Sustainable Aviation Fuels: The Key to Decarbonizing Aviation

Aviation is currently the third largest source of greenhouse gas emissions from the transportation sector in the US, and emissions are expected to continue to grow. It’s also one of the most challenging industries to decarbonize, due to the long lifespan of airplanes and the limited number of viable pathways for reducing emissions. The avenue that holds the most promise is sustainable aviation fuels (SAF), which can easily substitute as a drop-in replacement for conventional jet fuel. However the industry and SAF technologies are still nascent, and face significant economic and technological hurdles to scaling up.

Recognizing this challenge, the Biden administration has set a “SAF Grand Challenge,” with a goal of scaling US SAF production to 3 billion gallons per year in 2030 and 35 billion in 2050—a considerable ramping up from the current level of 4.5 million gallons per year. At scale, SAF could not only play a major role in fully decarbonizing aviation, but also offers other benefits including reduced local air pollution and considerable employment opportunities. Unlocking this potential will require significant new investment and long-term policy frameworks to jump-start the infant industry. In this report, we provide an overview of the current state of the industry and SAF technologies, followed by our estimates for the employment and economic benefits from scaling up SAF. We then discuss the challenges to scaling up SAF, as well as potential ways to help accelerate it.

The US is committed to decarbonizing the aviation sector

Just over a year ago, the Biden administration set an ambitious target of reducing economy-wide greenhouse gas (GHG) emissions to net-zero by 2050. The administration developed a long-term climate strategy to help achieve these goals, which includes shifting away from fossil fuels towards clean electricity and clean fuels to power the US economy. The combination of clean electricity and widespread electrification of end-uses is typically viewed as the most efficient and economical way to reduce emissions in sectors such as power, transportation, and buildings. However, this strategy is not always accessible or possible for hard-to-abate sectors like industry and heavy-duty transportation.

Of the hard-to-abate sectors, aviation is viewed as one of the most challenging to decarbonize, due to the long lifespan of airplanes and the limited number of pathways for emissions reductions over the next few decades. The aviation sector is the third largest source of US transportation emissions, accounting for roughly 7% of total sector emissions (Figure 1). Emissions from the sector are anticipated to continue growing, given the projected growth in US passenger air travel and freight.  Recognizing this challenge, the Biden administration has set a decarbonization target for the aviation sector specifically—to achieve net-zero GHG emissions by 2050.

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Aviation industry stakeholders have identified five primary options (Table 1) for reducing aviation emissions by 2050, and broadly agree that replacing conventional jet fuel with sustainable aviation fuels (SAF) is the most promising option for yielding significant CO2 emission reductions over the next 30 years.

Table 1

The decarbonization potential of sustainable aviation fuel

Sustainable aviation fuels (SAF) are low-carbon fuels produced from biological (i.e., plant and animal materials) and non-biological (i.e., municipal solid waste, industrial waste gases) feedstocks, which have similar physical and chemical characteristics as conventional jet fuel but with a lower life-cycle carbon footprint. One of the reasons why SAF is viewed as a leading feasible solution for decarbonizing aviation is because it can easily substitute as a “drop-in” fuel replacement for conventional jet fuel.[1] SAF and conventional jet fuel can be mixed safely, without having to redesign aircraft and aircraft engines to utilize it because the chemical characteristics are very similar. And existing fueling infrastructure can also be used to transport SAF.

SAF has the potential to reduce life-cycle CO2 emissions by up to 99% compared to traditional jet fuel, depending on the technological pathway and feedstocks used to produce the fuel. Other major benefits include local air quality improvements because of lower sulfur content and reductions in soot pollution. Communities responsible for producing and processing SAF feedstocks also stand to reap considerable employment and economic benefits as production scales.

At scale, SAF has the potential to play a major role in fully decarbonizing the aviation sector over the next 30 years. But SAF technologies are currently at various stages of technology readiness, and the scaling of production and deployment faces major technological and economic hurdles. In the rest of this report, we start with an overview of the different SAF technologies currently available or under development. We then provide estimates for the employment and economic benefits from scaling up SAF, followed by some of the challenges the nascent industry faces, as well as potential ways to help accelerate it.

SAF technology pathways

The SAF industry is currently in its infancy. There are several SAF technological pathways that have been developed or are currently under development. However, only seven have been approved by the American Society of Testing and Materials (ASTM) for blending with conventional jet fuel. ASTM is an international standards organization that develops technical standards for various materials, systems, and products. In the case of SAF, it establishes which technologies can be used to produce SAF, as well as the limits for blending SAF fuels with conventional jet fuel. Out of caution, ASTM currently limits most pathways to 50% by volume blending. Doing so helps to ensure that the blended fuel is a true drop-in fuel and will not require additional infrastructure (and costs) to support its use. Industry is currently discussing the need for higher blend limits. Additional testing and evaluations, however, will be needed to ensure that the higher blends remain drop-in compatible.

In this report, we focus on three of the ASTM-approved pathways[2] (Table 2): (1) hydroprocessed esters and fatty acids (HEFA); (2) alcohol-to-jet (AtJ); and (3) synthesis gas Fischer-Tropsch (FT). In the case of FT, we consider two pathways for synthesis gas (syngas) production: feedstock gasification (Gas-FT) and electrolysis of CO2. Production via the second FT route is often referred to as the “power-to-liquid” (PtL) pathway. The first three production routes listed in the table are classified as advanced biofuels. They have a life-cycle emissions-intensity that is at least 50% lower than fossil-based fuels. The PtL fuel is classified as an electrofuel—the term for a drop-in fuel produced from hydrogen obtained from clean electricity together with captured CO or CO2.

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Gas-FT was the first SAF pathway to be approved by ASTM, in 2009. The process involves the conversion of a synthesis gas (syngas) into liquid fuel via a Fisher-Tropsch (FT) reaction. FT is a common commercial process for producing liquid fuels from both coal and natural gas. Syngas is produced from the gasification of cellulosic feedstocks or municipal solid waste. The syngas is then converted to a mixture of hydrocarbons (the main chemical component of jet-fuel) in a FT reactor, before being further refined into SAF and other clean fuels.

The HEFA pathway was formally approved by ASTM in 2011. It involves the refining of vegetable oils, tallow, or waste greases into SAF through the deoyxgenation and hydroprocessing of the feedstocks. It is the most mature of the SAF technologies and the only one currently used today at commercial scale.

AtJ, using isobutanol as a feedstock, was approved in 2016, followed by the approval of ethanol as a feedstock in 2018. This pathway converts alcohol feedstocks (i.e., sugars, starches, hydrolyzed cellulose, industrial waste gases) into SAF and other clean fuels, through several chemical processes.

Electrofuels, also referred to as “power-to-liquids,” are another type of drop-in fuel produced using green hydrogen (H2) and sustainable CO2 via point-source capture or direct air capture (DAC). Like the advanced biofuel pathways, the PtL process can also be used to produce a series of clean fuels. PtL involves the conversion of syngas into SAF via a FT reaction. However, the syngas is produced from either green H2 and captured CO2 via a reverse water-gas-shift reaction or directly via co-electrolysis using solid oxide electrolysis cells and clean electricity.

Announced SAF production volumes

In the last few years, there have been numerous announcements of new SAF projects across the globe. Announced global capacity is on track to total roughly 4.3 billion gallons per year (BGY) by 2026, with HEFA accounting for more than two-thirds (3.1 BGY) of the new capacity (Figure 2). Still this capacity is relatively small compared to the 60 billion gallons consumed globally last year (~4 billion gallons in the US). HEFA production capacity could potentially increase by roughly another 2.5 BGY by 2026 if feedstock supply issues are immediately addressed. Announced capacity additions associated with AtJ, Gas-FT, and other pathways are minor, but are likely to ramp up considerably after 2026 as growing investment and policy support for these technologies help to advance their commercialization.

Figure 2

The economic benefits of scaling up SAF

In addition to being a potentially pivotal tool for decarbonizing aviation, scaling up SAF also offers significant economic and employment opportunities in the US.

We examined the potential employment benefits of SAF production for the four technology pathways described above: HEFA, Gas-FT, AtJ. Each estimate is associated with a typical 50 million gallon/year production facility and includes jobs created from plant investment, operations and maintenance as well as jobs associated with suppliers of equipment, energy, feedstocks and other upstream activities.

According to our analysis, the average total number of jobs associated with the construction and operation of a 50 million gallon per year SAF facility ranges between 1,645 and 7,640 jobs, depending on the technology pathway adopted by the facility. Jobs estimates can vary widely across pathways because of differences in the levels of capital intensity. Generally, the more capital intensive the production pathway is, the more job creation there is. We also note that our analysis focuses solely on total job creation, lacking details on job type and job quality. Forthcoming analysis will delve into these metrics for a better depiction of SAF-related jobs.

A major takeaway from our analysis is that on a plant-by-plant basis, SAF produced via AtJ has the potential to create the greatest number of jobs. However, uncertainties surrounding future deployment levels of each SAF technology make it unclear as to whether we will observe more overall SAF jobs coming from AtJ in the long-run. Our analysis indicated that while HEFA, AtJ, and Gas-FT all have the potential to scale significantly over the next few decades, PtL can scale to the largest quantities, given that it does not face the feedstock limitations that the biogenic alternatives face.

Noting this, we present the job results for a single PtL facility in Figure 3. We find that the construction and operation of a 50 million gallon per year SAF facility utilizing the PtL production process results in an average of 3,710 total jobs being created. Roughly 60% (2,200) of these jobs are directly related to the construction and operation of the physical facility, while all other jobs stem from supporting supply chain activities. Our findings associated with the other three biogenic pathways can be found in the Appendix.

Figure 3

Our analysis shows that the breakdown of job types also varies across the different pathways. In the example above, most of these jobs (3,530 jobs) are related to plant investment, which includes the construction, engineering, materials, and any equipment needed to build the facility. Construction and engineering jobs are those that have to do with the designing and planning of the facility’s construction. For example, this includes architectural services required to design the facility. Materials and equipment jobs capture those linked to the physical construction of the building and its systems. Also included in plant investment are the upstream supply chain activities that support facility construction, materials, and equipment. An average of 180 jobs are associated with ongoing plant operation and maintenance (O&M) activities, with onsite O&M being responsible for the bulk of these jobs. More specifically, it is the operation and maintenance of the electrolyzer system and other major plant components such as the FT reactor.

If the industry scales up enough to produce the majority of aviation fuel, hundreds of thousands of new industry jobs could be created. We have forthcoming analysis that will investigate jobs at scale in detail for the SAF industry.

More investment is needed to jump-start SAF

While SAF offers the potential of long-term decarbonization and significant employment benefits, ramping up production to meet these goals will require addressing major economic and technological hurdles first. In the US, current production levels of SAF are approximately 4.5 million gallons per year. A major hurdle to SAF deployment is the considerable cost differential that exists between it and conventional jet fuel. On average, SAF is 3 to 5 times more expensive than conventional jet fuel before considering subsidies and policy incentives (Figure 4). This is due in large part to the nascent production pathways for SAF, which are more expensive than fossil fuels. HEFA fuels are closer to being at price parity with conventional jet fuel than the other pathways primarily because of how long the technology has been around.

Figure 4

In addition to cost, the technological unreadiness of some SAF technologies also serves as a major hurdle on the supply side. To date, the AtJ, Gas-FT, and PtL technologies exist only at lab-scale or pilot-scale demonstration. Shifting to full commercialization will require continued investments in research, development, and demonstration.

Another major supply-side hurdle to scaling up SAF is investment levels, which have been insufficient to date. Poor investment levels are largely driven by high production costs with the converse also being true, creating a negative feedback loop. Both must be addressed in tandem to see improvements in overall SAF economics. Moving SAF forward to full-on commercialization will require additional investment in new and reconstructed SAF facilities, supply chain development, and other supporting infrastructure. Addressing this investment hurdle requires de-risking of “first-of-a-kind” SAF projects and increasing certainty around future SAF demand.

Limited availability of biogenic feedstocks also presents a hurdle for scaling up the advanced biofuels pathways. A large share of eligible biogenic feedstocks are already being used in other industries and transport applications (e.g., personal transport). Also, feedstocks are widely distributed across the world and difficult to collect. Potential solutions for increasing feedstock availability include increasing biomass production on degraded lands, continuing to make advancements in feedstock collection capabilities, and instituting new incentive structures which shift some biomass supply away from competing industries towards SAF.

On the demand side, one hurdle is uncertainty around sufficient future demand. Numerous airlines have established commitments that could potentially boost SAF demand. For example, Delta Airlines has committed to replacing 10% of their jet fuel with SAF by 2030. Similarly, the United Postal Service (UPS) plans to power 30% of their aircrafts using SAF by 2035. However, even with these types of ambitious SAF consumption targets and offtake agreements, demand continues to be rather scarce, which is stymying deployment.

New coalitions of non-governmental organizations and leading corporations such as the Sustainable Aviation Buyers Alliance (SABA) are working to drive new investment in low-carbon SAF and overcome barriers to procurement and scale-up—much-needed efforts to help jump-start the industry. Increased investment in SAF will be necessary to help make it price competitive with jet fuel and accelerate deployment. However, this on its own is not enough to get the aviation sector on track for decarbonization by 2050. In addition to increased investment, long-term policy frameworks will be needed to address many of the demand- and supply-side hurdles we have identified here.

Policy support for scaling up SAF

Recently, policy developments in the US, EU, and elsewhere internationally have been put in place to support SAF production and create demand for SAF. The most far-reaching of these is the multilateral Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). CORSIA is a three-phase program administered by the International Civil Aviation Organization (ICAO) that aims to stabilize international aviation emissions at 2020 levels by 2035. Several SAF pathways are approved for use in compliance with CORSIA, and airlines can use SAF, approved offsets, and other strategies to meet the target. Compliance with CORSIA is currently voluntary but will be mandatory for all participating countries beginning in 2027, potentially creating new demand for SAF globally.

In the US, the federal government has established a “SAF Grand Challenge” to reduce the cost, enhance the sustainability, and expand the production and use of SAF. The overarching goal of the effort is to scale SAF production to 3 billion gallons per year in 2030 and 35 billion in 2050. This multi-agency initiative includes coordination on research and development investments, demonstrations, and SAF supply chain support. In addition, the federal Renewable Fuels Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) include provisions allowing jet fuel producers to opt-in to these life-cycle GHG reduction programs with compliance credits acting as a supplemental revenue stream to support production. The US Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) both provide support for SAF supply and demand creation. The IRA provides a SAF production tax credit of up to $1.75/gallon for very low life-cycle GHG fuels through 2027. The IRA also includes tax credits for carbon capture, DAC, clean hydrogen, and clean electricity production, all of which indirectly support SAF deployment by decreasing the cost of SAF feedstocks. All these policies have the potential to substantially cut the delivered cost of SAF, and we plan to assess the net cost implications of all these programs in future analysis.

A recent Rhodium Group analysis of the IRA considered how much the new SAF production tax credits improved the cost-competitiveness of low and high cost SAF production pathways eligible for the maximum credit value. We estimated that SAF produced via the low-cost pathway could reach price parity with conventional jet fuel in 2027, the last year the credit is available (Figure 5). Although the IRA can potentially improve the economics of some production pathways, our analysis suggests that additional incentives and/or tax credits will be needed for more of the costlier pathways to be cost-competitive. We have a more in-depth analysis of the impact of tax extenders that is forthcoming.

Figure 5

Getting SAF to scale

SAF has the potential to play a major role in fully decarbonizing aviation. If the industry scales up enough to produce the majority of aviation fuel, hundreds of thousands of new industry jobs will be created. However, varying levels of technology readiness across the different technological pathways and general uncertainty about the future availability and pricing of sustainable feedstocks makes it unclear as to which pathway will emerge as dominant. HEFA is currently the more mature of the pathways. It is also the least expensive to produce and is currently commercially viable. However, because of high feedstock costs and feedstock limitations, it will serve as only a near-term decarbonization solution. Other biogenic pathways like AtJ and Gas-FT will likely serve as medium-term solutions as they eventually reach technical and commercial maturity and increasingly become more cost-competitive. Their deployment and possible viability in the long run will largely depend on future feedstock supply.

The current costs of PtL likely prevent it from being a near- or medium-term supply source for SAF. Sizeable declines in electrolyzer costs and the costs of CO2 capture, as well as a growing abundance of clean electricity sources—all of which are associated with PtL production (Figure 6)—will be necessary if it is ever to reach some degree of price parity in the future.

Figure 6

Despite the technology development and cost hurdles PtL faces, it is the only SAF technology that has the potential for unbounded production as it does not face the feedstock limitations that the biogenic pathways do. Future Rhodium work will explore ways to bring down these costs and technology deployment hurdles. More specifically, we will investigate how policies like the IRA improve PtL economics.

Our observations of growing investment in domestic first-of-a-kind SAF facilities along with mounting policy support (i.e., IRA, expansion of RFS and LCFS) suggest that industry stakeholders and policymakers alike understand the vital role SAF could play in decarbonizing US aviation. However, these efforts alone are not enough. More must be done to overcome the existing supply-side and demand-side hurdles, which greatly inhibit the scaling of SAF. The US government could push for more public-private partnerships for SAF production. And long-term policy frameworks are critical for getting SAF to scale. Possible avenues include continued government support (at both the federal and state levels) in the form of additional policy incentives, consumption mandates for airlines, further backing for SAF R&D and demonstration plants, and implementing policies that de-risk SAF plant investments.

[1] It is worth noting that SAFs are a subset of clean fuels which are drop-in fuels used anywhere in the economy that generate fewer life-cycle GHG emissions than their conventional counterparts. Many of the SAF processes are like those that produce clean fuels used elsewhere in the economy.  If the US does succeed at widespread economy-wide decarbonization, it is likely that clean fuel facilities will produce multiple types of fuels including SAF. We focus on SAF specifically in this note because clean fuels are most needed in the aviation sector.

[2] The other four pathways include: (1) Fischer-Tropsch synthesized kerosene with aromatics (FT-SPK); (2) Synthesized iso-parafinns (SIP); (3) Catalytic hydrothermolysis jet (CHJ) fuel; and (4) Hydroprocessed hydrocarbons – synthesized isoparaffinic kerosene (HC-HEFA).

 

 

China Pathfinder: Annual Scorecard 2022

China Pathfinder, a joint project of Rhodium Group and the Atlantic Council’s GeoEconomics Center, compares China’s economic system to those of market economies. This juxtaposition is important at a time when questions are mounting about Beijing’s economic trajectory, and both policymakers and businesses around the world are assessing how to respond and position themselves. This report looks at six components of the market model: financial system development, competition, innovation system, trade openness, direct investment openness, and portfolio investment openness. Our annual scorecard situates China in relation to ten leading market economies to establish a data-centered benchmark for discussion and analysis. We supplement the annual report with quarterly updates that zero in on the most important policy developments in China. This approach is designed to encourage a more constructive discussion of policy shifts taking place in Beijing, from the recent crackdown on technology companies, to the “dual circulation” strategy, and debate over “common prosperity.”

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Key Findings

China’s progress toward market economy norms slowed in most areas in 2021, though not enough to undermine the market opening efforts that took place since 2010. On our innovation system and trade metrics, China saw real progress in 2021 compared to its 2010 benchmarks, scoring higher than several OECD economies. In trade, China even improved on its 2020 performance. China’s financial system development, market competitiveness, and openness to investment, however, have stagnated; in these areas, the gap between China and market economies remains the largest. In upcoming reports, we hope to shed light on whether China’s economic performance is just temporarily reflecting the government’s aggressive steps to contain the COVID-19 pandemic, or if Beijing is diverging from market thinking in a more structural way.

Most of the OECD economies we track show a slight divergence from open market norms since 2010. For instance, Australia, Italy, and Spain saw some backsliding in their financial system development and market competitiveness, while German and South Korean markets saw a lapse in openness to foreign direct investment. Portfolio investment openness was the only bright spot, where all economies (except the UK) deepened portfolio markets or reduced cross-border restrictions compared to 2010. Intervention by governments in response to the pandemic played a role in the recent drift away from market openness. While most advanced economies are now moving on from the pandemic, ongoing geopolitical tensions in 2022, such as the war in Ukraine, could complicate their post-pandemic recovery.

In innovation, China had a higher composite score than Canada, Italy, and Spain. It also surpassed the open economy average in venture capital investment intensity. However, this progress comes with caveats. The role of the state in determining where innovation takes place—via government guidance funds and subsidies—and Beijing’s crackdown on technology companies risk undermining the innovation gains that China has made in recent years. Looking ahead, there is a risk that weakening foreign investment in China could chip away at the country’s innovative potential.

China’s composite score in trade comes closest to those of market economies, exceeding South Korea and Italy’s scores. But, here too, there are caveats. First, China’s remarkable competitiveness in goods trade is counteracted by its high barriers in digital services trade, where its score has declined in recent years. Second, non-tariff barriers cloud China’s trade landscape, benefiting domestic champions and hurting foreign players. Third, the US-China trade war continues to undermine confidence in deepening two-way trade for the long run. Thus, we saw China’s MFN tariff rate increase since 2020 (though it is still lower than it was in 2010), and while the US and the EU countries lowered their MFN rates, their tariffs on Chinese exports have not decreased. Finally, China’s economic growth continues to rely on exports; this is increasingly problematic given the domestic COVID-related disruptions and the relatively rapid recovery in China’s trading partners, which will drive a decline in demand for Chinese goods.

China’s investment openness has decreased since 2020, with a small slump in cross-border equity and bond volumes, as well as a drop-off in outbound FDI volumes. Though China’s restrictions on direct investment and portfolio investment have not changed, other factors such as the crackdown on technology firms and zero-COVID lockdowns have discouraged investment. As China’s scores in both areas of investment openness have been the furthest from market economy norms since 2010, the latest signs don’t do much to alter the dim picture.

President Xi Jinping will be confronted with important policy choices at the conclusion of the 20th Party Congress. Xi is widely expected to earn a third term as leader at the congress, freeing his hand to take bolder action in the face of formidable economic challenges. This could provide an opening for 2013-era market reform promises to reappear on the agenda. But while unfinished policy reform work is plain to see, few analysts in or outside of China can point to evidence of impending market reform acceleration.

China PathfinderChina Pathfinder

A Turning Point for US Climate Progress: Assessing the Climate and Clean Energy Provisions in the Inflation Reduction Act

On August 12th, the US House of Representatives passed the Inflation Reduction Act (IRA) after the Senate did the same five days before. The climate change and clean energy investments are the single largest component in the package, out of the many issues that the IRA addresses. When President Biden signs it, the IRA will be the single largest action ever taken by Congress and the US government to combat climate change.

In this report, we provide a detailed assessment of the key energy and greenhouse gas (GHG) emissions impacts of this historic legislation. The IRA is a game changer for US decarbonization. We find that the package as a whole drives US net GHG emissions down to 32-42% below 2005 levels in 2030, compared to 24-35% without it. The long-term, robust incentives and programs provide a decade of policy certainty for the clean energy industry to scale up across all corners of the US energy system to levels that the US has never seen before. The IRA also targets incentives toward emerging clean technologies that have seen little support to date. These incentives help reduce the green premium on clean fuels, clean hydrogen, carbon capture, direct air capture, and other technologies, potentially creating the market conditions to expand these nascent industries to the level needed to maintain momentum on decarbonization into the 2030s and beyond.

We also find that the IRA cuts household energy costs by up to an additional $112 per household on average in 2030 than without it, cuts electric power conventional air pollutants by up to 82% compared to 2021, and scales clean generation to supply as much as 81% of all electricity in 2030. The IRA represents major progress by Congress, and at the same time more action will be needed for the US to meet its 2030 target of reducing emissions by 50-52% below 2005 levels. With the IRA enshrined as law, all eyes will be on federal agencies and states, as well as Congress, to pursue additional actions to close the emissions gap.

A first for Congress: passing major climate legislation

Congress has had climate change on its radar since the first major hearings on the topic in 1988. Now,  with the passage of the IRA 34 years later, Congress has taken decisive action. Though the intervening years have seen plenty of false starts on legislation to tackle emissions, acting late is certainly better than never. The package of new grant and loan programs, tax credits and emissions fees touches nearly every corner of the US economy and will make meaningful progress toward decarbonizing the US energy system for the next decade and beyond. While the overall size of the package is trimmed down compared to the Build Back Better Act (BBBA) passed by the House in November, the emissions reduction components are still robust and effective.

In this report, we provide a comprehensive assessment of the emissions and energy system impacts of the IRA, building on our preliminary assessment published on July 28. To conduct this analysis, we used RHG-NEMS, a version of the Energy Information Administration’s (EIA) National Energy Modeling System modified by Rhodium Group. We model the impacts of the IRA using the three core emissions scenarios—high, central, and low—from our newly updated baselines for 2030 US emissions under current policy in Taking Stock 2022. We compare projected emissions from Taking Stock with the projected emissions trajectories we estimate under the IRA and calculate the emissions impacts of the IRA as the difference between the two policy environments for each emissions pathway. For more information on our methodology and analytical approach, see the technical appendix of Taking Stock 2022.

We first assess the IRA’s impact from an economy-wide vantage point. From there, we consider key impacts in the three largest emitting sectors in the US: electric power, industry, and transportation. We then zero in on the implications of the IRA for a few critical emerging clean technologies and look at its effect in other sectors. Finally, we quantify the IRA’s impact on consumer costs and energy security and conclude with a look to the future.

The IRA cuts emissions across the economy

The IRA contains an array of programs, tax credits, and fees that, in combination, drive a step change in decarbonization of the US economy by the end of the decade. These provisions lower the cost of commercial clean technologies like wind and solar, electric vehicles, and building efficiency, enabling them to become more competitive with incumbent fossil fuel technologies and driving a shift towards cleaner energy. Tax credits and other programs for manufacturing of clean technologies expand production capacity and help to enable accelerated deployment.

Provisions of the IRA also modify fossil fuel leasing on federal lands, including requiring lease sales and changing royalty rates, but we find almost no emissions impacts from the combined impact of these provisions, relative to the benefits of the clean energy provisions.

The net result of all the provisions in the IRA is that US net GHG emissions decline to 32-42% below 2005 levels in 2030. That’s up to 10 percentage points more than under current policy without the IRA, in which we project emissions of 24-35% below 2005 levels in the same year (Figure 1). The range reflects uncertainty around economic growth, clean technology costs, and fossil fuel prices across our high, central, and low emissions scenarios detailed in Taking Stock 2022. In the high emissions case, which features cheap fossil fuels and more expensive clean technologies plus faster economic growth, we find that the IRA can accelerate emissions reductions to a 32% cut below 2005 levels in 2030, compared to 24% without it (Figure 2). On the flip side, in the low emissions case, with expensive fossil fuels and cheap clean technologies, the IRA can drive even larger reductions, from 35% below 2005 levels without it to 42% below 2005 levels with it. In the central emissions case, the IRA accelerates emissions reductions to 40% below 2005 levels in 2030, compared to 30% without it.

Figure

This is a huge step forward towards the US climate target of 50-52% below 2005 levels in 2030, though clearly more action is needed. No single action on its own will be enough to meet the target. Still the IRA changes the game, not just with the deep emissions reductions it generates but also by cutting the cost of additional action by the executive branch and states, which could put the 2030 target within reach.

Progress in the three biggest emitting sectors

All told, the IRA cuts emissions and increases carbon removal by an additional 439-660 million metric tons in 2030 beyond what’s projected without the IRA (Figure 3). On the high end, that’s equal to zeroing out all current emissions from California and Florida combined. Put another way, the IRA helps close as much as 51% of the gap between the US emissions trajectory without the bill and the US’s 2030 climate target.

Figure

Our preliminary estimate of the impacts of the IRA found a 31-44% reduction over 2005 levels attributable to the policies. Our revised estimate finds a narrower band of emissions impacts of 32-42%, as we’ve honed our modeling to reflect more of the nuance of the bill language. The biggest drivers of the difference from our preliminary estimate are a more refined representation of the EV tax credits; more granular characterization of the transition from the current electric sector tax regime, as extended by the IRA, to the new clean electricity credits; and interactive effects of increased federal fossil royalty rates driving gas prices slightly higher in the low emissions case, leading to more coal generation and higher emissions relative to our preliminary assessment (though still substantially lower than without the IRA).

Looking across sectors, the biggest emission reductions by far occur in the electric power sector, followed by carbon removal (due to forest and soil practices, direct air capture and other actions), industry (including emissions from fossil fuel production), and transportation (Figure 4). The investments that drive these emission reductions will create new economic opportunities across the country and shift the US closer to a decarbonized energy system.

Record-level clean generation in the electric power sector

The suite of long-term, full-value, flexible clean energy tax credits and other programs in the IRA focus on the “4 Rs” of electric generation decarbonization:

  • Reinvigorate new clean capacity additions: production and investment tax credits (PTC and ITC)
  • Retain existing clean capacity: zero-emitting nuclear PTC
  • Retire fossil capacity: US Department of Agriculture (USDA) investments in rural electric cooperatives (coops) and Department of Energy (DOE) loan programs
  • Retrofit remaining fossil capacity: section 45Q carbon capture tax credit

Critically, the IRA includes direct pay and transferability provisions that make it easier to monetize the tax credits by decoupling them from a finite pool of tax equity dollars. Without these provisions, there would be a real risk that developers face financing bottlenecks as deployment expands, stifling the impact of incentives. Now, under the IRA, a broader set of players in the electric power industry can use tax credits and pour investment into achieving an increasingly cleaner electric grid. The manufacturing tax credits and other programs in the IRA will help expand domestic production capacity to support accelerated clean energy deployment across the US. New DOE and USDA programs can support rural electric coops and other owners of coal plants to retrofit or install new clean technologies to achieve CO2 and criteria pollutant reductions.

All of these measures taken together drive clean generation to the highest levels the US has seen in the modern era. Clean generation as a share of total electric generation rises from roughly 40% in 2021 to 60-81% in 2030 due to the IRA, compared to 46-72% without it (Figure 5). The IRA puts the US in a strong position to meet the President’s goal of 100% clean generation in 2035. These shares are achieved by preventing 10-20 GW of nuclear from retiring through 2030 and increasing the annual average capacity additions of renewables to 35-77 GW per year through 2030—more than double per year in the low and central emissions cases than the record set in 2021.

Figure

The largest absolute emissions abatement and lowest total power sector emissions occur in the central emissions scenario, which combines central clean technology costs and central fossil fuel prices. In this case, the IRA policy provisions drive large-scale deployment of clean generation, drive down coal generation, and limit the growth of natural gas generation. By contrast, in the low emissions case, natural gas prices are high enough in 2030 to allow relatively more coal generation to remain competitive, though generation from coal plants is still lower than without the IRA and relative to today.

All of this clean energy drives deep reductions in emissions of both GHGs and conventional pollutants. In 2030, electric power CO2 emissions are 69-80% below 2005 levels, which represents a meaningful departure from the 54-66% below 2005 levels that occur under current policy.

Electric power plant emissions of harmful air pollutants like sulfur dioxide (SO2) and oxides of nitrogen (NOx) that exacerbate asthma attacks and cause premature deaths also decline dramatically thanks to the IRA. Without the IRA, SO2 (Figure 6) and NOx (Figure 7) are on track to decline by 39-63% and 51-55% below 2021 levels in 2030 respectively. The shift to clean energy driven by the IRA cuts SO2 emissions down to 59-82% below 2021 levels and NOx to 61-66% below 2021 levels. These cuts will provide important relief to the communities nearby and downwind of major power plants.

Industrial emissions turn the corner

Without the IRA, industrial emissions decrease by 14% and 8% in our low and central emissions scenario and increase by 1% in our high scenario relative to 2005 levels. In Taking Stock 2022, we projected that industry would become the largest-emitting sector by the early 2030s, so progress in this sector is important for meeting the 2030 target and achieving long-term decarbonization. With the IRA, industrial emissions decrease by 3%, 11%, and 16% in 2030 relative to 2005 in the high, central, and low emissions cases, respectively (Figure 8).

Figure

There are two main reasons for the IRA-driven decline. First, the enhancements to the section 45Q carbon capture tax credit drive meaningful additional deployment of carbon capture. Without the IRA, we project 74 million metric tons of carbon capture and direct air capture (DAC) capacity will be retrofitted on existing facilities or installed by 2030. With the IRA we project a 35-40% increase, to 100-103 million metric tons of carbon capture and DAC (Figure 9). This additional capacity helps drive down industrial sector CO2 emissions. Importantly, the IRA continues to incentivize further carbon capture and DAC deployment after 2030, as the 45Q provision includes a commence construction deadline of 2032. By 2035, we project that that provision can help to more than double installed carbon capture and DAC capacity from 2030 levels, to 266-313 million metric tons of installed capacity. The longer duration and larger size of the credit also help drive carbon capture retrofits in harder-to-abate corners of industry, including in refineries, cement plants, and iron and steel facilities. The bill also provides an important level of foundational support for DAC deployment, helping to scale a new and necessary clean energy technology.

The other factor behind the decline in industrial emissions in the IRA is a decline in oil and gas production and transmission emissions, which we include as part of industrial sector emissions in our calculations. The clean technology provisions in the IRA lead to small reductions (<1%) in petroleum consumption and larger reductions of 3-10% in natural gas consumption across the economy. The much-discussed fossil fuel provisions of the IRA do not lead to meaningful increases in domestic production of oil and gas, which we discuss in greater detail below. All else equal, less production equates to lower production and transmission emissions. In addition, the IRA institutes a methane fee on emissions from production and transmission above a certain volumetric threshold, driving down oil and gas emissions further still.

Taken together, the policies start to bend the industrial emissions curve in the right direction, but much more needs to be done to drive the levels of decarbonization that will be required from industry. Fortunately, the bill makes an important down payment in that regard in the form of domestic manufacturing conversion grants, additional funding for the DOE Loan Programs Office, an advanced industrial facilities deployment program, and a suite of other provisions to help the industrial sector demonstrate and deploy new technologies.

Diversifying transportation sector energy consumption

Transportation has been the highest-emitting sector in the US since surpassing power sector emissions in 2016. Due to long vehicle stock turnover cycles, it will take decades to fully decarbonize the transportation sector, even with aggressive clean technology deployment. The array of tax credits for clean light, medium and heavy-duty vehicles (LDV, MDV, HDV) in the IRA accelerate the adoption of clean vehicles across the sector.

The new structure of the 30D electric vehicle (EV) tax credit limits its impacts in the near term, as manufacturers race to meet critical mineral and battery component sourcing requirements. This limits the amount of total LDV EVs on the road in 2030 relative to a policy without these requirements, reducing its emissions impact over this decade. Despite that, by 2030 the IRA increases the share that electric vehicles comprise of all LDV sales to 19-57%, up from 12-43% without it (Figure 10). In addition, these requirements and other investments made as part of the IRA can help stand up a meaningful EV supply chain domestically and in close partner countries.

The IRA also provides tax credits for used clean vehicles, improving access to this important clean technology for buyers for whom a new vehicle is out of financial reach. On the MDV and HDV front, the IRA provides a tax credit for the purchase of clean trucks. It also includes a number of grant programs and other fiscal incentives to drive clean vehicle deployment and reduce conventional air pollutants. In total, these provisions drive total transportation emissions down to 18-26% below 2005 levels in 2030, compared with an 18-24% reduction without the IRA.

More to do in carbon removal, agriculture, and buildings

Though we project some emissions abatement in the carbon removal and buildings sectors relative to current policy due to the IRA, in general, these impacts are small compared to the scale of decarbonization needed in these sectors, and continued work on all fronts will be necessary to drive down these emissions.

We find that a suite of provisions in the IRA can increase technological and natural carbon removal. For our accounting purposes, both direct air capture facilities and ethanol facilities retrofitted with carbon capture, which we discuss above, are accounted for as carbon removal. In addition, the agriculture title of the IRA includes agricultural conservation investments, non-federal reforestation projects, and state and private forestry conservation programs, which together increase the ability of natural and working lands to act as carbon sinks.

In the buildings sector, the bill makes important investments in decarbonizing buildings via retrofit and high-efficiency electric home rebates. The Greenhouse Gas Reduction Fund in the IRA may also help reduce emissions from buildings, though we don’t know enough yet about how the program would be implemented to model its effects. The bill also modifies the current tax credit for the adoption of energy efficiency appliances, but the effect is largely to incentivize the installation of more efficient gas appliances, locking in long-lived fossil-consuming assets rather than driving needed progress in electrification. The new energy efficient home credit also helps drive some improvements in new home shell efficiency. But in total, these reductions are modest compared to the rest of the bill. More action, actually focused on decarbonization and not just energy efficiency, is necessary in the buildings sector.

Cutting the green premium for emerging clean technologies

The IRA doesn’t just incentivize the commercial-scale clean technologies like solar and wind available today. It also builds on the investments in the Infrastructure Investment and Jobs Act to cut the cost of deploying a host of emerging clean technologies such as carbon capture and DAC covered above as well as clean fuels, clean hydrogen, advanced nuclear, and other cutting-edge solutions. It does so through new deployment tax credits that reduce the “green premium,” which is the added cost of clean technologies relative to fossil incumbents. The more diverse the set of emerging clean technologies that get to commercial scale, the more opportunities there will be for large, low-cost emissions reductions in the long-term. In other words, the investments in emerging clean technologies in the IRA make achieving net-zero emissions by mid-century more feasible and more affordable.

We find that these new tax credits can make clean fuels competitive with conventional fossil fuel options in this decade. For example, the new sustainable aviation fuel (SAF) credit in the IRA provides up to $1.75/ gallon of SAF produced with very low life-cycle GHG emissions. SAF is a critical technology for decarbonizing long-haul aviation where few other clean technologies are available. There are multiple ways to make SAFs, and they all have different associated costs. We considered low and high cost production pathways that can qualify for the maximum credit value and find that, at least in the low case, SAF could match projected fossil jet fuel prices in 2027, the last year the credit is available (Figure 11).

Figure

We find an even more encouraging story with regard to clean hydrogen. Clean hydrogen is sometimes referred to as the “Swiss Army Knife of decarbonization” because it can be used in so many applications across the energy system. Clean hydrogen can be made in a variety of ways including by using natural gas steam methane reformation equipped with carbon capture (“blue” hydrogen) or by splitting water via electrolysis using zero-emitting electricity (“green” hydrogen).

The new clean hydrogen production tax credit in the IRA supports both blue, green and other production pathways, providing higher credit values for lower lifecycle GHG emissions. The maximum credit is $3/kg for the cleanest processes. It is likely that the credit will shrink or eliminate the green premium for a variety of clean hydrogen options. Looking at green hydrogen produced with solar energy through high and low technology cost assumptions, we find that in 2030 the fuel will cost $3.39-$4.92 per kilogram to produce without the IRA (Figure 12). The IRA credit more than eliminates the green premium for clean hydrogen assuming low technology costs and shrinks it to just 40 cents per kilogram using the high technology cost assumptions. With this credit, clean hydrogen will be primed for takeoff through the 2020s.

Figure

Cutting costs and bolstering security

Beyond the large emissions impacts and other energy system benefits we’ve discussed, the IRA also has other effects across the economy, chief among them decreasing household energy costs and improving energy security.

Costs go down for consumers

The IRA lives up to its name by reducing the costs that consumers pay for electricity, other residential fuels, and transportation fuels by $27-$112 relative to without it in 2030 (Figure 13). The bill accomplishes this by driving some consumers to adopt electric vehicles, heat pumps, and other electrified and/or more efficient technologies that can help reduce their demand for fuels while meeting the same level of demand for energy services. But it doesn’t just help consumers who are able to go electric—by reducing overall demand for fossil fuels, the bill also drives down their costs for everyone by helping to reduce the price consumers pay for electricity, gasoline, diesel, and home heating fuels.  In addition to the savings from the IRA described above, current policy and improving energy market conditions drive further decreases in household energy costs over the next decade. All together, we estimate household energy costs will decrease by between $717 and $1,146 in 2030, relative to 2021 levels.

Figure

Less reliance on imported fossil fuels, improving energy security

We incorporate the IRA’s new leasing requirements and royalty reforms into our estimates of the impacts of the bill. We do not make exogenous assumptions around the impacts of these provisions; instead, the model finds the most economical way to meet demand for energy. As we mention in the discussion on industrial emissions, the clean energy provisions in the IRA drive down demand for petroleum and even more so for natural gas. Domestic production and imports respond accordingly, even though more federal land is available for exploration. In 2030, crude production is effectively flat (Figure 14) when comparing the IRA with current policy, and gas production declines by 2-7% (Figure 15) with the IRA compared to current policy.

Figure
Figure

As a sensitivity, we also tested the impacts of the IRA relative to a current policy scenario in which no new offshore exploration could occur until 2026. Compared to a future with this more restrictive leasing policy than is currently on the books, the IRA would increase domestic crude production by 0.1-0.2%, effectively flat, and decrease domestic gas production by 1-5%.

In addition to impacting domestic production, fossil fuel demand also drives trade dynamics. The IRA reduces net imports of crude oil by 1-6% and net pipeline imports of natural gas by 9-11%. The liquified natural gas trade remains unchanged with and without the IRA, as the price differential between US production plus transportation costs versus global gas markets isn’t sufficient to drive further LNG export capacity expansion beyond what happens under current policy.

So much achieved, so much more to do

The IRA is a historic step forward in the US’s efforts to rapidly decarbonize in the next decade and beyond. It lays a strong foundation for rapid clean energy deployment and the scale-up of emerging clean technologies, and it cuts conventional pollutants, household energy costs, and the US’s reliance on imported energy. The provisions in the IRA drive meaningful reductions in US greenhouse gas emissions, and at the same time, the IRA alone will not get the US on track to meeting its 2030 climate target of cutting emissions in half. However, it does lower the costs associated with additional action by the executive branch and subnational actors, which can help close the gap to the 2030 target.

All eyes will now be on EPA, DOE and other federal agencies as well as states to push the next wave of policies that build on the IRA and get US emissions down to 50-52% below 2005 levels in 2030. The biggest ticket policies to keep an eye on in the near term are the finalization of EPA’s proposed oil and gas methane regulations, how EPA proposes to regulate CO2 emissions from new and existing power plants, and if EPA and the National Highway Traffic Safety Administration (NHTSA) ramp up ambition in the next round of light-duty vehicle standards.

Congress may also be of further help. A range of policies that were previously part of the Build Back Better Act and other past climate legislation didn’t make the cut for the IRA, including some areas where there’s been recent bipartisan agreement like electric power transmission, CO2 pipelines, and building energy efficiency. The permitting reform bill currently under development is widely expected to contain provisions to accelerate the construction of some fossil fuel infrastructure, which has the potential to push emissions in the wrong direction. But it could also be a vehicle to address some of these and other issues relating to roadblocks to clean deployment of clean energy and associated infrastructure. The 2023 Farm Bill could be an important vehicle for more investments in rural decarbonization and carbon removal on natural and working lands. We look forward to assessing options and impacts across all of these fronts in this new era where the US finally has momentum on the road to long-term decarbonization.

This nonpartisan, independent research was conducted with support from Bloomberg Philanthropies, the William and Flora Hewlett Foundation, and the Heising-Simons Foundation. The results presented in this report reflect the views of the authors and not necessarily those of supporting organizations.

Taking Stock 2022: US Greenhouse Gas Emissions Outlook in an Uncertain World

For the past eight years, Rhodium Group has provided an independent annual assessment of US greenhouse gas (GHG) emissions and progress towards achieving the country’s climate goals in our Taking Stock report series. Each year, we research trends in the key drivers of US GHG emissions—including technology cost and performance advancements, changes in energy markets, policy developments, and expectations for the economy—and estimate a range of emissions outcomes based on these trends.

Given these trends and current federal and state policies in force as of June 2022, we find that the US is on track to reduce emissions 24% to 35% below 2005 levels by 2030, absent any additional policy action. This falls significantly short of the US’s pledge under the Paris Agreement to reduce emissions by 50-52% below 2005 levels by 2030. These estimates represent a rosier outlook for emissions reductions compared to Taking Stock 2021 (which estimated a 17-30% reduction by 2030 under current policy), but this change is largely attributable to slower macroeconomic growth projections and higher fossil fuel prices—not large policy changes. Even by 2035, GHG emissions remain stubbornly high at 26% to 41% below 2005 levels.

In Taking Stock 2022, we focus on a wide range of uncertainties that can affect emissions outcomes. Global and US energy markets and the economy look very different now than they did a year ago, amid the war in Ukraine and high inflationary pressures from COVID-recovery turmoil. These geopolitical and macroeconomic trends affect the energy costs and technology developments underpinning our emissions projections, and this year has reminded us all of the inherent challenge in forecasting the future in these realms. In our analysis, we account for near-term increases in fossil fuel prices attributable to global energy market instability from the war in Ukraine. We also incorporate updated medium-term price forecasts for natural gas and oil, which are generally higher than in the recent past. And we update our technology cost and performance inputs to incorporate the latest forecasts from leading experts.

Uncertainty reigns on the US policy front as well. There has been some policy movement in the past year, although not close to the level of action required to meet the US’s 2030 climate target, and the recent Supreme Court ruling in West Virginia v. EPA has called EPA’s regulatory pathways into question. In our analysis, we update our suite of current policies to include all relevant policies on the books as of June 2022. This includes passage of the Infrastructure Investment and Jobs Act at the end of 2021 and enactment of new greenhouse gas emissions and fuel economy standards for light-duty vehicles on the federal level, as well as updates to state policies like new renewable portfolio standard targets.

Our projections for US emissions in Taking Stock 2022 can help inform policymakers as they design decarbonization approaches that are robust to future developments. And now, more than ever, it’s important for policymakers to focus on maximizing the impacts of policy: the clock is ticking on both achieving the US’s 2030 climate goals and on reducing emissions to avert the worst impacts of climate change.

Detailed national and 50-state results for all Taking Stock emissions baseline scenarios—including GHG emissions and underlying sectoral data—are available in Rhodium’s ClimateDeck data platform.

Key findings

As shown in Figure 1, we find that under current policy and with no additional action, the US is on track to reduce emissions by 24-35% below 2005 levels in 2030, and 26-41% below 2005 levels in 2035. The range accounts for macroeconomic, energy market, and technology costs uncertainty. As is evident from the trajectories, the US is not on track to meet its 2025 or 2030 climate goals, nor does it meet those goals later in 2035.

In addition to the economy-wide outlook for US emissions under current federal and state policy, this report also unpacks key sectoral developments underpinning these topline figures, including the following trends:

  • Industry becomes the largest-emitting sector absent meaningful policies to curtail emissions growth, with emissions remaining relatively flat depending on the scenario.
  • Emissions from the power sector generally continue to decline, but gas and renewable prices have a major impact on the 2035 outcome.
  • Fuel economy improvements and more EV sales drive declines in transportation sector emissions.
  • By 2035, household energy costs drop by 16-25% relative to 2021 bills as more electric vehicles on the road lead to lower costs at the pump.

New for this year, we also model a range of additional cases beyond our core emissions scenarios, which include a steady progress case representing a return to stable declines in the cost of clean energy technologies as well as lower oil and natural gas prices from prolific domestic production; a continued volatility case in which events beyond the scope of the energy sector roil global energy markets and short-circuit clean technology growth; and a high growth case that demonstrates the impact that variation in GDP can have on emissions.

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Circuit Breakers: Securing Europe’s Green Energy Supply Chains

In April 2022, Italy’s first offshore wind farm went into operation at the port of Taranto, powered by turbines produced by Chinese firm MingYang. This marked a first win for the Chinese wind champion in Europe’s offshore market. Just a few months prior, the largest wind farm in Croatia opened in the coastal town of Senj, constructed and run by Chinese company Norinco International. This too was equipped with turbines imported from China. These were produced by Shanghai Electric, another of China’s champions in the wind sector and among the top ten companies globally in the sector.

European countries are investing heavily in the green transition. But projects such as the Italian and Croatian wind farms have taken on new relevance and urgency as Europe deals with the war in Ukraine and works to reduce its energy dependence on Russia. Both projects, however, illustrate the challenges ahead for the European Union in ensuring a future that is both green and energy-secure. In the Taranto project, a European turbine-maker’s failure to deliver products on time provided an opening for its Chinese competitor. At Senj, Norinco International, which is providing both capital and hardware, is not only a Chinese state-owned industrial giant, but also a major defence company and supplier of weapons and equipment to the Chinese People’s Liberation Army.

Though Europe’s oil and gas dependence on Russia is the more immediate chokepoint, its reliance on China for the energy technologies of the future poses a similar problem. China has become a global player across a wide range of green technologies, which makes it indispensable for the green transition that the EU is pursuing. As with Russia, this creates risks of over-dependence on an authoritarian power. Compared to Russia, however, China is a far bigger non-market economy and has much greater sway over global technology markets.

Navigating this situation will require European policymakers to make hard choices. This policy brief reviews some of the major supply chain risks linked to green energy technologies, especially as they relate to China. It proposes the following approaches to guide policymakers’ actions:

  • Reassess the geopolitical risks that affect supply chain resilience. European policymakers need to make green energy supply chains more resilient to any further deterioration in relations with China.
  • Right-size China exposure. Securing Europe’s green energy supply chains will come at a cost – but it is possible to address security concerns without resorting to full-scale reshoring.
  • Prioritise business-friendly policies. Europeans should work to enhance the competitiveness of domestic firms. Their policies should aim to ensure that those European industries that emerge from the transition are globally competitive in the long term.
  • Uphold high environmental and ethical standards to achieve long-term sustainability. Any effective green energy policy will require adherence to high standards of sustainability and ethics that fit with the EU’s values.
  • Work with partners. Building resilient green energy supply chains will demand an unprecedented degree of cooperation with like-minded partners.
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Chinese FDI in Europe: 2021 Update

This report, from Rhodium Group and MERICS, summarizes China’s investment footprint in the EU-27 and the United Kingdom (UK) in 2021, analyzing the impact of the pandemic as well as policy developments in Europe and China. Below are the main findings and a link to the full report:

Chinese outbound investment to the rest of the world stalled in 2021. While overall global FDI rebounded strongly, Chinese outbound FDI edged up by just 3 percent to USD 114 billion (EUR 96 billion). Meanwhile, China’s global outbound M&A activity slipped in 2021 to a 14-year low, with completed M&A transactions totaling just EUR 20 billion, down 22 percent from an already weak 2020.

China’s FDI in Europe (EU-27 and the UK) increased but remained on its multi-year downward trajectory. Last year, completed Chinese FDI in Europe increased 33 percent to EUR 10.6 billion, from EUR 7.9 billion in 2020. The increase was driven by two factors: a EUR 3.7 billion acquisition of the Philips home appliance business by Hong Kong-based private equity firm Hillhouse Capital and record high greenfield investment of EUR 3.3 billion. Still, 2021 was the second lowest year (above only 2020) for China’s investment in Europe since 2013.

The Netherlands received most Chinese investment, followed by Germany, France and the UK. Hillhouse Capital’s takeover of the Philips business made the Netherlands the biggest destination for Chinese investment in 2021. Germany, France and the UK accounted for another 39 percent of total Chinese investment.

The share of Chinese state-owned investors fell to a 20-year low in Europe. Compared with 2020, investment by state-owned enterprises (SOEs) decreased by 10 percent. Their share of total Chinese investment also reached its lowest point in 20 years, at 12 percent. SOE investment was concentrated in energy and infrastructure, particularly in southern Europe.

Consumer products and automotive were the top sectors. Due to the Hillhouse Capital acquisition, investment in consumer products surged to EUR 3.8 billion. Activity in automotive was driven by Chinese greenfield investments in electric vehicle (EV) batteries. Together, the two sectors accounted for 59 percent of total investment value. The next three biggest sectors were health, pharma and biotech; information and communications technology (ICT); and energy.

The nature of Chinese investment in Europe is changing. After years of being dominated by M&A, Chinese investment in Europe has become more focused on greenfield projects. In 2021, greenfield investment reached EUR 3.3 billion, the highest ever recorded value, making up almost a third of all Chinese FDI.

Chinese venture capital (VC) investment is pouring into European tech start-ups. In 2021, Chinese VC investment in Europe more than doubled to the record level of EUR 1.2 billion. It was concentrated in the UK and Germany, and focused on a handful sectors including e-commerce, fintech, gaming, AI and robotics.

Chinese investment in Europe is unlikely to rebound in 2022. The Chinese government is expected to stick to strict capital controls, financial deleveraging and Covid-19 restrictions. The war in Ukraine and expanding screening regimes and scrutiny of Chinese investment in the EU and the UK will create additional headwinds.

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Two Way Street – An Outbound Investment Screening Regime for the United States?

The intensifying competition between the United States and China is forcing changes in the way the global economy is governed. After a significant overhaul of inward foreign investment screening rules globally, legislative proposals are being considered in Washington that would create a regime to review US outbound investment to China and other countries of concern. This report by Rhodium Group for the National Committee on U.S.-China Relations provides background on the genesis of this legislation and discusses its implications. Our top findings are: 

At a time of intensifying competition between the US and China, lawmakers in Washington are taking a closer look at US investment in China and the risks that such investment could pose to national security: While US foreign direct investment (FDI) into China has elicited criticism in past decades, growing geopolitical tensions and the COVID-19 pandemic have amplified concerns. Critics argue that such investments, when not properly controlled, can lead to the transfer of potentially sensitive technologies, the outsourcing of critical production, and a loss of visibility into supply chains.

A bipartisan group of US lawmakers believe that existing tools are insufficient to address these concerns: Members of Congress and some parts of the executive branch now argue that the United States needs to go beyond existing policy tools—such as export controls, sanctions, industrial policies and supply chain security rules—to restrict the flow of technology and production capacity to China.

Proposed legislation would establish a mechanism to screen US outbound investment to China and other countries of concern: While the ultimate design of such a regime has yet to be decided, the leading proposal – the National Critical Capabilities Defense Act (NCCDA) – would establish an interagency committee led by the Office of the US Trade Representative. This committee, according to the language in the current NCCDA proposal, would be able to screen transactions by US businesses in “countries of concern” and where “national critical capabilities” are at stake.

If enacted, the proposed regime could have serious implications for the US-China investment relationship: While the final language of the bill and details around implementation are still pending, our analysis suggests that up to 43% of US FDI to China over the past two decades would have been covered under the broad categories set out in the NCCDA. In addition to slowing new investment, a new regime could also pressure US businesses to reassess existing operations in China because of potential effects on revenue, profits, and market share. The proposed mechanism could accelerate the already visible shift in US-China investment relations away from “active” channels (long-term direct investment) toward more “passive” channels (securities investment and the sourcing of non-sensitive inputs).

An outbound investment screening regime would represent a break from US foreign economic policy tradition: If the legislation is enacted, the US would be one of only a handful of advanced economies with industry specific outbound investment restrictions distinct from traditional sanctions regimes. If not designed in a targeted, predictable manner, this change could negatively impact not only the global competitiveness of US companies in affected industries but also the attractiveness of the United States as an investment location for firms that operate globally.

A new US regime could trigger more restrictive investment policies in other nations: A decision by the US to introduce an outbound FDI screening mechanism might encourage some US allies to consider similar steps. This could help coordination but in a worst-case scenario could also lead to another wave of investment policy reform that creates additional regulatory barriers for cross-border investment flows globally. There is also a possibility that other countries could view US outbound investment restrictions as going too far and refuse to follow suit. US allies could react negatively if the US operations of their companies are suddenly subject to such restrictions. This could complicate, rather than enhance, multilateral coordination in responding to China and put US companies at a competitive disadvantage.

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Comparing a Clean Electricity Standard and a Carbon Tax

As the United States commits to accelerating decarbonization as part of global efforts to combat climate change, the policies it enacts will govern its chances of success. These international ambitions are balanced against domestic realities: the effect of net-zero greenhouse gas strategies on households and the broader economy. Comparing different policy options against one another in terms of specific outcomes, such as emissions abatement and financial impact on consumers, is a useful exercise for policy makers. Because US congressional proposals have focused on two potential policy routes—an economy-wide price on carbon dioxide and other greenhouse gas emissions, and a sector-by-sector approach that starts with a clean electricity standard—this report models outcomes for these scenarios.

A carbon tax and clean electricity standard (CES) are similar policies in some ways. Both have the potential to drive large emissions reductions from the US power sector and beyond. If the CES is designed to be technology-neutral with tradable credits for clean electricity generation, both policies would operate as market-based mechanisms to encourage such generation. They also differ in significant ways, and this report, part of the Carbon Tax Research Initiative at Columbia University’s Center on Global Energy Policy, uses energy system modeling to zero in on those differences to enable policy makers to better understand the advantages and drawbacks of each policy tool.

A variety of constructions even within a single tool—particularly a CES—can be employed. What type of generation is eligible for credit in a CES and how much credit each resource receives, for example, are in part products of political and policy trade-offs. For comparison purposes with an economy-wide carbon tax, this report primarily focuses on a single crediting approach that most closely resembles the incentives new and existing electric power generators could receive under a carbon tax (and is similar to the CES included in the Clean Energy Innovation and Deployment Act of 2020). And for CES comparison purposes, the authors construct a carbon tax pathway that closely approximates the annual and cumulative electric power CO2 emissions of the CES.

Given the equal emissions-reduction ambitions of the two policies modeled in this report, the greatest trade-offs come down to price increases and revenues. The carbon tax raises consumers’ electricity price more than the CES does, but also raises significant revenues that could be used, among other purposes, to offset increases in consumers’ energy-related bills. Other findings from the report include the following:

  • It takes a lower carbon tax rate to get to the same CES emissions outcome when clean energy technologies are relatively cheap. Under a mid-tech-cost CES scenario, the equivalent carbon tax rate starts at $14/ton in 2024 and rises to just over $18/ton in 2030. In the low-tech-cost CES scenario, the equivalent carbon tax rate starts at $9/ton and rises to just under $12/ton in 2030. These rates are far lower than any recent carbon tax proposal in Congress because the cheapest near-term abatement opportunities reside in the electric power sector.
  • The CES could drive US power sector greenhouse gas (GHG) emissions down roughly 55 percent from 2005 levels by 2025, and down 62 percent by 2030, from 2,420 million metric tons (MMT) in 2005 to roughly 920 MMT in 2030. By design for this report, electric power sector emissions with the carbon tax are the same. But because the carbon tax modeled in this report is economy-wide, it could drive total US net GHG emissions down 27 percent by 2025 relative to 2005 levels, and 30 percent by 2030, from 5,999 MMT in 2005 to roughly 4,230 MMT in 2030.
  • While the two policies result in a slightly different electricity generation mix, coal sees the most significant decline in both.
  • Both policies substantially reduce conventional pollutants like sulfur dioxide (SO2) and nitrogen oxides (NOx), but SO2 emissions are 23–54 percent higher and NOx emissions are 7–16 percent higher under the CES on an annual average basis than under the carbon tax, which creates explicit disincentives for coal and to a lesser extent natural gas.
  • Electricity prices increase more under the carbon tax because the tax is applied to all carbon dioxide emissions from electricity generation. In contrast, once generators achieve the mandated carbon intensity standard of the CES, their remaining emissions are effectively unregulated, so no costs are associated with these remaining emissions to be passed on to consumers. A carbon tax, however, brings in revenue that can be used in a number of ways, including offsetting any increases in electricity bills.
  • The higher consumer prices under the carbon tax provide a stronger incentive for conservation of electricity than is found under the CES. The model shows electric retail sales to be 1 percent lower in the carbon tax scenario.
  • Overall electricity generation is 1 percent higher in the CES scenario than in the carbon tax scenario, because the policy goal of the CES is to reach a certain carbon intensity level, providing incentives to both reduce emissions (the numerator of the fraction) and increase generation (the denominator).
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Translatlantic Tools: Harmonizing US and EU Approaches to China

Close cooperation between the United States and Europe is essential if advanced economies are to develop effective responses to the array of challenges presented by China. The transatlantic partners share democratic political systems, open market economies, and a commitment to many of the same values. Washington and Brussels also share concerns about recent developments in China. These include worries about the competitive distortions arising from the role of the state in China’s economy, Beijing’s use of advanced dual-use technologies to repress ethnic minorities and fuel its military, and the spread of authoritarian influence through the Belt and Road (BRI) and other foreign policy initiatives.

Despite the shared concerns, there has been a lack of coordination and cooperation in recent years between the United States and the European Union (EU) (and its member states) when it comes to responding to China’s policies and behaviors. Under the Trump administration, tensions in the transatlantic relationship and differing views about how to address the array of challenges presented by China prevented a common agenda. Although talks took place between the administration and European capitals on issues like investment screening, export controls, and fifth-generation (5G) telecommunications technology, policies evolved mostly in parallel on either side of the Atlantic. This is more problematic than it may have been in decades past. The complexity and systemic nature of competition with China—encompassing trade, technology, security, human rights, climate, and more—makes transatlantic cooperation even more important today.

Washington’s focus on risks to US economic and national security contrasts with an emphasis in Brussels on ensuring reciprocity and leveling the economic playing field. This has yielded two distinct policy approaches with some overlap, but also many differences. The EU is devising complex regulatory instruments to limit the activities of subsidized foreign firms in the EU market, ensure reciprocity in public tenders, and compel corporations to vet their supply chains for environmental harm and human-rights abuses. No similar measures are currently being pursued in Washington. The United States, by contrast, has developed an array of China-related tools that don’t exist in Europe. The Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA) of 2018 give the US government far-reaching powers when it comes to investment screening and export controls. Washington has also developed innovative approaches to counter the BRI, and introduced outward financial-investment bans in relation to Chinese firms with military links.

These distinct policy approaches are partly a reflection of the differences in how Washington and Brussels perceive the China challenge. Differences in legal systems and political cultures also make it difficult (or impossible) to introduce rules and regulations that have been implemented on one side of the Atlantic on the other side. But, with the transatlantic relationship back on a better footing under the Biden administration, new structures for transatlantic dialogue being put in place, and a greater focus on the Indo-Pacific in both Washington and Brussels, there is now an opportunity for the United States and Europe to learn from each other and harmonize some of their China-related efforts. The United States can learn from a rules-based, actor-agnostic EU approach that does not define every challenge as a threat to national security. The EU and its member states, by contrast, must learn to be nimbler, adapting their thinking and processes to the new geopolitical reality of systemic competition.

Aligning approaches is important for several reasons. It can close loopholes in defensive mechanisms, reduce the risk of subsidies on both sides of the Atlantic nullifying each other, and limit the burden on firms from complying with two sets of regulations. Alignment also reduces the risk of conflicts in the transatlantic relationship because of diverging, or even competing, approaches. Ultimately, a coordinated approach can lead to a more constructive relationship with China—one that is based on consensus and is less prone to reactive or excessive measures.

To facilitate the transatlantic discussion, this Rhodium Group policy brief for the Atlantic Council takes a granular look at the full range of autonomous policy tools that have been developed in the United States and Europe over the past half decade (Section 2). Among these tools, it identifies three policy areas where the crossover potential is high (Section 3). These are policy areas that have not yet been given top priority under the EU-US Trade and Technology Council (TTC). For each, the paper describes EU and US approaches to date, presents the case for greater transatlantic coordination, outlines possible concrete next steps, maps out barriers to greater harmonization, and proposes avenues for overcoming them. It then offers concluding thoughts (Section 4).

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Pathways to Paris: A Policy Assessment of the 2030 US Climate Target

Over the course of this year, the impacts of climate change have become more immediate and tangible. A cascade of natural disasters—floods, hurricanes, wildfires, droughts, and extreme heat —have touched nearly every corner of the US. Meanwhile, it’s clearer than ever that the planet is on track for even more intense impacts in the decades ahead if action isn’t taken soon to avoid the worst climate damages.

President Biden campaigned on a platform that prioritized action on climate change. Now in office, the Biden administration has taken a whole-of-government approach to the issue, placing staff in key agencies to coordinate federal efforts to cut emissions. As part of this effort, President Biden submitted a nationally determined contribution (NDC) under the Paris Agreement, pledging the US will cut net greenhouse gas (GHG) emissions in the range of 50-52% below 2005 levels by 2030.

Meanwhile, congressional leaders are shepherding a major infrastructure package and a multi-trillion dollar spending bill towards the finish line. The two bills combined have the potential to be the largest action ever taken to abate climate change in US history. In a few weeks, world leaders will meet in Glasgow, Scotland for the UN Climate Change Conference (COP26) to enhance global action and limit warming to 1.5 degrees Celsius. As other countries step to the plate with bold ambition, they will need to be able to trust that the US can deliver on its 2030 promise of a 50-52% reduction.

This report aims to provide an independent, objective, and policy-focused assessment of the US 2030 target. We combine our knowledge of the US economy, energy systems, and policy design with state-of-the-art modeling tools to comprehensively answer two questions: Can the US cut net GHG emissions by 50-52% by 2030 and if so, what does a policy pathway to the target look like?

We consider actions by all key actors in the US federal system, including legislation under construction in Congress, regulations and other actions that can be taken by the Biden administration and key departments, as well as actions by climate-leading states and corporations. The suite of policies we consider is not intended to be exhaustive. Instead, it represents a series of actions that can be reasonably expected to occur over the next nine years if leaders in all levels of government work in earnest to address climate change. Based on this analysis, here is a summary of our key findings.  

Without new action, the US will not meet its 2030 target

Under current policy as of May 2021, with no new action, the US is on track to reduce GHG emissions 17-25% below 2005 levels in 2030. The range reflects uncertainty around energy markets, clean technology costs and the ability of natural systems to remove carbon from the atmosphere. This leaves a gap of 1.7-2.3 billion metric tons of emission reductions required to achieve the US target in 2030 (Figure ES1). The gap is roughly equal to all 2020 emissions from the transportation sector on the low end and all emissions from electric power and agriculture combined on the high end.

While the challenge of closing the gap is daunting, achieving the target is in line with what’s required to avoid the worst impacts of climate change. Not following through on this commitment risks undermining the credibility of the US and reduces the chances of an ambitious multilateral response to climate change.

Joint action by Congress, the executive branch, and subnational leaders can put the 2030 target within reach, but all must act

Our analysis demonstrates that meeting the US’s 2030 target is achievable, if Congress, the executive branch, and subnational leaders all take a series of practical and feasible policy actions—what we refer to as our “joint action” scenario (Figure ES2). This scenario represents passage this year of the infrastructure bill and budget reconciliation package in Congress, coupled with a steady stream of standards and regulations by federal agencies and accelerated action by leading states and companies. Combined, these actions can cut US net GHG emissions to 45-51% below 2005 levels in 2030.

At each level of government, we identify practical policy actions under clearly established authorities (where applicable) that, if pursued on reasonable timelines, can help achieve the target. No one level of government alone can deliver on the target. None of the policies we identify are novel or new, and all federal regulatory action can be implemented with existing legal authority. To close the emissions gap, agencies and states will need to pursue new actions at a pace, scope, and level of ambition that has not been seen to date, but which are also practical and within reach.

Action across all sectors of the economy is required to achieve the 2030 target

We find that the biggest opportunities for emission reductions in this decade reside in the electric power sector—covering 39-41% of total reductions achieved in the joint action scenario. If actions to cut electric power sector emissions are not successful, then achieving the 2030 target may not be possible. Even so, achieving the target will require successful emission reduction actions across all sectors of the US economy, not just the power sector, as well as increased natural and technological removal of carbon from the atmosphere.

Achieving the 2030 target can also cut harmful air pollutants and consumer bills

Getting US emissions on track to reach the 2030 target can be done with little cost to consumers. Long-term tax credits, investments in energy efficiency and other factors cushion consumers from price increases associated with new standards and regulations. On a national average basis, households save roughly $500 a year in energy costs in 2030 in our joint action scenario. Many policy actions that cut emissions also reduce harmful air pollutants. For example, SO2 emissions in the electric power sector decline to near zero by 2030.

If Congress fails to act, the 2030 target may be in jeopardy

Congressional action is critical to achieving the 2030 target for two reasons. First, measures in the infrastructure and budget packages can enable and accelerate clean technology deployment and on their own cut emissions significantly. Second, those same programs reduce consumer and compliance costs of federal and state actions that, combined with congressional actions, put the target within reach. Without the cost reduction assistance of congressional actions, federal and state leaders will face higher technical and political hurdles as they pursue the ambitious policies required to get to the 50-52% target. Congressional investments in emerging clean technologies will also drive innovation to enable the next wave of decarbonization after the 2030 target is reached.

Achieving the target will be a historic feat but is only halfway to the net-zero finish line

If all actors successfully pursue all aspects of the joint action scenario and achieve the 2030 target, it will represent one of the most monumental national achievements in recent decades. Even then, achieving the ambitious goal puts the nation just halfway to the longer-term goal of net-zero emissions by mid-century, which is the level required for the US to play its role in a robust global response to the threat of climate change. Getting to net-zero will require new policies and the commercial scale-up of a suite of emerging technologies like clean hydrogen, direct air capture, and advanced zero-emission electric generation, as well as continued electrification of transportation and buildings. Without near-term progress on these fronts in the years ahead, closing the gap to net-zero emissions by 2050 will be even more challenging than getting to the 2030 target.

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RELATED RESEARCH:

For more information about our approach and methods, read the Pathways to Paris Technical Appendix. 

For a June 2022 progress update, read Progress on the Pathway to Paris?

For the implications of the Supreme Court’s ruling in West Virginia v. EPA, read Has the Supreme Court Blocked the Path to the 2030 Climate Target?