How industrial policy is shaping a new fuel landscape for hard to electrify industries

The world is undergoing a major shift towards cleaner, more sustainable energy sources. In addition to expanding renewable energy, the fuel landscape must transform to lower emissions in sectors that are difficult to electrify directly, such as aviation and shipping. These fuels—including low-carbon fuels, e-fuels, and renewable fuels—are vital to meeting global climate targets.

Production, however, is currently far from the levels needed to realize a pathway to net zero in 2050. By 2030, 0.8 billion gallons are needed to meet the EU’s mandates for SAF and e-SAF. In 2024, only 0.3 billion gallons of SAF was produced, according to the International Air Transport Association.

Supportive policies are crucial to speed up the adoption of clean fuels. The industry for clean fuels is being built on an accelerated timeline in a short amount of time, relying initially on rudimentary supply chains with relatively high costs due to the small scale. This makes it difficult for new technologies and pathways to compete with an efficient industrial system that has been optimized for over 150 years.

Conventional fuels have a daily volume of over 3 billion gallons, are supported by mature value chains and established industry standards, and have been able to optimize efficiencies and economies of scale over many decades. In addition, market prices fail to account for the climate impact of fossil fuels.

This creates a price gap, where clean fuels are, on average, three to five times more expensive than conventional fuels. Consequently, consumers are often reluctant to commit to using clean fuels due to increased costs and fear of losing competitiveness in their downstream markets. Many clean fuel plants are first-of-a-kind industrial projects, and without committed off-take, they are not considered bankable and, therefore, fail to move to final investment decisions.

Robust industrial policies are needed to drive down costs for new technologies and pathways in order to level the playing field and drive the fuel transition.

In recent years, several governments have taken the lead in establishing supportive industrial policies driven by climate considerations and the desire to strengthen energy security, enhance resilience and foster sustainable economic growth and job creation.

A crucial component of industrial policy is setting 'demand-pull mechanisms,' such as mandates and regulations. For example, the EU's Renewable Energy Directive (RED II and III) requires that a specific percentage of fuels used in industry and the transport sector come from renewable sources, encouraging investment in cleaner alternatives. Similarly, the UK’s Sustainable Aviation Fuel (SAF) mandate requires fuel suppliers to supply SAF at airports, ensuring a market for these fuels.

The use of market-based measures that allow the trading of emissions certificates, such as the European Emission Trading Scheme (ETS), can be another powerful driver for the fuel transition. Following the 'polluter pays principle,' efficient carbon pricing mechanisms are essential to create a level playing field between conventional fuels and cleaner alternatives, encouraging consumers to reconsider their fuel choice.

In the absence of a global carbon market, regional or sectorial approaches offer tangible solutions to move forward. The International Maritime Organization, for instance, is considering introducing a global greenhouse gas levy. If adopted, this measure could generate billions in revenues that could be re-invested to finance a just and equitable transition and the development of sustainable marine fuels. The European Hydrogen Bank is already demonstrating how ETS money can be used to produce renewable hydrogen.

Beyond mandates and carbon pricing, governments are also using financial incentives to help fuel producers. The Clean Hydrogen Energy Standard, for example, is a support programme for hydrogen-generated electricity in South Korea. It includes a series of auctions for clean ammonia to be used in co-firing plants, allowing project developers to receive a fixed or indexed price over a 15-year period. Providing clean fuel projects with long-term revenue certainty is critical to unlocking initial investments.

Another example is the UK, where the government has announced a revenue certainty scheme for SAF production, providing much-needed support to the industry. This approach, which combines demand-driving policies with financial incentives, helps ensure that the supply of clean fuels will grow at the same pace as demand.

Industrial policies focus on productivity growth and innovation. The EU and UK SAF mandates, for instance, encourage the innovation of advanced fuels, particularly with the introduction of a synthetic jet fuel mandate (e-SAF) from 2030 onwards. Fostering technological advancement can help build future industrial leadership and competitiveness.

Both the United States and the EU have adopted measures to support clean energy value chains in their industrial policies, allowing for faster deployment of innovative technologies. The Net-Zero Industry Act, the Critical Raw Materials Acts, and the Inflation Reduction Act are examples of these measures. They aim to support the scaling of critical clean technologies by aligning industrial and energy policies and providing long-term viability to attract investments.

Local content requirements can further ensure that the ramp-up of domestic clean fuel production capacities and cleantech manufacturing benefits the local economy and helps mitigate supply chain vulnerabilities, especially in the context of increasing geopolitical tensions. This is particularly relevant to strengthening energy security and reducing and preventing reliance on imports for critical components, such as electrolyzers used in hydrogen production.

At the same time, industrial policies must balance these goals with the need for global cooperation. The transition to clean fuels is a global challenge that requires international collaboration. While regional policies are essential, they must be carefully designed to avoid isolating markets and ensure that global trade continues to flow, fostering innovation worldwide and facilitating economies of scale.

The shift towards clean fuels has the potential to deliver significant economic and environmental benefits. It can drive economic growth by supporting new industries and creating jobs. It can also boost energy security. By developing domestic production capacities for fuels like green or low-carbon hydrogen and SAF, regions like Europe can reduce their dependence on foreign energy sources, creating more resilient economies.

Governments must act decisively to ensure the transition is fast and sustainable. By fostering partnerships between public and private sectors, aligning policies across borders and incentivizing local production, industrial policy can accelerate and unlock the full potential of clean fuels.

The time to act is now — and industrial policy will be the catalyst for the transformation that is urgently needed to achieve a sustainable, low-carbon future.