Europe throws ignition cars a thin lifeline

The spread of the coronavirus disease (COVID-19) near Montabaur
Cars drive on the highway A3 near Montabaur, Germany, April 15, 2020. REUTERS/Thilo Schmuelgen

MILAN, March 28 (Reuters Breakingviews) - Combustion engines will live to die another day. Bowing to pressure from automaking Germany, the European Union has agreed to exempt cars that run on carbon-neutral synthetic fuel from a ban on new combustion engine vehicles in 2035. The deal may help niche players like luxury sports-car maker Ferrari (RACE.MI). Mass-market brands, like Volkswagen (VOWG_p.DE), will struggle to change course.

Supporters of so-called e-fuels hail them as an alternative way to render the car industry greener. Making such propellants involves capturing carbon from the air or industrial processes and mixing it with hydrogen made from renewable power. The result is a fuel that is neutral from a climate perspective, as it emits the same amount of pollutant that would otherwise be in the atmosphere.

There is a problem. E-fuels, yet to become commercially viable, are not cheap. Produced at scale, they would cost an estimated 2 euros per litre: that’s four times the typical wholesale price for gasoline. Also, the electrolysis process required to source hydrogen from water by separating it from oxygen needs a lot of energy. Using e-fuels to satisfy just 10% of EU gasoline demand would require the bloc to build 137 gigawatts (GW) of new renewable capacity, according to calculations from Independent Commodity Intelligence Services. That's more than three times the 40 GW of new solar capacity the EU built last year.

Cost and energy scarcity suggest e-fuels may be best used in sectors that are harder to convert to electric engines, like trucks, shipping or planes.

They may also have a small role in passenger cars. Ferrari Chief Executive Benedetto Vigna told a Reuters Newsmaker on Monday that the EU exemption would allow the luxury carmaker to continue to produce some models using the roaring motors that have made its fortune. Germany’s Porsche (P911_p.DE) may also use e-fuels for some of its more expensive cars, whose affluent clients will be able to afford the higher cost.

For mass-market brands, electric cars will likely remain the cheapest option. RBC industry analysts expect electric and plug-in hybrid vehicles to make up 90% of Western European passenger vehicle sales by 2035. And carmakers cannot afford to hang back if they are to compete with new entrants like Tesla (TSLA.O). Volkswagen, for example, has already committed to invest 180 billion euros over five years in areas including battery production and sourcing raw materials.

Germany, and Italy, will hail the EU compromise as a great political victory. Yet, it will do little to stop the hollowing out of Europe’s combustion engine supply chain. With some 500,000 jobs on the line, that will be a major political headache.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)


Bowing to German pressure, the European Commission has agreed to exempt cars that run on synthetic so-called e-fuels from a European Union plan to ban new combustion engine vehicles after 2035, according to a Commission document seen by Reuters on March 27.

The deal paves the way for EU ministers to approve the 2035 phaseout law for CO2-emitting cars on March 28.

E-fuels, yet to be produced at scale and more expensive than regular fuels, are created by combining captured CO2 emissions and low-carbon hydrogen.

Ferrari CEO Benedetto Vigna told a Reuters Newsmaker on March 27 he welcomed the EU exemption, adding that he expected the price of e-fuels to come down over the coming years.

Editing by Neil Unmack, Pranav Kiran and Streisand Neto

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