Cruising Through Controversies: The Future of E-Fuels-only Vehicles
Ponderings by Dr. Friedrich Gebert, Attorney and Partner, Arqis, and Finn-Ole Münchow, Attorney, Arqis
Is regulatory framework instrumental in sparking an electrical revolution?
The German auto market is grappling with a dip in electric vehicle (EV) sales while big-name manufacturers push for a transition away from internal combustion engines (ICEs). This ongoing shift is meeting resistance from the legislature, who are courageously stepping in. The European Union's (EU) regulation on the infrastructure for alternative fuels has recently been implemented, setting continental-wide minimum expansion targets for charging infrastructure. Simultaneously, the Federal Ministry of Finance proposed draft legislation for a possible e-fuel-only law, with the aim of streamlining the tax treatment of zero-emission vehicles.
The e-fuel-only act fosters the use of synthetic fuels derived from renewable energy sources (E-Fuels) and plans to level the playing field by making current EV benefits technology-agnostic, benefiting other climate-neutral vehicles as well. The law has four fundamental areas:
- Classification Update: The law introduces a new vehicle category: e-fuel-only vehicles. Registering authorities will issue certificates to those who confirm their vehicle operates solely on climate-neutral fuels.
- Tax Exemption: e-fuel-only vehicles registered between 2030 and 2039 will be excused from vehicle tax for a decade, ending no later than 2042.
- Fiscal Parity: e-fuel-only vehicles will be treated like EVs for tax purposes, affecting vehicle tax levies and personal company car usage.
- Rental and Leasing Boost: Companies using e-fuel-only vehicles will see reduced rental and leasing costs, resulting in decreased taxes.
Regrettably, e-fuels-only vehicles remain shrouded inambiguity at the EU level in terms of specific guidelines. The EU-Berlin compromise to herald the end of ICEs in 2035 stipulates the creation of an EU-wide legal vehicle category for e-fuel-powered vehicles by autumn 2024, but no concrete steps have been taken yet.
E-fuels are foreseen as a promising alternative for hard-to-electrify vehicles like trucks and airplanes. They can also extend the lifespan of ICEs on the road. However, the manufacturing process for e-fuels is power-intensive, considered inefficient in comparison to the direct usage of electricity in EVs. For every 100 kilometers, an electric car consumes 15 kWh of power, while a car powered by e-fuels requires approximately 70 kWh of energy for the same distance. In addition, e-fuels are more costly than electricity or conventional fuels.
For the interim, promoting e-fuel adoption may still be prudent until full electrification. Still, policymakers must ensure that the encouragement of e-fuels doesn't hamper electromobility progress. A parallel promotion approach seems vital.
The e-fuel-only law instills a definitive incentive to perpetuate dependence on ICEs. When e-fuel technology advances, ICEs would be able to operate unchanged. This would ease but also prolong the transition toward electromobility, as manufacturers may prioritize existing ICEs over the development of electric alternatives, leading to increased conversion costs. Availability and price play crucial roles in market acceptance.
More Expansions Needed
Accelerating the shift to electric vehicles (e-cars) is vital for curbing CO2 emissions in traffic. In response, policymakers are mulling over additional measures to speed up the e-car transition:
- Expanding Charging Infrastructure: The new EU regulation 2023/1804 mandates Europe-wide minimum infrastructure expansion targets, with Germany slated to contribute incrementally by 2035.
- Sustainable Battery Production: The upcoming EU battery regulation advocates for ecologically friendly battery production and recycling technologies.
- Purchase Incentives and Tax Breaks: Increased tax credits and subsidies for e-cars are being considered to boost demand, as e-cars are only as eco-friendly as the renewable electricity they utilize.
The e-fuel-only law is a constructive advancement toward neutral technology-based decarbonization in the automotive sector. However, whether e-fuels are cost-effective and eco-friendly enough to become mainstream remains to be seen. The expenses associated with synthetic fuels are currently prohibitive. At the same time, investments in electromobility must continue unabated. With balanced regulations that combined both drivers, Germany can achieve its climate aspirations.
Dr. Friedrich Gebert is a legal practitioner and partner at Arqis, while Finn-Ole Münchow is an attorney at Arqis.
Extra Insights
- E-Fuel Market Projections: According to market research firm Wood Mackenzie, Europe's e-fuels capacity is anticipated to increase to 4.5 million metric tons per year by 2026, thanks to government incentives and increased investment[1].
- E-Fuel Production and Storage: battery-electric cars batteries store energy, whereas e-fuels allow long-term storage of intermittent renewable energy. This flexibility allows energy trading and stabilization of the power grid[1].
- Aircraft Emissions Facts: Aircraft account for about 2% of CO2 emissions worldwide, and emissions from aviation are projected to grow by 300% by 2050, according to the United Nations' International Civil Aviation Organization[4]. E-fuels may provide a solution to reduce aviation's carbon footprint.
- Legislation Dynamics: The European Parliament is considering banning the sale of fossil-fueled cars by 2035, adding more pressure to the European auto industry to invest in alternative fuel technologies[4].
- The e-fuel-only law aims to level the playing field by making current EV benefits technology-agnostic, benefiting other climate-neutral vehicles as well, including e-fuels derived from renewable energy sources.
- Regardless of the potential benefits of e-fuels, policymakers must ensure that the encouragement of e-fuels doesn't hamper electromobility progress, as a parallel promotion approach seems vital for achieving Germany's climate aspirations.
