/0053 between European Commission Directorate-General Environment and AEA Technology plc; see www.eutransportghg2050.eu Skinner I, Pridmore A, Halsey S, Wilkins G, Barham P, Jones S, Edge V and K Lucas (2011) Knowledge Review of the Social and Distributional Impacts of DfT Climate Change Policy Options, Report undertaken by AEA, TTR and TSU (Oxford) for the UK’s Department for Transport. Smokers R, Skinner I and H van Essen (2011) Exploration of the likely knock-on consequences of relevant potential policies. Task 3 paper within the EU Transport GHG: Routes to 2050 II project under a contract between European Commission Directorate-General Climate Action and AEA Technology plc; see website www.eutransportghg2050.eu Snape J and J de Souza (2005) Environmental Taxation Law: Policy, Contexts and Practice Ashgate, Aldershot (UK), ISBN 0 7546 2304 1 TEEB (2009) The Economics of Ecosystems and Biodiversity for National and International Policy Makers – Summary: Responding to the Value of Nature 2009.





6 Overall conclusions from this task

Task 5 looked at the risks and uncertainties associated with three types of policy instruments for reduction of GHG from transport (biofuels, electricity and hydrogen, economic instruments). The main objective was to assess how these risks may adversely impact on the desired result from the considered policy instruments, as well as to develop recommendations to avoid, manage and mitigate the consequences of the risks. Biofuels are expected to contribute significantly to the future GHG emission reduction in the transport sector, as there is a large global potential and they do not require a completely new infrastructure or engine technology. However, there are still quite a number of risks and uncertainties related to the four conditions that need to be met if the full potential of GHG reduction with biofuels is to be realised – the availability of biofuels, their sustainability and actual GHG reduction, their technical compatibility and public support. In the coming years, the strategies should focus on effective implementation and improvement of the biofuels sustainability criteria. In addition, research into new (so-called 2nd generation) biofuels production processes should be promoted, to ensure a diverse biomass use in the future that does not compete with the food sector nor lead to significant negative impacts from increased demand for land. In the longer term, risks can be managed by setting the right biofuels targets, policies and (sustainability) boundary conditions. This should lead to a biofuels supply that is sustainable, diverse, available at a reasonable cost and is compatible with the vehicles and engines used in the various transport modes. In parallel, efforts should also be put into global initiatives that can reduce land use change and biodiversity loss due to biomass cultivation for biofuels, for example within the IPCC and CBD framework. The implementation of electricity and hydrogen as GHG reduction options for the transport sector is a transition that involves drastic and structural changes in both the transport and the energy sector and that will take several decades to start up, roll out and complete. Governments and stakeholders in the market need endurance and a long term vision to manage this transition in an effective way. An important uncertainty, however, is the difficulty of knowing which one to invest in. Mitigating risks and removing uncertainties is an important and unavoidable part of that. Proactive steps are required in the short term in laying the ground work for longer term policy instruments, in terms of both early market formation and in setting up and managing a process that timely delivers the insights that are necessary to develop a suitable dominant design for the energy distribution infrastructure. The overall ranking of risks and uncertainties for the achieving GHG emission reduction by the implementation of electric and hydrogen-fuelled vehicles identifies the following issues as most important for immediate action:

- Impact of zero-emission vehicles under the CO2 legislation in combination with the need for a methodology on how to account for GHG intensity of energy carriers. Determining appropriate metrics is essential to make sure that post 2020 targets for fuels as well as energy carriers provide the right incentives to manufacturers and energy suppliers.

- Uncertainty about the business case. This issue is closely linked with development of costs of vehicles and infrastructure, consumer acceptance and the role of supply and demand oriented policy measures on the business case.

- Interaction with the energy system. This issue partly concerns developing a more mature view on the dominant design of the charging infrastructure for electric vehicles in interaction with grid-related developments at a local and regional scale, but also concerns interaction on a (trans)national level regarding how electric and hydrogen-fuelled



vehicles, on the one hand, require decarbonisation of the energy supply system and, on the other hand, influence investments in the generation of infrastructure that may or may not be consistent with the need for decarbonisation.

If road user charging (an economic instrument) is to be implemented to reduce transport’s CO2 emissions, it should be introduced in addition to, rather than instead of, fuel taxation. In this respect, a number of economic, social, environmental and political risks and uncertainties exist. Many of these risks are linked. At the strategic level the main risks associated with the introduction of road user charging relate to public and business acceptability and the associated political risks. These risks are linked to, and based on, a collection of economic, social and environmental risks. Some of these risks are perceived, whereas others are real, but many could be addressed either in the design of the charging scheme, or by the introduction of complementary policy instruments (which could even be introduced in advance of the charging scheme itself). In general it was concluded that at least some of these risks and uncertainties can significantly hinder the desired impact of the considered policy instruments. It is therefore recommended that the recommendations which were developed in this paper are taken into account for policy development, monitoring and evaluation, and posterior assessment.



Annex A Summary of information from literature on risks

and uncertainties with respect to biofuels

This Annex summarizes results from the literature on the risks and uncertainties listed in section 2.7 and discussed in detail in chapter 3. Results are grouped according to the following categories: economic, social, environmental, technical, political and other. Economical risks and uncertainties Costs of biofuels may reduce over time due to upscaling of production, technological development etc., but there are also a number of potential drivers that may increase the cost and thus potentially reduce availability (at an acceptable price) and political and public support. The following are the key drivers for (potential) cost increases of biofuels:

- limited supply of sustainable biomass compared to demand (either structural or temporarily due to annual or seasonal changes in agricultural yield or political developments in biomass-exporting countries),

- increasing cost of sustainable biomass production, - high cost of conversion technology, - trade policies such as import and export duties or - low oil price, which increases the cost of biofuel policy. The cost of biofuels depends on the cost of the feedstock, on the production cost and on the global market for both the feedstock and the biofuel, i.e. on the balance of supply and demand, trade barriers etc. The cost structure of the biofuels depends on the biofuel type. In case of FAME (biodiesel), for example, the main cost element is the feedstock, whereas with bioethanol, conversion cost is dominant. The cost of the first type of biofuel is thus especially sensitive to feedstock cost fluctuation, whereas the latter typically has relatively high investment and operational costs. Also, biofuels cost will depend on cost of other energy sources, as this determines cost of both biofuel production and, in case of biofuel from agricultural commodities, biomass cultivation. Global food demand is expected to increase further in the coming decades and the supply can most likely not be increased sufficiently by increasing yields of current agriculture (CE Delft, 2008) only. Any additional demand for agricultural crops for biofuels will thus further increase the demand for land and thus increase cost. Biofuel costs not only depend on the feedstock and production cost, but also on the market conditions: the balance between demand and supply of both the feedstock and the final product (the biofuel), and possibly trade policies. Cost increases due to an imbalance of supply and demand can be limited or prevented if biofuels demand is increased gradually, and if any demand increases are known well in advance. The industry can then anticipate on future developments, and production capacities and feedstock cultivation can be increased in line with the demand increases. Biofuels supply and demand is, however, a global market, which means that biofuel cost are not only affected by EU demand but also on demand from other countries. And finally, biofuels cost (and availability) may also be affected by sustainability criteria. Tightening these criteria further can be expected to reduce the volume of biofuels that meet these criteria, and increase their cost. An important issue in this respect could be the development of biofuels production from waste and residues: if this R&D is successful, it may result in a significant increase of the potential supply of biofuels that meet the criteria.



High biofuel cost (and reduced availability of low-cost biofuels) may then have various economic impacts. - It will increase transport fuel cost. This will have an adverse economic impact on the

transport sector, and on sectors that are make use of transport (both businesses and households).

- If biofuel demand is such that it increases the cost of the biomass feedstock, other sectors such as food and feed, or electricity, chemical and materials from biomass may be affected. o If the biomass feedstock is a food or feed commodity, as is currently the case for a

large share of the EU biofuels, increasing feedstock cost may result in increasing food or feed cost. This may have various social or economic impacts, especially in developing countries, were a relatively large share of income is spent on food. However, the impact of biofuels demand on food cost seems to be limited so far to some specific commodities, and price impacts seem to have been quite modest. The potential impact of biofuel policies on increasing food prices was studied by various researchers, especially in the light of global food price increases in 2008 (Faaij, 2008; LEI, 2008). The agricultural commodity market is complex and number of drivers are found to cause price increases29, but some conclusions can be drawn from the literature (IEA RETD, 2010). First, effects will be highest for those commodities where biofuel demand accounts for a significant share of total demand (e.g. maize, oilseeds, sugar care). Second, potential price impacts are most likely to occur when biofuel demand increases rapidly, and biomass production is not increased accordingly at the same time.

o If biofuels feedstock changes from agricultural commodities to non-food feedstock such as woody biomass, residues or waste in the future, biofuels may increasingly compete for this biomass with the other sectors that want to deploy biomass to reduce emissions: the electricity sector, materials and chemical production. This may lead to cost increases and thus economic impacts in those sectors.

Another type of risk worth noting is the potential economic impact on the aviation sector. As this sector has relatively limited technical alternatives for CO2 reduction (insufficient to compensate the predicted growth rate, see AEA/CE/TNO, 2010), insufficient supply (or perhaps even lack of) bio-kerosene at reasonable cost levels could lead to high CO2-cost and a barrier to further growth in the future, depending on climate policy developments (SWAFEA, 2010)30. And finally, the biofuels industry and investors are faced with economic risks associated with potentially fluctuating markets. Added to the risks related to, for example, global demand and supply and energy cost uncertainties, the biofuels market is specifically prone to effects of policy changes. In the past years, this was illustrated by, for example, the overcapacity of biofuel production capacity after the German quota were cut back in 2009 (Eurobserver, 2010), and the effects of US bioethanol support policies on the EU bioethanol production volume (IEA RETD, 2010). Social risks and uncertainties A number of risks of negative socio-economic impacts of biofuel production, and in particular of biomass cultivation, are identified in the literature (IEA RETD, 2010). These impacts are mainly seen in developing countries, and are often related to rapid expansion of biomass production and large-scale production of agro-commodities in these countries (Kessler eta al., 2007). Typical issues that are observed are land use conflicts, water use conflicts, labour issues and increased inequality in terms of income, access to land and gender issues. It should be noted, however, that these are issues that are not specifically related to biomass

29

For example, local or regional weather increases, rising food or feed demand, speculation on international food markets, etc. 30

Other transport modes also face that risk, but they do not seem to be so dependent on this specific GHG reduction measure.



production but have other origins, and are therefore not a necessary effect of biomass cultivation. In fact, biofuels policy may also have positive socio-economic impacts, on individual farmers and local communities. Even though a number of criteria have been developed with which any negative impacts can be limited or prevented (see for example IEA RETD, 2008), in practice it appears to be difficult to address these issues effectively in policies. As mentioned earlier, if biofuels demand leads to increases in food and feed prices and increased demand for agricultural and (potentially) fertile land, this will also have social impacts, especially in developing countries. Evidence has also been found that the price of especially vegetable oil is now linked (to some extent) to that of fossil oil, since these two products now partly compete on the same market (see, for example, MVO, 2009): if the crude oil price increases, biofuel producers can afford to pay more for their feedstock (such as vegetable oil) whilst maintaining the same profit margin. Furthermore, (global) biofuel demand is typically found to increase with increasing fossil fuel prices (and, vice versa, decrease when oil prices go down), putting additional pressure on the prices for these commodities and agricultural land31. These risks do not directly affect the availability and GHG potential of EU biofuels policy. They may, however, have indirect effects: they may reduce public support for biofuels, and the may lead to the extension of the current environmental criteria for biofuels with socio-economic criteria. These may reduce biofuels availability and increase biofuels cost. Another type of social risk is related to potential public concerns of car owners in the EU. Firstly, there must be public support for and trust regarding the use of biofuels in cars. An example of how these concerns (whether real or perceived) can impact biofuels growth is the recent E10 debate in Germany, where concerns emerged about possible damage that E10 could do to vehicle engines. In addition, there could be a risk that public support for biofuels policy decreases if governments and fuel sellers cannot prove that the biofuels are sustainable. Environmental risks and uncertainties The most notable environmental risk related to biofuels policies are the large variations in GHG emissions, in some cases even leading to GHG emission increases, and biodiversity loss. In recent years, quite a number of publications have looked at these issues. From these studies, it can be concluded that a key driver for these negative environmental impacts are both direct and indirect land use changes caused by the increasing demand for biomass. These changes can lead to very significant changes in carbon stock, both above and below ground, potentially resulting in significant GHG emissions. In addition to any land use change, biomass cultivation itself may cause significant GHG emissions (as any agricultural activity may do), it may impact the local and regional water table and cause eutrophication and water pollution. These effects depend on the type of crop that is cultivated, on local conditions and agricultural practices. In order to prevent these environmental impacts, the EU has included a number of sustainability criteria in the Renewable Energy Directive (EC, 2009). It also contains a provision to count biofuels from waste and residues double towards the renewable energy transport target, as these are deemed to cause less or no land use change and other environmental effects. These criteria are not yet complete and fully developed, and thus cannot yet effectively ensure all aspects of biofuels sustainability, but they are a step towards ensuring the sustainability of the EU biofuels.

31

As (OECD/FAO, 2008) concludes, food expenditures average over 50% of income in many low-income countries, higher food prices will then push more people into undernourishment. However, these effects also depend on the type of commodity that is affected. For example, in countries such as India, rice is the main staple food, and there are virtually no effects predicted of biofuels demand increases on rice prices (IEA RETD, 2010).



An important omission in the current criteria is the prevention of ILUC (EC, 2010). According to a broad scope of recent scientific literature, ILUC can lead to GHG emissions that are in the order of the GHG emissions saved by reducing the use of fossil fuels. This effect depends on a number of variables and conditions, but most importantly on the type of land that is being converted, and on the crop that is being cultivated. Notably, ILUC may also have a positive impact in some cases, for example if marginal land with low carbon stock is converted to agricultural land with higher carbon stock. ILUC may also lead to impacts on other environmental parameters such as biodiversity, eutrophication and water pollution – these effects may not differ from the direct land use change impacts and are thus important risks to prevent or limit. These indirect effects are, however, more difficult to quantify, as they are not directly linked to the biofuel production chain. The EC is currently working on the development of policies that prevent negative ILUC effects (EC, 2010). On the one hand, these policies can be expected to result in a limitation of the biofuels availability in the EU, and possibly an increase of biofuels cost. On the other hand, however, they can ensure that the biofuels policies indeed lead to the desired GHG emission reduction, also from a global point of view. Technical risks and uncertainties Firstly, a number of technological barriers may have a negative impact on biofuel deployment. The main risks in this area are probably 1. the current car fleet cannot drive on high blends biodiesel or bioethanol. 2. most current biofuels are not suitable for use as aviation fuel, see for example (SWAFEA,

2010). The first issue directly limits the biofuels volume that can be sold in the EU. It may be solved by two means: by ensuring that the vehicle fleet, or at least a significant part of the fleet, can process high blends of these biofuels, or by switching to biofuels that are more compatible with the current engine and aftertreatment technology and materials. The first can be expected to take quite some time because it takes many years to replace the vehicle fleet (the lifetime of an average passenger car is about 15 years), and in most countries, there is no policy in place yet to achieve such a shift. Examples of the latter are HVO diesel, a biofuel that is expected to come onto the EU market in significant volumes in the coming years (www.nesteoil.com), or Fisher-Tropsch biodiesel, also known as BTL (Biomass-to-Liquid). The BTL biofuel is still under development, and proven in relatively small scale pilot projects only. This route will therefore also take quite some time and effort to achieve (IEA Bioenergy, 2008). Secondly, there are a number of technological risks related to the future large scale conversion of biomass, in particular of non-food biomass such as waste, residues, woody biomass and algae. Biofuels from food commodities may have a number of adverse effects (see above), these technologies might therefore be crucial to the future sustainable growth of biofuels demand. However, potential future biofuels such as Fischer-Tropsch diesel, bioethanol from woody biomass and large scale biodiesel production from algae are not yet developed fully, and large scale production is not yet viable (IEA Bioenergy, 2008)(SWAFEA, 2010). If these R&D developments are unsuccessful in the medium term, this can be expected to negatively affect the future sustainable biofuel potential. Political The Renewable Energy Directive (RED) aims to reduce a number of the risks related to biofuels that were identified for the period until 2020, by obliging member states to achieve



10% renewable energy in transport in 2020, and by specifying the sustainability criteria that these biofuels need to meet. EU member states now have to implement this directive in national polices. In view of the obligatory nature of the RED, it can be expected that this implementation will be carried out in the coming years. Regarding longer term targets and further development of sustainability criteria, developments are still very uncertain. The scientific and political debate on how to effectively prevent ILUC is still on-going (EC, 2010). It is difficult to predict the outcome of this debate, but it may be reasonable to expect some form of EU policy on ILUC in the coming 1-2 years. It might be possible, though, that it may then take some more years to further refine this policy. Literature IEA RETD, 2010 BUBE: Better Use of Biomass for Energy, Background Report to the Position Paper of IEA RETD and IEA Bioenergy Bettina Kampman, Uwe R. Fritsche et al. Delft/Darmstadt: CE Delft/Öko-Institut, July 2010 OECD/FAO, 2010 Agricultural Outlook 2010-2019 OECD-FAO, 2010 Faaij, 2008 A. Faaij Bioenergy and global food security Berlin: Wissenschaflichen Beirats der Bundesregierung Globale Umweltveränderungen (WBGU), 2008 LEI, 2008 M. Banse, P. Nowicki, H. van Meijl Why are current World food prices so high? Wageningen: Wageningen UR, 2008 OECD/FAO, 2008 Agricultural Outlook 2008-2017 Paris: OECD/FAO, 2008 CE Delft, 2008 Agricultural land availability and demand in 2020, A global analysis of drivers and demand for feedstock, and agricultural land availability Delft: CE Delft, 2008 AEA/CE/TNO, 2010 Towards the decarbonisation of EU’s transport sector by 2050 Final report produced under the contract ENV.C.3/SER/2080/0052, for the European Commission DG Environment see www.eutransportghg2050.eu 2010




SWAFEA, 2010 SWAFEA, Sustainable Way for Alternative Fuels and Energy in Aviation State of the Art on Alternative Fuels in Aviation, Executive Summary A project lead by ONERA, for the European Commission DG TREN 2010 EC, 2009 Directive 2009/28/EC of the European Parliament and of the Council On the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC April 2009 EC, 2010 COM(2010) 811 final Report from the Commission on indirect land-use change related to biofuels and bioliquids 2010 IEA Bioenergy, 2008 R. Sims, M. Taylor, J. Saddler, W. Mabee From 1st- to 2nd-Generation Biofuel Technologies, An overview of current industry and RD&D activities Paris: OECD, International Energy Agency (IEA), 2008 EurObserv’EU, 2010 Biofuels Barometer 2009 July 2010 MVO, 2009 Market Analysis Oils and Fats for Fuel Productschap MVO, the Dutch Product Board for Margarine, Fats and Oils December 2009



Annex B Summary of information from literature on risks

and uncertainties with respect to electricity and

hydrogen in transport

Summary of information from the literature: electric vehicles

The studies reviewed below identify risks and uncertainties related to the introduction of

electric vehicles (incl. plug-in hybrids and range extender electric vehicles. The findings are

largely in support of the overview presented in the previous section but also provide some

useful additional insights. IEA Technology Roadmap for Electric and plug-in hybrid electric vehicles This roadmap presented in [IEA 2009] identifies six strategic goals for accelerating EV/PHEV development and commercialisation: 1. Set targets for electric-drive vehicle sales.

National governments should working with “early adopter” metropolitan areas, targeting fleet markets, and supporting education programmes and demonstration projects via government-industry partnerships.

2. Develop coordinated strategies to support the market introduction of electric-drive vehicles.

making vehicles cost competitive with today’s internal combustion engine (ICE) vehicles

ensuring adequate recharging infrastructure is in place

3. Improve industry understanding of consumer needs and behaviours.

Consumer willingness to change travel behaviour and accept different types of vehicles and, perhaps, driving patterns is an important area of uncertainty.

Industry needs to gain a better understanding of “early adopters” and mainstream consumers in order to determine sales potential for vehicles with different characteristics (such as driving range) and at different price levels.

Auto manufacturers regularly collect such information and a willingness to share this can assist policy makers.

4. Develop key performance metrics for characterising vehicles.

Additionally, governments should set appropriate metrics for energy use, emissions and safety standards, to address specific issues related to EVs, PHEVs and recharging infrastructure.

5. Foster energy storage RD&D initiatives to reduce costs and address resource-related issues.

In particular, lithium and rare earth metals supply and cost are areas of concern that should be monitored over the near-to mid-term to ensure that supply bottlenecks are avoided.

Over the medium term, strong RD&D programmes for advanced energy storage concepts should continue, to help bring the next generation of energy storage to market, beyond today’s various lithium-ion concepts.

6. Develop and implement recharging infrastructure.



Realisation of these strategic goals can be seen as a critical success factor. Inversely anything that may hinder the realisation of these goals then contributes a potential risk / uncertainty to the implementation of electric and hydrogen fuelled vehicles. Recommendations from this document, pertaining to various risks and uncertainties, further include: - Governments should help offset initial costs for battery manufacturing plant start-up

efforts to help establish and grow this important part of the supply chain.

- When EVs and PHEVs gain a sufficient long-term market share, increased taxation on electricity may be needed to maintain state revenues currently lifted by taxation on fossil fuels. This may be partly counterbalanced by cost reductions resulting from technological advances and learning. Countries may also shift toward different taxation systems, possibly based on factors such as GHG emissions, infrastructure use, pollutant emissions, noise, and/or the occupation of public land.

- While it will be necessary to standardise the vehicle-to-grid interface, it is important to avoid over-regulating in order to allow for innovation.

- Use a comprehensive mix of policies that provide a clear framework and balance stakeholder interests. Governments should establish a clear policy framework out to at least 2015 in order to give stakeholders a clear view.

- National roadmaps can be developed that set national targets and help stakeholders better set their own appropriate targets, guide market introduction, understand consumer behaviour, advance vehicle systems, develop energy, expand infrastructure, craft supportive policy and collaborate, where possible.

CE Delft / Ecologic / ICF 2011 study on the potential impacts of large scale market penetration of EVs in the EU, with a focus on passenger cars and light commercial vehicles According to [CE 2011] electric vehicles are still far from proven technology. There exist many uncertainties with respect to crucial issues like:

- The battery technology (energy capacity in relation to vehicle range, charging speed, durability, availability and environmental impacts of materials).

- Well–to-wheel impacts on emissions. - Interaction with the electricity generation. - Cost and business case of large scale introduction. Key variables that impact the development but are currently still uncertain are:

- Cost of the vehicles and/or batteries, in combination with the vehicle and battery lifetime. - Customer response to cost and ranges of battery-electric vehicles as well as plug-in

hybrids and range extender electric vehicles. - Charging point availability and grid limitations to charging. - Government policy. - Battery and electric vehicle production capacity limitations. - Oil and electricity price. How to Avoid an Electric Shock Electric Cars: From the Hype to the Reality, T&E 2009 [T&E 2009] highlights the following issues: - EU ETS sets a cap on emissions from the power sector and large industry of 21% below

2005 levels by 2020. CO2 emissions from electric cars are indirectly covered by the EU ETS through the cap. This means that, in principle, any additional CO2 emission resulting



from the additional demand for electricity production for electric vehicles would have to be compensated by emission reductions in another sector. In practice, this may not be (entirely) the case, for two reasons:

o The first is that over half of the emission reductions may be offset through the Clean Development Mechanism (CDM), which funds emissions savings in developing countries. Additional demand for electricity could thus lead to extra emissions within the EU, if this extra demand is met by fossil energy sources. The global emissions will increase if the funded CDM projects do not fulfil strict requirements with respect to additionality, meaning that they would not also have been implemented in the absence of funding through CDM.

o The second reason is that the ETS cap is only set until 2020, and after this period it will be renegotiated. Extra power sector emissions for electric vehicles might play a role in setting a future cap. The net long term effect of EVs thus depends on the post-2020 target.

- Electric vehicles may increase the demand for cheap, CO2-intensive base load power:

o Charging large numbers of EVs on the low voltage grid requires load management or eventually smart grids. Load management flattens the demand profile, leading to increased demand for base load. Coal-fired power plants are the cheapest but most CO2-intensive form of base load. [T&E 2009] suggests that strict application of ET-ETS cap or additional policy is necessary to avoid increase in carbon intensity of electricity production.

Green Power for Electric Cars, CE Delft 2010 In addition to the above [CE 2010] states that the Renewable Energy Directive (RED) could be further improved so that actual data is reported on renewable electricity used for vehicle charging. In the FQD and regulation on CO2 and cars, more realistic methodologies should be implemented to take into account the actual energy use and the CO2 emissions of electricity used in these vehicles. This requires accurate metering, which is also an important aspect to ensure any future regulation of electricity and to provide an opportunity for demand side management. In addition to the latter it can be noted that this is also important /essential to allow the possibility of differentiated tax rates for electricity once it becomes necessary to recoup lost revenue from decreased sales of conventional fuels – i.e. different tax rate for transport electricity use versus households / heating. EUCAR 2009, The Electrification of the Vehicle and the Urban Transport System In [EUCAR 2009] the following risks and uncertainties as well as mitigation measures are identified: - Coordinated action required in a consistent direction from short term (based on today's

technologies), to long term solutions where adapted and new technologies will enable the electric vehicle to be affordable and dominant in the urban regions.

- Standards and common interfaces (e.g. vehicle-to-infrastructure) need to be agreed upon quickly for Europe as a whole to avoid a fragmented pattern of local competing and incompatible solutions.

- To achieve a large scale replacement of the conventional fossil-based ICE vehicle by EV, there is a need to support an accelerated evolution (but not revolution) of today's EV technologies. For future electric vehicles it seems to be appropriate to progressively introduce more and more dedicated design solutions for the vehicle in order to be able to use optimised component technologies.



- R&D needs to address the following major areas:

o An affordable and safe battery system with improved performance and lifetime o An efficient vehicle and energy management system o A dedicated vehicle-to-infrastructure interface

ERTRAC 2009, European Industry Roadmap Electrification of Road Transport The roadmap presented in [ERTRAC 2009] mentions the following risks and uncertainties:

- Substantial reservations persists about the long-term performance of Li-ion batteries under the extreme heat, cold, humidity and vibration conditions that automobiles have to endure on a daily basis.

- Cost and supply constraints will keep the booming HEV, EV markets in a critical state of flux for several years. Specific uncertainty is related to the availability of reliable and diversified supplies of permanent magnets necessary to assure high efficiency and high power density (compact) electrical motors.

- From one side prospective users are asking for EV capabilities well beyond those that the OEMs can deliver, on the other side an overenthusiastic market threatens to pressurise the spread of unsafe vehicles, bad practices and inefficient infrastructures that must be avoided.

AEA 2009, Market outlook to 2022 for battery electric vehicles and plug-in hybrid electric vehicles Risks and uncertainties identified in [AEA 2009] include: - The greatest barrier for successful EV introduction is public perception. Consumers need

to be convinced that electric vehicles are a robust technology and that they can fulfil their requirements, particularly in light of the lack of infrastructure and the need to plug-in the vehicle.

- The major technological risk associated with EVs and PHEVs is owning the battery:

o Firstly, the batteries are expensive to replace (they are largely responsible for the price premium over conventional vehicles) so if they failed prematurely yet outside the vehicle warranty the owner could be left with a sizeable bill.

o Secondly, there is an issue regarding the value of the battery upon re-sale of the vehicle. Given that it will represent a large proportion of the value of the vehicle would the battery may need to be inspected prior to re-sale. It is also not clear how the residual value of the battery would be priced, given that battery performance (with most battery chemistries) degrades with use.

o Thirdly, lithium-ion battery technology, which is likely to be the battery technology of choice for many EVs and PHEVs, is still relatively new to market, particularly in an automotive application. Consequently, this will exacerbate the fears amongst some consumers of a potentially costly battery failure.

This issue can be resolved using appropriate business models for battery leasing, vehicles leasing, or subscriptions for car use or mobility.

Summary of information from the literature: hydrogen vehicles Socio / Economic Analysis, deliverable D 3.22 (Final Report) of Phase II of the HYWAYS project, www.hyways.de One of the risks mentioned in [HYWAYS 2007] relates to infrastructure investments and how they can be matched to the number of vehicles on the road. The tendency exists to dimension initial infrastructure for growth, i.e. to match a fleet size that is aimed to be met



somewhere in the future. This first of all leads to underutilization of the infrastructure in the early phase of roll-out, involving significant costs. But given the overall uncertainties regarding the market success of H2 cars the roll-out of hydrogen infrastructure also poses a potential risk of losing several billion Euro’s due to investments in premature H2 infrastructure and H2 car development that in the end are not utilized at all. Matthias Altmann, Towards a European Hydrogen Roadmap According to [Altmann 2004] confidence in hydrogen to become a safe “public fuel” is an important issue and depends on:

- Existing set of EU-wide regulations/ technical standards relevant for hydrogen applications have to be implemented on national level for practical use

- Commitment and participation of authorities, R&D institutions, and commercial companies in the development and implementation of technical solutions, regulations and standards related to hydrogen safety

- Global collaboration in the development of internationally harmonised rules is specifically important for global vehicle and fuel markets

- Validation of safe applications, codes & standards in demonstration projects - Continuous and systematic governmental and industrial funding for competence building

measures to improve level of expertise in authorities and organizations assisting in approval processes

- Communication that industry works on standards which ensure safe products McKinsey, A portfolio of power-trains for Europe: a fact-based analysis [McKinsey 2009] analyses the consequences of a roll-out scenario that assumes 100,000 FCEVs in 2015, 1 million in 2020 and a 25% share of the total EU passenger car market in 2050. This scenario is found to result in a cumulative economic gap (defined as the delta between the TCO of a fuel cell vehicle and that of conventional vehicle, multiplied by the number of vehicles in the respective year) of €25 billion by 2020. Almost 90% of this relates to the relatively higher cost of the FCEV in the next decade. Around €3 billion investment is required for a hydrogen supply infrastructure (production, distribution, retail) for 1 million FCEVs by 2020. Of this investment, around €1 billion relates to retail infrastructure. In the first decade the infrastructure will suffer from low utilisation by a small number of FCEVs. This could lead to a potential write-off of around €0.5 billion per annum if roll-out is terminated or delayed. If the cumulative economic gap for FCEVs of €25 billion up to 2020 is to be met by only a few car manufacturers, they will each need to finance €1 billion per year. An incentive to ramp up production therefore only exists if most car manufacturers commit and co-ordinate, and government provides temporary funding support. Literature AEA, 2009 Market outlook to 2022 for battery electric vehicles and plug-in hybrid electric vehicles, prepared by AEA on behalf of the UK Committee on Climate Change, 2009 Altmann, 2004 Towards a European Hydrogen Roadmap, Matthias Altmann, L-B-Systemtechnik GmbH, http://www.coleurope.eu/content/studyprogrammes/eco/conferences/Files/Papers/Altmann_Towards_a_European_Hydrogen_Roadmap.pdf



CE, 2010 Green Power for Electric Cars: Development of policy recommendations to harvest the potential of electric vehicles, CE Delft, 2010 CE, 2011 Study on the potential impacts of large scale market penetration of EVs in the EU, with a focus on passenger cars and light commercial vehicles, CE Delft / Ecologic / ICF 2011 for the European Commission’s DG CLIMA, 2011 DAU, 2006 James Gates (2006), Application Of Learning Curve Theory To Systems Acquisition, Defense Acquisition University, Business, Cost Estimating And Financial Management Department, April 2006, Teaching Note ERTRAC, 2009 European Industry Roadmap Electrification of Road Transport, by ETRAAC / EPoSS / SMARTGRIDS, 2009 EUCAR, 2009 The Electrification of the Vehicle and the Urban Transport System, EUCAR 2009 HYWAYS, 2007 Socio / Economic Analysis, deliverable D 3.22 (Final Report) of Phase II of the HYWAYS project, www.hyways.de IEA, 2000 Experience Curves for Energy Technology Policy, IEA 2000, http://www.iea.org/textbase/nppdf/free/2000/curve2000.pdf IEA, 2009 Technology Roadmap, Electric and plug-in hybrid electric vehicles (EV/PHEV), IEA 2009 McKinsey, 2009 A portfolio of power-trains for Europe: a fact-based analysis, McKinsey, 2009, http://www.zeroemissionvehicles.eu NASA, 2007 NASA Cost Estimating Web Site, Learning curve calculator, http://cost.jsc.nasa.gov/learn.html T&E, 2009 How to Avoid an Electric Shock Electric Cars: From the Hype to the Reality, T&E 2009



Annex C Summary of information from the literature on

user charging

This annex summarises information from the literature review, complemented by issues raised by stakeholders at the focus group meeting on 4 May 2011 and comments by internal reviewers. In relation to the economic risks and uncertainties of applying user charging to transport, Akyelken (2010) noted the economic arguments in favour of user charging for freight, but was concerned that the impact on prices could be inflationary (quoting TransCare, 2006). The paper also expressed concerns about the potential wider economic effects on employment and regional development of internalising the external costs of transport. In the final report of the ProgTrans study, Rommerskirchen et al (2010) concluded that the internalisation of external costs in the European road haulage industry would lead to substantially increased costs for the road freight sector as well as the foreign trade economy. It argued that this would potentially affect European competitiveness and the internal aim of equal opportunities for economic development, employment and competitiveness. However, the study does not appear to take account of the potential benefits of reducing externalities. On the other hand, JRC (2010) concluded that the benefits in terms of reduced externalities of charging hauliers for their external costs outweighed the limited negative impacts on individual operators. Given that this assessment assumes that user charging is implemented in addition to, rather than instead of fuel taxation (see Section 5.3), governments have the potential to increase its income from applying user charging in addition to fuel taxation. However, in order to increase the political and public acceptability of the introduction of a new charge, revenues could be recycled to support the development of transport infrastructure for other modes (Skinner et al, 2011). ICCT (2010) noted that one of the challenges to be overcome when introducing congestion charging was the concerns of business with respect to the economic impacts of any congestion charging scheme. They noted that Transport for London concluded that, after five years of the London congestion charge, there was no measurable impact on business and economic activity in London resulting from the introduction of the charge. Additionally, they quoted Opiola (2010) who argued that businesses should benefit from the congestion charging, service times should improve, as should the reliability of delivery vehicles. In its review of policies to reduce land transport’s GHG emissions, UK ERC (2009) concluded that the public needed to be convinced of the benefits of road pricing, as they were generally sceptical of road user charging. This was in part due to a perception that they were already paying too much for their car use and concerns about increases in costs that would result, particularly in relation to the effects on low income groups (see below). Policy instruments that aim to reduce transport’s CO2 emissions by increasing the cost of use all have the potential for adverse social and distributional impacts. In particular, such policies would impact on the affordability of transport and thus the mobility of different social groups, particularly low income groups and those living in rural areas. While on average, congestion charging and other forms of user charging targeting drivers could be considered to be progressive, as the rich tend to drive more, those worst affected would be low income car drivers who have no alternative to using their car, at least in the short-term. It was also noted that there is a risk of some traffic avoiding charging zones, which could also adversely affect the social groups living in those areas (Skinner et al, 2011). There is also some evidence from the introduction of user charging for heavy goods vehicles in Germany that heavy goods



vehicles also take action to avoid charged routes, in this case motorways, and use secondary routes instead (CE Delft et al, 2008b). In a review of policy instruments to reduce transport’s CO2 emissions, UK ERC (2009) noted that road charging is viewed with scepticism by the public, although research on public attitudes leads to inconsistent conclusions. They note that any intervention that is perceived to interfere with how people use their cars tends to lead to knee-jerk reactions and public opposition. The report noted that complementary instruments are important, such as the prior investment in public transport that was undertaken in London prior to introduction of its congestion charge. Akyelken (2010) notes the perception of an “inalienable right to mobility” that would be a barrier to any policy instrument perceived as restricting travel, as well as concerns about distributional impacts. ICCT (2010) notes that securing initial public acceptance can be difficult, but that public support can increase once a scheme has been introduced. They note the importance of effectively communicating the overall benefits of the charge and of upfront investment in public transport to absorb those shifting modes and to provide affordable mobility for those on low incomes. The revenue from the charge could be used to improve public transport and travel conditions for other modes, which can also improve effectiveness of congestion charging. Some of the revenues could also be recycled back to residents of affected areas. Many studies support the conclusion reached in Section 5.3 that implementing user charging instead of fuel taxation risks increasing CO2 emissions. OECD/ITF (2007) note that fully aligning charges with external cost estimates could reduce off-peak driving costs and therefore increase off-peak demand. They note that, while localised congestion charging schemes were more likely to reduce overall driving, the approach would not necessarily be optimal from an economic perspective. UK ERC (2009) notes that some authors urge caution as optimising road use could increase traffic levels and CO2 emissions, particularly if charges offset by reductions in fuel duty (quoting EAC, 2006). In turn, they note that reducing road usage could lead to increases speeds and therefore CO2 emissions and that improving travel time without affecting demand could increase emissions, if, for example, a scheme is revenue neutral (quoting Grayling, 2005 and Graham and Glaister, 2004). UK ERC conclude that revenue raising schemes would deliver CO2 reductions, while revenue neutral schemes would deliver no, or only marginal, reductions as a result of the redistribution of traffic to lower charged routes, increased speeds and generally lower costs on less congested routes. ECMT (2007) argues that targeted road pricing and interventions to manage congestion and to influence modal split will be “less than fully successful”. However, they note that the impact of road pricing on CO2 is in part determined by whether it is accompanied by any reductions in fuel taxation, as well as the size of the charges. Ekins and Potter (2010) note that studies have suggested that replacing fuel duties with road user charging in a revenue-neutral way could increase traffic and emissions, as motoring costs in less congested areas would fall; activity would also be redistributed towards low-charge areas. Hence, there is a need to increase the price of use, as well as using targeted measures such as congestion charges in some areas and reforming the treatment of transport in personal and corporate tax regimes. In relation to some forms of user charging, for example those that note (at least some elements of) the movements of vehicles, there are concerns about privacy, which need to be addressed (ICCT, 2010). Additionally, the potentially complex technical and administrative systems that need to be put in place could increase costs, thus outweighing the benefits of introducing the schemes (e.g. see Akyelken, 2010). As a result of the economic and social concerns noted above, the introduction of charging for road users is often politically controversial. Introducing a charging scheme in addition to fuel taxes will increase the cost of use, at least in some locations, which will raise concerns about local social and economic impacts. Where the costs of use increase as a result of user charging, then there would be more general social and economic concerns associated with



such costs. In many cases, such concerns can be unfounded or addressed by complementary measures or policy instruments. While arguably it would be important, from the perspective of the internal market, to better harmonise the way in which transport use is taxed within different Member States, in practice it is difficult to reach an agreement on such harmonisation, as agreement on taxation needs unanimity at the European level. Literature Akyelken, N (2010) Policy Analysis for Sustainable Freight Transport and Economic Growth in UK and Ireland. University of Oxford. Working paper N° 1047. Transport Studies Unit School of Geography and the Environment. CE Delft, INFRAS, Fraunhofer-ISI, IWW and the University of Gdansk (2008a) Handbook on estimation of external costs in the transport sector Produced within the study Internalisation Measures and Policies for all external cost of Transport (IMPACT) – Deliverable 1 CE Delft, INFRAS, Fraunhofer-ISI, IWW and the University of Gdansk (2008b) Internalisation measures and policies for the external cost of transport Produced within the study Internalisation Measures and Policies for all external cost of Transport (IMPACT) – Deliverable 3 Dix (2002) The Central London Congestion charging Scheme – from Conception to Implementation Paper prepared for the second seminar of the IMPRINT-EUROPE Thematic Network: “Implementing Reform on Transport Pricing: Identifying Mode-Specific issues”, Brussels, 14th/15th May 2002 ECMT (2007) Cutting Transport CO2 emissions: What progress? van Essen, H., Blom, M., Nielsen, D. and Kampman, B. (2010) Economic Instruments Paper 7 produced as part of contract ENV.C.3/SER/2008/0053 between European Commission Directorate-General Environment and AEA Technology plc; see website www.eutransportghg2050.eu European Commission (2011) White Paper: Roadmap to a Single European Transport Are – Towards a competitive and resource efficient transport system COM(2011) 144, Brussels 28.03.2011 Ekins P and S Potter (2010) Reducing Carbon Emissions Through Transport Taxation: Briefing Paper 6 for the Green Fiscal Commission; see http://www.greenfiscalcommission.org.uk/images/uploads/gfcBriefing6_PDF_ISBN_v7.pdf ICCT (2010) Congestion Charging: Challenges and Opportunities JRC 2010 Impacts of proposed Eurovignette amendment May A, Koh A, Blackledge D and M Fioretto (2010) “Overcoming barriers to implementing urban road user charging schemes”, European Transport Research Review, 2:53-68, Springer OECD/ITF (2009) Reducing Transport GHG emissions: Opportunities and costs, Preliminary findings Rommerskirchen et al (2010) Internalisation of External Costs: Direct impact on the economies of the individual EU Member States, and the consequences on the European road haulage industry, ProgTrans final report for the IRU




Significance and CE Delft (2010) Price sensitivity of European road freight transport – towards a better understanding of existing results, a report for Transport & Environment Skinner I, van Essen H, Smokers R and Hill N (2010) Towards the decarbonisation of EU’s transport sector by 2050 Final report produced under the contract ENV.C.3/SER/2008/0053 between European Commission Directorate-General Environment and AEA Technology plc; see www.eutransportghg2050.eu Skinner I, Pridmore A, Halsey S, Wilkins G, Barham P, Jones S, Edge V and K Lucas (2011) Knowledge Review of the Social and Distributional Impacts of DfT Climate Change Policy Options, Report undertaken by AEA, TTR and TSU (Oxford) for the UK’s Department for Transport. Smokers R, Skinner I and H van Essen (2011) Exploration of the likely knock-on consequences of relevant potential policies. Task 3 paper within the EU Transport GHG: Routes to 2050 II project under a contract between European Commission Directorate-General Climate Action and AEA Technology plc; see website www.eutransportghg2050.eu Snape J and J de Souza (2005) Environmental Taxation Law: Policy, Contexts and Practice Ashgate, Aldershot (UK), ISBN 0 7546 2304 1 TEEB (2009) The Economics of Ecosystems and Biodiversity for National and International Policy Makers – Summary: Responding to the Value of Nature 2009.



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