Doubts mount over Europe's 'bogus' e-fuels exemption

High energy demand and rules around its sourcing could lead to a de facto ban on combustion engines

News last year that combustion-engine cars will gain a reprieve in the European Union after 2035 as long as they run on carbon-neutral e-fuels was cause for celebration among the exemption’s chief backers in Germany.

However, not everyone is convinced that legislators are fully behind the shift. BMW CEO Oliver Zipse voiced suspicion that, despite including the exemption, the European Commission is still aiming for what amounts to a de facto ban on combustion engines. 

“There are currently many indications that the European Commission is driving for a bogus solution in which the ban on combustion engines is relaxed simply by ostensibly opening up to e-fuels,” Zipse told analysts on the company’s second-quarter earnings call.

Germany was the driving force behind the exemption, which would allow car makers to continue to sell their most profitable combustion-engine models even after the bulk of their fleet had been switched over to electric. The previous Conservative government ruled out the use of e-fuels in the UK for new cars.

However, BMW’s fear is that the European Commission is banking on energy companies failing to establish a credible e-fuels industry. “If the Commission does nothing to accelerate the ramp-up of low-CO2 fuels and make their use practicable, this would be a deliberate ban on combustion engines through the back door,” Zipse said. “We continue to believe that a categorial ban on combustion technology in 2035 is the wrong approach.”

E-fuels are a synthetic fuel produced using ‘green’ hydrogen and carbon. They are made by separating water into its hydrogen and oxygen components using electrolysis, then combining the hydrogen with CO2 from the air and converting it into a liquid energy carrier.  

The problem the energy industry faces in making e-fuels with this method is that it is incredibly energy intensive and it requires the electricity used to come from renewable sources.

Reportedly, the European Commission has said any fuels used for new vehicles with combustion engines to be sold after 2035 must be climate-neutral. 

That would tie in with the concession being made in line with the EU’s promise to reaching 'net-zero' CO2 emissions by 2050 but, according to draft wording, it also requires the electricity to come from renewable-energy generators that wouldn’t have otherwise been built, so it doesn’t divert green energy from the grid.

The German government, led by transport minister Volker Wissing, is pressuring the EU to dial back that requirement to make it fully carbon neutral. “We need to find a provision that fits into the European regulatory system and that, above all, allows the use of synthetic fuels with internal combustion engines,” he said. “This can’t be 100%,” Wissing told an e-fuels conference last September, according to an Euractiv report. Some within the Commission have floated a 70% reduction in carbon emissions.

Wissing has since warned that the carbon-neutral requirement would create “CO2 tourism”, where CO2 captured in Europe – for example, from industrial sites within the EU’s carbon trading scheme – is shipped to countries like Morocco with its bountiful sunshine and lower energy needs.

The fact is that countries with excess renewable energy are likely to be outside the European Union – one reason Porsche spent £62 million on a pilot production of synthetic fuels in Chile in late 2022, with a target of roughly 28,500 gallons (130,000 litres) annually.

Right now, e-fuels are expensive and there’s not enough visibility on the price dropping fast enough for energy companies to be convinced to invest in production on a scale to include cars as well as shipping, aviation and heavy goods vehicles, all of which sit ahead of cars in the queue for supply.

Only last week, renewable energy company Ørsted canned a hydrogen-based e-fuels refinery in Sweden that was expected to start supplying e-methanol for shipping next year. The company cited the lack of investment case and took a $221m (roughly £170m) loss on the project.

BMW’s argument is that the EU should be supporting the development of e-fuels in these early phases, citing the need to fuel the entirety of Europe’s 250 million combustion vehicle parc.

BMW, Porsche, Ferrari and others are publicly in favour of e-fuels because they continue to see profit in combustion-engine vehicles. However, others including Stellantis, Volvo and Ford have voiced concerns. Volkswagen brand CEO Thomas Schäfer last year described the debate over e-fuels as "unnecessary noise".

Unless you’re making significant margins on combustion-engine vehicles, continuing to invest in them side by side with electric is expensive and fraught with uncertainty, given the debate surrounding them.

Green groups are generally against them too. “Opening the door to e-fuels for cars under the false flag of technology neutrality is a major threat to investment, especially with significant battery investments currently at risk," Julia Poliscanova, senior director for vehicles and e-mobility supply chains at Brussels-based pressure group Transport & Environment, said in an 18 July blog.

Extending combustion engines means extending legislation to govern their tailpipe emissions, which wouldn’t be much different from now. There’s also the problem of ensuring that new e-fuel-certified combustion-engine cars aren’t just driven down to the nearest petrol forecourt and filled with unleaded, given it is a drop-in fuel.

It could be that by 2035, car companies are much less concerned about their ability to make money on electric vehicles while their customers have got used to charging rather than refilling. But until then, the size and role of e-fuels after 2035 will remain a hotly debated subject in the European Union and likely the UK too.