UC Davis

Aviation and Marine transport are small but critical elements of the global transportation ecosystem. This study compares each jurisdiction's policy strategies (i.e., aims, enforcement type, and policy level) and policy influence on the production costs of low carbon fuels for maritime and aviation in the US and EU. In the US, two policies, the Renewable Fuel Standard (RFS) and Inflation Reduction Act (IRA), provide a foundation for alternative fuel deployment in these sectors. The EU has an extensive legislative package, Fit for 55, for aviation and maritime. The two regions also have carbon credit trading systems: Low Carbon Fuel Standard (LCFS), Cap and Trade (CAT) in California (CA), and Emission Trading System (ETS) in the EU. As CA provides additional benefits to federal policies, it would represent the highest level of US clean fuel policies. We analyze the policy impact on production costs of clean fuels. After applying policy influence to production costs, we calculate the Total Actual Cost (TAC) of fourteen different fuels in three categories (i.e., biofuel, hydrogen, and electrofuel (Efuel)). In phase I, we estimate production costs through subsidies, penalties, and carbon trading prices in the CA and EU. In phase II, we predict the value of input parameters of TAC using Vector Autoregression (VAR) with macroeconomic variables (i.e., Consumer Production Index (CPI) and Natural Gas (NG)). Monte Carlo Simulation (MCS) is implemented to consider the uncertainties of TAC in the future. In phase III, Marginal Abatement Cost (MAC) is generated for maritime and aviation in each region, as it is widely used for climate change policies. The result in phase I shows that the price of clean fuel in CA is lower than in the EU, but the cost of penalized fossil fuel in the EU in maritime is 78.5 $/GJ, while it is only 45 $/GJ in CA. The predicted distribution of TAC in phase II reveals that clean fuels would be more competitive with continued policy. In phase III, the projected Marginal Abatement Cost (MAC) suggests that a combination of sources would be used for both aviation and maritime. In all phases, the EU has higher costs than CA, and the shipping sector has continuously higher expenses compared to aviation. In the future, hydrogen and biofuels tend to have lower abatement costs than Efuel.