Are the days of the European biodiesel industry numbered?

October 4, 2012 | 00:00

Are the days of the European biodiesel industry numbered?

The continuity of the European biodiesel industry appears threatened as this summer's food vs. fuel debate has injected fresh life into long-pending EU proposals on how to prevent the indirect displacement of forest by crops grown for fuel ('indirect land-use change' or ILUC). Studies have shown that production of biofuels can lead to a net rise in CO2 emissions if ILUC effects are taken into account. Debate has raged in Brussels over whether and how these effects should be handled in new biofuels legislation. In October, proposals originally due in early 2010 are finally likely to see the light of day. A leaked draft suggests they are full of surprises - but one thing is evident: they spell big trouble for the European biodiesel sector. Sonja van Renssen reports from Brussels on the implications of the draft proposals for the bioenergy market, oil companies and EU climate goals.

The problem is that not all biofuels are sustainable
(c) Wikipedia

The EU has a goal for 10% renewable energy in transport by 2020. This is set out in its renewable energy directive, adopted in 2 009 as part of the famous climate and energy package. It also has a goal to reduce greenhouse gas emissions in road transport by 6% by 2020, compared to 2010. This is under the so-called fuel quality directive, a revised version of which was also adopted as part of the climate and energy package. In practice, these two goals come down to the same thing: biofuels. Both would be met almost entirely by substituting traditional fossil fuels by biofuels (electric vehicles could play a role after 2020, but are unlikely to do so before).

The problem is however, that not all biofuels are sustainable. They can displace food production, for example. NGOs such as Oxfam and Friends of the Earth have pulled no punches in accusing the EU of fuelling “land-grabbing” and world hunger in its bid to drive green. The biggest political debate at EU level in recent years has been over one very specific issue: indirect land-use change (ILUC). This is the indirect displacement of forest by crops grown for energy – for example because they displace food crops – leading to a net increase in CO2 emissions. And defeating the whole point of biofuels in the first place.

There is a swathe of scientific studies on ILUC – enough for policymakers to regulate, say many stakeholders. But a debate over whether and how to do this has raged for years in Brussels, with the biodiesel industry up in arms because research shows that when ILUC is taken into account, biodiesel can be worse for the environment than normal diesel.

Food crops

When the Commission’s draft proposal on ILUC was leaked to the press a few weeks ago, the Brussels biofuel community went into overdrive. “It surprised nearly everyone,” says one EU stakeholder. The biggest surprise of all was a proposal to cap biofuels from food crops – “conventional biofuels” – at 5% in 2020. There had been no hint of this idea in earlier drafts. Pretty much all biofuels today are made from food crops. And they already add up to nearly 5% of transport fuel in Europe. The proposal therefore effectively caps conventional biofuel production at current levels. It halves the 10% renewables in transport target, when you consider that "almost the entire biofuel production to 2020 is expected to come from crops grown on land that could be used to satisfy food and feed markets” – the Commission’s own words in its draft proposal.

Conventional biofuel production would be capped through a second mechanism as well: ILUC factors, or emission penalties to account for ILUC. The Commission proposes them not per feedstock, as NGOs wanted, but per crop category: 55grams of CO2-equivalent per megajoule (gCO2/MJ) for oil crops, 13gCO2/MJ for sugars and 12gCO2/MJ for cereals and other starch rich crops. These figures would be added on to the emissions balance sheet of biofuels and result in a new weighting of their climate friendliness – and thereby their usefulness to fuel suppliers who face a 6% emission reduction target under the fuel quality directive. Basically, the proposed penalties would be catastrophic for the biodiesel industry, which relies on oil-based crops. Fuel suppliers looking to meet their 6% target will not buy biodiesel when ILUC is taken into account.

The point of ILUC factors and a 5% cap on biofuels from food crops is to move the biofuels market “beyond food” to so-called advanced biofuels that don’t cause ILUC or compete with agriculture. These biofuels are made from for example waste and require more complex processing. The Commission also proposes a direct stimulus for advanced biofuels: biofuels from “municipal solid waste, aquatic material, agricultural, aquaculture, fisheries and forestry residues and renewable liquid and gaseous fuels of non-biological origin shall be considered to be four times their energy content,” it says, adding “only advanced biofuels… should be supported as part of the post 2020 renewable energy policy framework.”

Biodiesel pain, environmental gain

Most stakeholders in Brussels are still working out what it might all mean. But there is one thing they agree on: the proposals as they stand spell the end of the European biodiesel industry as we know it.

When the Commission’s draft proposal on ILUC was leaked to the press a few weeks ago, the Brussels biofuel community went into overdrive
The lethal blow comes from the ILUC factors – they make it impossible for fuel suppliers to use conventional biodiesel and comply with the 6% target in the fuel quality directive. The European Biodiesel Board (EBB), which represents producers who make about three-quarters of all EU biofuels today, says the proposals, if implemented, would “definitively cause the death of the whole EU biodiesel industrial sector.”

Some €10bn a year and 450,000 direct and indirect jobs are at stake, the EBB says. It has in the past attacked the scientific validity of the Commission’s work on ILUC and calls the Commission’s promise to respect existing investments “a mere linguistic exercise”. Other stakeholders agree that the long-term future looks grim for European biodiesel. But Nuša Urbancic, a campaigner at Brussels-based NGO Transport and Environment, also points to an Ecofys report which calculates that “no less than 95% of investments in current biodiesel installations would be paid back at the end of 2017, when an ILUC policy option would take full effect.”

In a new peer-reviewed study, the International Council on Clean Transportation (ICCT) calculates that without ILUC factors, the EU renewable energy directive would probably deliver only a 4% CO2 saving (in transport), with a nearly one-in-three chance of net emissions actually going up. With ILUC factors, the expected savings go up to 54%, with zero risk of a net rise in emissions. Combine this with reports of increased deforestation in Southeast Asia as the EU imports more and more vegetable oil and soaring food prices on the back of biofuel mandates, and the obvious question is: what will replace biodiesel?

Bioethanol and blend walls

The ICCT knows the answer to that question: “All the [transport] saving from the [EU’s renewable energy] policy is likely to come from the supply of bioethanol,” it says. Other stakeholders agree that the proposals as they stand are probably good news for Europe’s bioethanol industry. Fuel suppliers will need bioethanol to meet their fuel quality directive obligations. And conventional bioethanol has scope for growth even with a 5% cap on food-based biofuels: remember that even though Europe is already nearly at this limit, over three-quarters of it is biodiesel. So why isn’t the bioethanol lobby, represented in Brussels by lobby group ePURE, thrilled?

For one, although comparatively better off than biodiesel, the bioethanol industry is still tainted by the increasingly negative portrait of biofuels in general (never mind that some bioethanol producers are also biodiesel producers). ePURE put out a press release in late August rejecting the claim that ethanol production is driving up food prices. “Global grain use for biofuels is miniscule and nowhere near enough to inflate prices significantly,” said ePURE’s secretary general Rob Vierhout. He argues that biofuel production has more positive than negative effects on the food sector – raising farmers’ incomes and producing animal feed as by-product, for example. The whole biofuel industry argues that the Commission ignores the benefits of these by-products, which would otherwise have to be imported from countries like Argentina (and risk causing deforestation there). However, experts such as Chris Malins at the ICCT say by-products have been taken into account in the ILUC modeling.

In any case, bioethanol comes up against a big barrier in its great leap forward: around two-thirds of European road transport runs on diesel, one third on petrol (biodiesel blends with diesel; bioethanol with petrol). The European Commission is making an effort to change this with its proposal to revise the

Most stakeholders in Brussels are still working out what it might all mean. But there is one thing they agree on: the proposals spell the end of the European biodiesel industry
EU’s energy taxation directive to force member states to tax diesel more than petrol, based on its higher energy and CO2 content. But the European Parliament has rejected this idea and member states look set to do the same. Thus, diesel is likely to retain its historical tax advantage. Yet it is bioethanol that fuel suppliers will have to mix into their traditional fuels to meet their fuel quality target. Do the maths and the conclusion is inescapable: the existing 10% blend wall for bioethanol into petrol will have to be broken. Bioethanol will have to be mixed in at levels of at least 20% if the EU is to meet its target to cut greenhouse gas emissions from road fuels.

Pre-ILUC, there were other options: hydrogenated vegetable oil (HVO) was an alternative that could be mixed with normal diesel in any proportion, for example. It could have been the filler to deliver emission reductions still needed after B7 (biodiesel blended in at 7%) and E10 (bioethanol blended in at 10%) had done most of the work. With ILUC, “the HVO option has gone” in the words of one fuel supplier (except if made from used cooking oil, points out an external expert).

Mixing in higher volumes of bioethanol brings with it fresh challenges: to car manufacturers (engines will need to be adapted), to gas station infrastructure (will it be possible to offer normal petrol for older vehicles, E10 and E20 at the pump?), to fuel supplier economics (a high ethanol blend should be cheaper than normal petrol – to drive its uptake – but will in reality cost more to produce ) and to the customer (even E10 has seen a public backlash in countries such as Germany). A shift to bioethanol also means exacerbating the diesel vs. petrol trade imbalance in Europe: fuel suppliers will need to import even more diesel (to replace today’s biodiesel) and export even more petrol (as it’s replaced by bioethanol).

Meeting targets

“The proposal makes the target under the renewable energy directive impossible and the target under the fuel quality directive even more impossible,” says one fuel supplier representative. And yet on paper, the 10% target will probably be met. Conventional biofuels are already delivering nearly 5% and the other half will require just 1.25% advanced biofuels if you consider that they can count for four (4x1.25%=5%). Neither the biofuel industry nor NGOs seem happy about this seemingly generous incentive however. “It means energy counted in statistics for the target but non-existing in reality,” says European biomass trade association Aebiom. “It waters down the ambition of the target,” says Urbancic from T&E. “This kind of creative accounting enables them [EU policymakers] to keep the 10% target.”

The problem is that the existing double counting incentive has not kicked off the advanced biofuels market. Why should quadruple counting do any better? There are lots of advanced biofuel projects in development but none if very little advanced fuel is currently expected on the market by 2020. Many advocates of advanced biofuels want a specific mandate for their product: “Capping conventional biofuels is not the same as setting a target for advanced biofuels,” points out one company stakeholder. “No amount of incentives this side of 2020 will help,” says another. “The market needs clarity from 2020 onwards to move forward.” There is little political appetite for a post-2020 biofuels target however and no mention of one in the Commission’s 2050 energy roadmap.

The really big debate in the years ahead will be over how to meet the 6% fuel quality target. “In the original framing, the two targets were broadly consistent i.e. 10% under the RED [renewable energy directive] equaled 6% under FQD [fuel quality directive],” says the ICCT’s Malins. “Under this new framing, finding additional compliance pathways under the fuel quality directive becomes important – which could mean some or all of low-ILUC biofuels, vehicle electrification, fuel cells and reductions in fossil fuel extraction emissions like flaring.”

Fuel supplier representatives advocate a “carbon-based incentive” for advanced biofuels. But extending the double or quadruple counting initiative from the renewables to the fuel quality directive would artificially inflate greenhouse gas emission reductions. Fuel suppliers also want the ILUC penalty to be dropped if biofuel producers can demonstrate they have acted to prevent or reduce the risk of ILUC. This could include growing biofuel crops on degraded or abandoned land, for example.

Impact assessment and way ahead

As the questions pile up, it is clear that the implications of the Commission’s draft proposal are far from clear. A draft accompanying impact assessment of the different policy options sheds some light on the

"The proposal makes the target under the renewable energy directive impossible and the target under the fuel quality directive even more impossible"
Commission’s ultimate priorities however. This clearly identifies a 5% cap on conventional biofuels as the preferred policy option for tackling ILUC, ideally complemented with ILUC factors and a raised minimum emission saving for biofuels produced in new installations. (The draft proposal suggests all biofuels produced in installations operating from July 2012 must deliver at least a 60% greenhouse gas saving vs. a 35% to 2017 and 50% thereafter for biofuels produced at older installations.)

The cap on food-based biofuels “provides the clearest signal to industry as to what volumes of conventional and advanced biofuels are needed to 2020”, says the Commission. It is effective in combating ILUC, yet least challenging for the existing car fleet because it would, on its own, maintain the existing biodiesel vs. bioethanol balance. (It is the accompanying ILUC factors in the draft proposal that throw this balance out of kilter.) There is a risk however – as there is for all the options for action – that the existing biofuels targets will not be met because of insufficient advanced biofuels. This market has been slower to develop than initially forecast, the Commission says.

It is also the cap on food-based biofuels that the EU’s energy and climate commissioners, Günther Oettinger and Connie Hedegaard, picked up on when they took the unusual step of commenting on the draft proposals at an informal energy and climate summit in Nicosia, Cyprus in mid-September. “It is wrong to believe that we are pushing food-based biofuels,” they said in a statement. “In our upcoming proposal for new legislation we do exactly the contrary: we limit them to the current consumption level. And the Commission’s message for post-2020 is that our clear preference is biofuels produced from non-food feedstocks.”

Both the commissioners’ comments and impact assessment suggest that it is the 5% cap on food-based biofuels that now lies at the heart of the Commission’s forthcoming plans. Yet the troublesome ILUC factors of earlier drafts are still in there too. At the end of the day it is about accurate carbon accounting. This holds true as much for biofuels as it does for oil sands. By calculating the carbon footprint of different fuels, suppliers of those that have less impact on the environment – and this will ultimately be the advanced biofuels – can improve their competitive position. Regulatory action on ILUC will not make it easier or cheaper for fuel suppliers to meet their fuel quality target, but it will give them greater certainty over where to put their money. In the end it is European policymakers who created the European biofuels industry, and European policymakers will decide its future.


Gaps still to fill

The proposal’s value, when it finally becomes law, will be to enable fuel suppliers to start making choices about fuel investments. Nonetheless, it will probably leave some gaps to fill: biofuels from energy crops, for one. In the draft proposal, these escape the 5% cap on food-based crops and continue to benefit from an existing double-counting incentive under the renewable energy directive, but their ILUC effects are not taken into account. The US is evaluating this crop category in its renewable fuel standard, points out Urbancic. So far they are virtually non-existent however, which may explain why the Commission has left them alone for now. It does say new ILUC factors may be added if new feedstocks come to market. Some stakeholders say these crops would in principle be grown on degraded land anyway. Energy crops such as poplars and elephant grass could be turned into renewable diesel or petrol.

Woody plants like poplars however, may well fall under a separate sustainability regime for wood that is still to be developed. Unlike the existing binding EU sustainability criteria for biofuels – on which the ILUC rules will be overlaid – there are as yet no binding EU sustainability criteria for solid biomass. The Commission is reportedly still undecided over whether to propose them before its mandate ends in 2014. The biomass industry, represented by Aebiom, wants the Commission to legislate. “We do not want public debate [questioning the environmental impact of biomass] to ruin the bioenergy sector,” says Edita Vagonyte from Aebiom. “It’s not that we want this [binding sustainability criteria] but it’s needed.” They would like existing national schemes to be taken into account however.

Other issues still to be resolved include oil sands and whether a separate emissions value is assigned to them under the fuel quality directive. Recognition of their above average emissions would only increase the pressure on fuel suppliers to use more biofuels to meet their climate targets. A new Commission impact assessment on oil sands is due at the end of this year. Other apparently unrelated legislation under discussion that may have important consequences for biofuels is the Common Agricultural Policy reform. “If the EU is serious about advanced biofuels, it needs to introduce incentives for farmers and foresters to collect residues,” says one biofuel stakeholder. “Waste” will probably still need to be better defined if it may be used to generate biofuels that count four times towards the renewable energy directive target.

On the fuel quality directive, see also Sonja van Renssen's earlier article: "Brussels pushes for full accounting on all road transport fuels", European Energy Review, 6 March 2012.


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