Cars that run on a synthetic fuel, made from water and air, represent the cutting-edge of innovation now sweeping the auto industry. In a German factory, Audi is making “e-diesel” that uses— rather than emits—carbon dioxide.

The carbon-neutral fuel contains no sulfur or fossil oil. If it catches on and is produced for a mass market, it could make internal combustion engines much cleaner in the future.

“Synthetic diesel using CO2 is a huge success,” says Germany’s Federal Minister of Education and Research Johanna Wanka, who showed her support last week by putting the first five liters (1.3 gallons) into her work car, an Audi A8.

E-diesel is the latest in a slew of breakthroughs aimed at building cleaner cars via carbon-neutral fuels or extended-range batteries. Earlier this month, in research partly funded by Shell*, Virginia Tech unveiled a much more affordable way to produce hydrogen fuel by using discarded corn cobs, stalks and husks.

Alternatively-fueled cars are starting to hit the streets—and racetracks. In California later this year and in Northeast U.S. states next year, Toyota is launching Mirai, a four-door hydrogen-powered sedan that can go up to 300 miles on a full tank and emits nothing but water and vapor from its tailpipe. The Mirai was the first hydrogen-fueled vehicle to enter a NASCAR race on April 25 at the Richmond International Raceway.

Audi has been working on cleaner diesels since 2009, and the only raw materials needed for its newest synthetic are water and carbon dioxide. Its pilot plant in Dresden, operated by the German clean technology company sunfire, uses CO2 supplied by a biogas facility. Additional CO2 for e-diesel is captured from ambient air via technology from Audi’s Zurich-based partner Climeworks.

“We are promoting another fuel based on CO2 that will allow long-distance mobility with virtually no impact on the climate,” says Reiner Mangold, Audi’s chief of sustainable product development, in announcing the first batch of e-diesel. He says this “fuel of the future” could be used in other industries and other countries.

Making e-diesel requires several steps, which are powered by renewable energy sources such as wind and solar. High-temperature electrolysis splits water, heated to form steam, into hydrogen and oxygen. The oxygen is released into the atmosphere while the hydrogen is fed into a reactor, where it reacts with CO2 to form a liquid long-form hydrocarbon known as “blue crude.” Audi says the efficiency of the overall process is “very high”—about 70 percent.

“The engine runs quieter and fewer pollutants are created,” says sunfire Chief Technology Officer Christian von Olshausen. He says the demonstration facility, which opened in November, can produce up to 160 liters (42 gallons) per day, but a bigger plant could follow.

“If we get the first sales order,” he says, “we will be ready to commercialize our technology.”

*Shell is sponsor of The Great Energy Challenge, a special series that explores energy issues. National Geographic maintains autonomy over content.