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Home›Shipping Transport›how does the transport sector in Europe reduce its emissions?

how does the transport sector in Europe reduce its emissions?

By Michael K. Davidson
September 22, 2021
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Greenhouse gas emissions in the EU fell 3.8% in 2019, according to the European Environment Agency, bringing them to 24.0% below levels seen in 1990.

However, the EU is aiming for a 55% reduction by 2030 (compared to 1990) with the goal of reaching net zero by 2050. There is still a long way to go.

The progress made by some sectors is encouraging. Greenhouse gas emissions from energy supply are declining rapidly, for example. However, transport emissions continue to increase, as shown in the graph below.

Obviously, the transportation industry is going to have to make big changes in a short period of time. The business sector has a crucial role to play in delivering products and innovations that can help meet the 2050 goals.

The difficulty is that each type of transport – road, rail, air, sea – requires a different strategy to reduce emissions. Some of these areas are much more advanced than others, but the need to decarbonise grows more and more as the climatic deadlines approach.

As investors, we believe there are returns to be made in this next period of rapid change, taking advantage of any pricing error where the broader market may not understand the magnitude of the opportunity to to come.

EVs to help decarbonise road transport

Road trips represent around 70% of total greenhouse gas emissions in Europe from transport (source: EEA). However, technology is available to help reduce these emissions.

Electric vehicles (EVs) are at the forefront of decarbonizing road transport in Europe and several car manufacturers on the continent are turning into EV leaders.

Volkswagen is already one of the most advanced and has set itself ambitious targets, of which at least 70% of unit sales in Europe by 2030 will be all-electric vehicles. This involves more than a million vehicles. Another example is Stellantis, formed by the merger of Peugeot with FiatChrysler. Stellantis is targeting 70% of passenger car sales in Europe to be low-emission vehicles by 2030.

There are other fuel options. Finnish company Neste is the world’s largest producer of renewable diesel, which can reduce emissions by up to 90% compared to conventional diesel.

Another option – especially for heavier vehicles like trucks and buses where batteries are inconvenient – is the hydrogen fuel cell. Most of the hydrogen is currently produced from natural gas, which is very polluting, but if renewables are used, hydrogen can essentially be produced without CO2. When used in a fuel cell, the only by-product is water.

Johnson Matthey, a company known for producing catalysts that clean up harmful emissions, is also branching out into hydrogen. The group manufactures membranes which are at the heart of fuel cells.

However, electric vehicles, fuel cells and renewable diesel are not a complete solution for sustainable transportation. They solve the emissions problem, but there is still air pollution caused by dust from tires and brakes, as well as congestion on Europe’s busy road network.

Rail on track for a sustainable future

Rail has the lowest carbon footprint of all major modes of transport – it has only one-eighth of the carbon footprint of air transport and one-third of road. 2021 has been declared “European Year of Rail”, an initiative designed to promote the sector and support the EU’s climate goals.

Rail may already be a very sustainable transportation choice, but there is still room for improvement. Train technology is getting much cleaner and more efficient. In addition, given the emphasis on sustainability, government policy is increasingly designed to encourage passengers and freight to use rail rather than roads. One example is France’s ban on domestic flights, in cases where an alternative journey can be made by train in two and a half hours or less.

This means that there is an opportunity for companies offering sustainable solutions. The possibilities for electrification are still numerous, with only 54% of the European rail network electrified (according to Statista data for 2018).

And the expected growth in volumes means that there are also opportunities for innovation. One example is Alstom, a developer of hydrogen trains that only release water as an exhaust. They are already operating in Germany and other countries. Alstom’s Coradia iLint, the world’s first hydrogen train, can travel 600 miles on a single tank.

We see opportunities for investors as demand for train travel increases, new trains are ordered and existing fleets are modernized. However, from an emissions perspective, the more sensitive sectors of aviation and shipping need to be addressed.

Aviation demand offsets efficiency gains

Improved energy efficiency has helped reduce aviation emissions in recent years; the quantity of fuel consumed per passenger fell by 24% between 2005 and 2017 (source: European Commission). However, this was offset by the growth in air traffic. The Covid-19 pandemic may have temporarily disrupted this growth, but the sector has yet to significantly reduce its emissions.

Alternative fuels are a potential answer. In addition to renewable diesel for cars, Neste turned to airplanes with the development of sustainable aviation fuel (SAF). This is produced from used cooking oil, as well as animal fat and fish waste from the food industry.

The resulting fuel reduces GHG emissions by up to 80% compared to conventional jet fuel. The product is used by Lufthansa and KLM, blended with fossil jet fuel, on flights departing from Frankfurt and Schiphol airports.

This is an exciting area of ​​innovation and growth that could be helped by more ambitious regulation. In July, the European Commission published its RefuelEU Aviation proposals that would impose a minimum 5% share of SAF in 2030, rising to 63% in 2050.

A crucial point is that SAF should not be done with biofuels made from food crops, as this may displace the land needed for food production. Neste and other producers will have an important role to play in the development and production of FAS on a large scale.

The Commission has also proposed to end the exemption of kerosene for aviation fuel from energy taxation, as well as to end free GHG emission allowances for aviation within the EU by 2026.

The push for green shipping

The sight of the Evergreen container ship stuck in the Suez Canal earlier this year – and the cascading disruptions – made it clear how much the world relies on shipping for freight. However, this comes at the cost of harmful emissions.

As with aviation, the latest proposals from the European Commission aim to end the tax exemption for heavy fuel oil used by the maritime industry. At the same time, there will be a zero tax rate on sustainable fuels to encourage their adoption and the emissions trading system will be extended to include the sector.

This is in addition to existing global regulations designed to limit the sulfur content of marine fuels. However, recent studies suggest that very low sulfur fuel oil (VLSFO) may actually cause higher emissions of polluting carbon black, as well as suboptimal engine performance compared to high sulfur fuel oil. (HSFO).

In the short term, this could see the industry revert to HSFO and use “scrubbers” to clean up emissions. However, it also increases the pressure to find an alternative fuel source. Batteries are a potential option, but are only suitable for small vessels on short trips.

Liquefied natural gas (LNG) could be the winner in the medium term because it emits less carbon dioxide, sulfur dioxide or black carbon than HSFO. But it is also not a long-term solution because LNG produces significant amounts of methane.

In the longer term, green hydrogen and ammonia promise zero carbon solutions. Hydrogen has sufficient energy density to be used on large ships and long voyages, while the combination of hydrogen and nitrogen produces ammonia that is easier to store. Again, however, both hydrogen and ammonia should be produced in a sustainable manner and this is an area where significant investment is required.

What does this mean for investors?

As we can see, different transport sectors are at very different stages of their transition to a low emission future.

For both road and rail, the necessary technology is already available. The question is that of take-up and, for investors, of supporting the winning companies best placed to take advantage of growing demand.

For aviation and maritime transport, the technologies necessary for decarbonization are still relatively nascent. The VLSFO case highlights the need for companies and regulators to exercise caution and ensure that solving one type of emissions problem does not simply create another.

In our opinion, this creates a huge opportunity for investors who can identify innovative companies capable of developing technologies and products that can make the transition a reality.


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