The Commission's Climate & Energy Package: A Rocky Road ...€¦ · biofuels industry, biofuels trade groups and the NGOs at the center of the issues to get their perspective on the

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The Commission's Climate & Energy Package: A Rocky Road for Biofuels in Europe

Monthly Report to Future Fuels Outlook Members April 2017

Key Points

• Aspects of the RED served to incentivize the development of advanced biofuels like renewable diesel but also propelled ethanol and some biodiesel plants to undertake the same kinds of plant efficiency changes seen in the U.S. to meet RED requirements and continue to participate in Europe's biofuels market. However, changes that have been proposed to the RED in the EU Commission's Climate & Energy Package would essentially remove those incentives by capping food-based 1G biofuels at 3.8% by 2030. Some advocates and NGOs are calling for a total ban on these biofuels.

• The LCFS in California incentivized a massive shift in the biofuels industry in the U.S. (and,

arguably, abroad) toward decarbonization, lowering CI and increasing GHG savings for biofuels producers. This was especially true for the ethanol industry in the U.S. What about in Europe? For renewable diesel (which will be the focus of an upcoming report) and ethanol, the answer is yes. European producers undertook similar projects to improve the CIs of their facilities, similar to U.S. producers.

• In my discussions with some of the stakeholders in the biofuels and oil industry, they all

pointed to what they say is the true end game for perhaps the Commission, but specifically the NGOs: near 100% electrification across the EU as quickly as possible in conjunction with the greening of the grid. Wider-scale electrification will help "push the grid" further into renewable energy. Biofuels does not fit into that picture.

• While the debate about the best decarbonization strategy for transport continues, GHG

emissions continue to climb. According to the European Environment Agency, road transport is responsible for the largest increase in GHG emissions and grew by 124 Mt from 1990-2014, and 7 Mt from 2013-14, representing a 17% increase while overall GHG emissions declined 24% over the time period. Consider that transport is expected to deliver a significant portion of the EU’s 40% emissions reduction pledge as part of the Paris Agreement. Incidentally, aviation and marine emissions increased as well by 82%.

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• But whatever the final package, I believe it will not provide the regulatory certainty the industry

craves. The problem is that 1G is ultimately a bridge to 2G and beyond. And the Commission does not appear to be interested in making 1G as efficient and GHG-saving as possible as a bridge to 2G. A number of the companies and investors involved in 1G, having been through the European experience with biofuels, are less likely to invest in 2G. And they are much less likely with their products capped and knowing what the Commission's ultimate goals are.

Introduction

In the March report, I discussed declining carbon intensity (CI) for biofuels in the U.S., especially under the California Low Carbon Fuels Standard (LCFS) program. I noted that the LCFS has been successful at incentivizing biofuels producers to the lowest CIs, or GHG savings, possible. Corn ethanol carbon intensity was a major focus of that report, including the industry's efforts to lower CI through changes to production facilities and proactively engaging the California Air Resources Board (CARB) in providing data inputs into its model, the CA-GREET model, in determining approved pathways and CIs. And, as I showed, they will continue to do that will the ultimate aim of bringing CIs even lower, into the 20-30 range. I discussed the possible outcomes and consequences were that to happen.

But what about the EU? Has the Renewable Energy Directive (RED) accomplished the same? To some degree, yes. Aspects of the RED served to incentivize the development of advanced biofuels like renewable diesel but also propelled ethanol and some biodiesel plants to undertake the same kinds of plant efficiency changes seen in the U.S. to meet RED requirements and continue to participate in Europe's biofuels market. While not the subject of this report, the development, implementation and adherence to sustainability criteria and certification schemes is much clearer and stronger in the EU and that produced GHG savings/CI reductions as well.

However, changes that have been proposed to the RED in the EU Commission's Climate & Energy Package would essentially remove those incentives by capping food-based 1G biofuels at 3.8% by 2030. Some advocates and NGOs are calling for a total ban on these biofuels. This report explores these issues in more detail. For this report, I talked to representatives from the oil industry, biofuels industry, biofuels trade groups and the NGOs at the center of the issues to get their perspective on the future of biofuels, particularly 1G, in Europe.

Background: Biofuels in the EU Today

The European Commission released its second State of the Energy Union report recently reviewing progress in the EU since the first report was released in 2015. I dug a bit into the accompanying report on renewable energy to review what the Commission had to say about transport. It noted:

“Transport is the only sector which is currently below aggregated NREAP trajectories at EU level, with a 6% share of renewable energy in 2015. This confirms a rather slow progress to

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the mandatory 10% target in transport, due to various difficulties including relatively high GHG mitigation costs and regulatory uncertainty.”

Tellingly, the footnote to that statement said, “Influenced by the discussions on the legal framework for biofuels produced from crops grown on agricultural land and ILUC.”

The figure below summarizes EU-28 renewable energy in transport through 2015. According to the Commission, biodiesel is the main biofuel used for transport in the EU, representing 79% of total use of biofuels in 2015 and the main country users are France, Germany and Italy. The share of biofuels produced from wastes, residues, ligno-cellulosic and non-food cellulosic material in the EU biofuel mix has increased from 1% in 2009 to 23% in 2015 mostly driven by Sweden, the United Kingdom and Germany. At the EU level, these biofuels exceeded by three times the planned trajectory, with around 3 Mtoe (million tons oil equivalent) in 2015, mainly because of the utilization of used cooking oil.

Renewable energy shares, including for transport, are shown for each member state in the following chart:

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The Commission notes that in 2014, around 10% of ethanol and around 26% of biodiesel consumed in the EU was imported. The main exporting countries were Malaysia for biodiesel and Guatemala, Bolivia, Pakistan, Russia, Peru for ethanol. EU ethanol is mainly produced from wheat, maize and sugar beet, and that in 2014, more than 50% of biodiesel consumed in the EU was produced from rapeseed while the use of waste oils and fats but also of palm oil has significantly increased since 2010. In accordance with industry data, more than 60% of biodiesel and more than 90% of ethanol consumed in the EU was produced from the EU feedstock.

Non-EU ethanol feedstock is imported from Ukraine (maize, wheat), Canada (wheat), Russia and Moldova (barley, ray), and Serbia (sugar beet). The largest exporters of biodiesel feedstock to the EU were Indonesia and Malaysia (palm oil), Brazil and the U.S. (soybean). The majority of rapeseed oil is of EU origin. Feedstock potential for advanced renewable fuels is very large, but production facilities at commercial scale are still limited. The table below breaks down feedstock and their percentages in the ethanol and biodiesel pools.

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You would not know it from the years-long controversy over the use of palm oil ILUC in the EU for biofuel, but it actually represents a small portion of biodiesel consumption, according to the Commission and as the table above shows. In fact, the Commission says:

“On biofuel sustainability, the majority of biofuels consumed in the EU are produced within the Union from domestic feedstock. No significant direct adverse effects on biodiversity, soil and water, food security nor on developing countries have been identified. (Emphasis mine.) However, risks of indirect land use change impacts remain of concern. Modelling analysis has found risks of indirect land use change (ILUC) resulting from food based biofuels. This is why, with the adoption of the ILUC Directive, the EU has limited the contribution of these biofuels to the 10% renewables transport target. Furthermore the Commission has recently made proposals to gradually reduce the share of food-based biofuels after 2020, while promoting their progressive replacement through advanced biofuels and renewable electricity.”

The Climate & Energy Package

In November 2016, the European Commission released its draft revised regulation of the Renewable Energy Directive (RED) as part of a sweeping package of energy legislation called the Winter Climate and Energy Package. In short, and among other provisions, the Commission is

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looking to limit food-based 1G biofuels and promote advanced biofuels and advanced alternative fuels. Provisions include the following:

• An obligation on European transport fuel suppliers to provide an increasing share of renewable and low-carbon fuels, including advanced biofuels, renewable transport fuels of non-biological origin (e.g. hydrogen), waste-based fuels and renewable electricity. The level of this obligation is progressively increasing from 1.5% in 2021 (in energy terms) to 6.8 % in 2030, including at least 3.6% of advanced biofuels. Preferential rules apply to advanced aviation fuels in order to support their deployment in the aviation sector (e.g. their energy content is accounted 20% more). The following table shows progression of the obligations:

Calendar Year

Maximum contribution from liquid biofuels produced

from food or feed crops to the EU renewable energy

target as referred to in Article 7 paragraph 1 (in

percent)

Minimum shares of energy from advanced biofuels and biogas

produced from feedstock listed in Annex IX, renewable transport fuels

of non-biological origin, waste-based fossil fuels and renewable electricity, as referred to in Article

25(1) (in percent)

Minimum shares of energy from advanced

biofuels and biogas produced from feedstock listed in Part A of Annex

IX as referred to in Article 25(1) (in percent)

2021 7.0 1.5 0.5 2022 6.7 1.85 0.7 2023 6.4 2.2 0.9 2024 6.1 2.55 1.1 2025 5.8 2.9 1.3 2026 5.4 3.6 1.75 2027 5.0 4.4 2.2 2028 4.6 5.2 2.65 2029 4.2 6.0 3.1 2030 3.8 6.8 3.6

Source: European Commission, November 2016

• To minimize the indirect land use change (ILUC) impacts, a cap on the contribution of food-based biofuels towards the EU renewable energy target has been introduced, starting at 7% in 2021 and going down progressively to 3.8% in 2030.

• The Commission says the sustainability criteria for biofuels are improved, including by requiring that (new) advanced biofuels emit at least 70% fewer GHG emissions than fossil fuels.

• An 80% GHG saving requirement has been included for heat and power produced from biomass and biogas (applying to large scale installations with a fuel capacity equal or above 20 MW).

The intention to reduce food-based biofuels in the RED has been well known since the Commission released its Low Emission Mobility Strategy over the summer. But, it still sent shock waves through the 1G biofuels industry. Ethanol industry advocacy group ePure noted:

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“A reduction of the limit on conventional biofuels use to 3.8% undermines the existing €16 billion invested in European biofuel production facilities since 2003 as a result of the EU biofuels policy. The proposed phase out of conventional biofuels means that the Commission has now proposed 4 different changes to the targets for renewable energy use in EU transport since the adoption of its first biofuels policy in 2003. The proposal also backtracks on the compromise agreed by the EU institutions as part of the revision of the Renewable Energy Directive in 2015, which Member States have only begun the process of implementing. This permanent policy flux is diametrically opposite to the Commission’s Better Regulation Agenda and has created an impossible policy environment that significantly jeopardises further investments in both conventional and advanced biofuels in Europe.”

ePure illustrated the renewable energy share in transport against the EU targets (and proposed targets) in the figure below. According to the group, a 15% gap could exist between what the Commission in proposing in the package and what is needed to meet 2030 climate goals. As noted below, Europe is currently not on track to meet its GHG goals in transport. In fact, overall GHG emissions are declining but not in transport where they continue to increase.

The Commission defended its position in the regulation, stating the following:

“A progressive reduction of food based biofuels and their replacement by more advanced biofuels will realise the potential for decarbonising the transport sector. However, in determining the progression of the reduction of conventional biofuels, it is important not to retrospectively undermine the business models incentivised by the existing directive. Therefore the proposed trajectory progressively reducing the share of conventional biofuels aims at avoiding stranded assets and unintended job losses, whilst taking into account the important past investments realised so far, and is also in line with a realistic rollout of advanced biofuels in the market. The exact path of the gradual reduction

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trajectory set out in this Proposal reflects an informed political assessment of what would constitute a balanced approach to stability of investments and the reduction of greenhouse gas emissions in transport.”

Carbon Intensity Is Also Decreasing in Europe for Some Biofuels...But Does It Matter?

As noted, the LCFS in California incentivized a massive shift in the biofuels industry in the U.S. (and, arguably, abroad) toward decarbonization, lowering CI and increasing GHG savings for biofuels producers. This was especially true for the ethanol industry in the U.S. What about in Europe? For renewable diesel (which will be the focus of an upcoming report) and ethanol, the answer is yes. European producers undertook similar projects to improve the CIs of their facilities, similar to U.S. producers. The graphic below shows GHG savings for ethanol compared to gasoline from 2009 to 2015. GHG savings were 52% in 2009 and increased to 64% in 2015, a 23% improvement over six years.

Source: ePure, 2016

For biodiesel, the situation is much different in the EU. While CIs for biodiesels with qualified pathways are generally low under the LCFS (and among the lowest CIs of all fuels in the program), the analysis in Europe has been quite different. The chart below, from the NGO Transport & Environment (T&E), compares GHG savings for biofuels as compared to fossil fuels. Under a study T&E cites that was completed by a consortium of consultancies for the European Commission commissioned in 2013 and released in 2016 (the "Globiom study", discussed further below), all 1G biodiesels were found to have worse GHG emissions than fossil fuels, especially palm oil

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biodiesel. Notably, most 1G ethanol and advanced biofuels considered in the study performed better, especially corn and sugarcane ethanol.

This study, its key findings and the political fallout from it are key to understanding where the Commission, and especially NGOs, want to go on biofuels. As background, the European Commission following its shift in biofuels policy to limit crop-based biofuels to 5% of transport fuel by 2020 from its previous policy implemented in 2009 requiring 10% of energy used in transport in each member state be produced from renewable energy sources, such as biofuels, biogas, electricity or other renewable sources by 2020.

The about-face on biofuels were driven by concerns about food versus fuels and the emerging and evolving field (nay, cottage industry) of indirect land use change (ILUC) analysis. Internal and external discussions with stakeholders for years dragged on interminably and investment and confidence in both 1G biofuels and the potential for advanced biofuels plummeted with no sense of regulatory certainty and stability.

In 2013, the Commission commissioned a study from the respected consultancies E4tech, Ecofys and IIASA to determine the extent of the ILUC effect on biofuels and to attempt to definitively determine which biofuels reduce emissions and which do not and put an end to the hand-

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wringing. It didn't happen. Known as the "Globiom" study after the IIASA's ILUC model, the study found along with what was noted above that:

• Increased demand for ethanol made from sugar and starch crops and cellulosic biomass can be met with low impacts on land use change and low resultant land use change emissions.

• Demand for sugar and starch crops for ethanol production can be met without impact on food prices.

• Conventional ethanol feedstocks, such as starch crops and sugar, have much lower land use change and emissions impacts than other biofuel feedstocks. (Noted in the T&E graphic above the data of which were derived from the Globiom study.)

• Cellulosic ethanol feedstocks similarly have a low or even positive LUC impact.

• Land use change impacts and associated emissions can be much lower if abandoned land in the EU is used for biofuels production; or if yield increases occur as a result of biofuels demand.

• There are significant and serious ILUC issues for biodiesel, especially palm oil-derived.

Unlike the analytical approaches taken by CARB in California, this study was not peer reviewed and there was no opportunity to publicly comment, dialogue or provide the researchers data that might have improved or further informed the analyses. Moreover, the Commission, upon receiving these results, has been accused of deliberately keeping them from the public, and especially during a consultation it held from November 2015 to February 2016 to receive stakeholder and public input on how it should proceed with respect to again revising the Renewable Energy Directive for the years 2020-2030.

The study was only released after the consultation ended, which means the stakeholders had no real transparent or public means to fruitfully respond to the findings. Even members of the European Parliament were kept in the dark, after repeated requests to review the study. After public pressure, the Commission finally released the study, downplaying its relevance and stating that analyses are still ongoing. (However, according to the study authors, the study had been completed and submitted to the Commission for months. They had promised to keep stakeholders informed but did not do so presumably because of pressure from the Commission.) Stakeholders have charged the Commission buried the results of the study because it didn't conform to the true view held by those charged with biofuels policymaking there. And that's that food-based biofuels have got to go no matter their CI or GHG saving.

UNICA, the sugarcane ethanol trade industry group, summed up the issue as follows:

"If like us you like to think you are a logical person, right now, you’re thinking ‘why’? Why would the Commission not differentiate between two clearly different biofuels even though their emission performance is so different? Why would the Commission go as far as to

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ignore the findings of a study it paid for itself? And why do this while knowing that the EU is lagging behind its transport [GHG] emissions target?

Believe it or not, the answer is… public opinion. The Commission explicitly admitted that its decision was based on the public’s feelings towards conventional biofuels (the fuel vs. food myth which has been debunked, including by the European Commission itself, a number of times), despite what the scientific data showed. It even went as far as discrediting the calculations of the study it had paid for itself."

Marie Donnelly, Director for Renewables, Research, and Energy Efficiency in the DG Energy agreed as much when she said in a recent forum that it should take public perceptions into account when policymaking even when those views are wrong (or not even based in science):

“We cannot just be led by economic models and scientific theories. We have to be very sensitive to the reality of citizens’ concerns, sometimes even if these concerns are emotive rather than factual based or scientific. We cannot just be led by economic models and scientific theories. We have to be very sensitive to the reality of citizens’ concerns, sometimes even if these concerns are emotive rather than factual based or scientific."

What was missing from this assessment is the fact that the Commission's own actions created this kind of environment, supported and fomented by many environmental NGOs that want to see 1G biofuels (and maybe even next generation biofuels) ultimately phased out.

In fact, NGOs such as T&E have been highly critical of the biofuels provisions in the Climate & Energy Package. They say:

“Just four months after promising a phaseout of food-based biofuels, the European Commission proposes to still have them supply 3.8% of Europe’s transport energy in 2030. This is not a phaseout. It is business as usual, allowing the transport sector to pretend it is cleaning up on paper, while increasing its emissions on the road. Where have we seen this before?”

With respect to the opportunity costs and lost investments from those companies that invested in 1G plants, T&E says that these "plants are built for a payback period of 5-10 years, and that 95% of investments in current biodiesel installations would be paid back at the end of 2017." When I spoke with T&E, they strongly confirmed their position that 1G biofuels need to go and that this should not be a problem because the original plants that were built, having been incentivized by the RED, have been paid back. They felt the policy on advanced biofuels would be strong enough to incentivize these producers to switch or move to next gen biofuels technologies. They did not seem concerned that policies that could serve to undermine 1G, might also undermine 2G+ as well.

What's the Real End Game Here?

In my discussions with some of the stakeholders in the biofuels and oil industry, they all pointed to what they say is the true end game for perhaps the Commission, but specifically the NGOs:

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near 100% electrification across the EU as quickly as possible in conjunction with the greening of the grid. Wider-scale electrification will help "push the grid" further into renewable energy. Biofuels does not fit into that picture. For the record, T&E did tell me they support non-food feedstock advanced biofuels but admitted they see electrification as the real future. In fact, T&E's executive director said as much recently:

"Granted, ethanol may not be as bad for the climate as biodiesel – some types of ethanol even save on greenhouse gas emissions. But ethanol production is also very land-intensive and inefficient. The yield of one football pitch worth of ethanol crops can power 2.6 cars for a year. For comparison, one football pitch full of solar panels could fuel 260 cars!

But we need to be smart and realistic about this. For example, the 3.6% target for advanced biofuels is probably too high and we need much better safeguards to ensure only genuinely sustainable sources qualify as 'advanced'.

We also need to acknowledge that the EU’s relationship with biofuels can no longer be exclusive. Volkswagen, Mercedes and BMW are just a few of the carmakers that have announced 15-25% electric car sales in 2025. Renewables are getting cheaper and EU electricity production is getting cleaner. We need a renewable energy directive that supports and accelerates the transition to renewable electricity as the prime source of energy in transport."

Similarly, the WWF stated that the Commission's proposals were "a prelude to another biofuels 'fiasco'":

“The vast majority of future energy supply needs to come from wind and solar, not bioenergy. But instead of allowing those technologies to flourish, today’s proposals create big new incentives to use more bioenergy - and without any meaningful sustainability criteria. This means that we are likely to see further increases in types of bioenergy that offer few if any benefits over fossil fuels."

It is expected that WWF will come out with a formal position soon that is not unlike T&E's.

Getting to that electrified future will not be easy. While EV sales have been growing in Europe, with 222,000 units sold in 2016 (graphic below) they represent not even 1% of the 15 million passenger cars that were sold in the EU last year. The Commission has promulgate an Alternative Fuels Infrastructure Directive that required member states by November 2016 to develop policy frameworks for rolling out publicly available electric recharging points and natural gas filling stations, and optionally hydrogen filling stations. Only half the member states have done so to date.

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Given the sluggish uptake in EVs, the Commission may do more to incentivize EVs down the line. In its Low Emission Mobility Strategy it noted it will:

"also analyse the impact of different ways to incentivise low- and zero-emission vehicles in a technology neutral way, such as setting specific targets for them. Such vehicles will need to be properly defined, including possibly distinguishing between low-emission and zero-emission vehicles.”

A ZEV mandate of some kind, similar to California's could be on the horizon. The Commission noted in the Strategy also that: “As regards consumer up-take, more needs to be done to create markets for low- and zero emission vehicles.” The Commission cited improved labeling, public procurement (fleets) and tax instruments as potential measures.

Several countries in Europe, including Denmark, France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and the UK already have policy mechanisms or incentives in place to support EV uptake including rebates, sales tax exemptions, tax credits, waivers on parking fees and other measures. Dieselgate has appeared to do little to propel consumers toward EVs.

While the debate about the best decarbonization strategy for transport continues, GHG emissions continue to climb. According to the European Environment Agency, road transport is responsible for the largest increase in GHG emissions and grew by 124 Mt from 1990-2014, and 7 Mt from 2013-14, representing a 17% increase while overall GHG emissions declined 24% over the time period. Consider that transport is expected to deliver a significant portion of the EU’s 40% emissions reduction pledge as part of the Paris Agreement. Incidentally, aviation and marine emissions increased as well by 82%. The following charts from Fuels Europe show road fuel demand in the EU and demand history of oil products over the 10 years or so.

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Conclusion & Outlook for the Climate & Energy Package

What is the outlook for the Climate & Energy Package? The Package won't be finalized for at least another year, but sources pointed to a few potential and outcomes such as a potential ban on palm oil, a measure the Parliament already seems to support, and that the 3.8% cap may not remain and in fact, may be increased. Also, key agricultural-heavy member states are weighing in against the cap on 1G food-based biofuels. One source speculated that the Commission would go its way and implement the Package, while member states may do more to incentivize biofuels in their countries. Several, such as the Netherlands, are looking at increasing biofuels blending (in the case of the Netherlands, to E10).

But whatever the final package, I believe it will not provide the regulatory certainty the industry craves. The problem is that 1G is ultimately a bridge to 2G and beyond. And the Commission does not appear to be interested in making 1G as efficient and GHG-saving as possible as a bridge to 2G. A number of the companies and investors involved in 1G, having been through the European experience with biofuels, are less likely to invest in 2G. And they are much less likely with their products capped and knowing what the Commission's ultimate goals are. And why would investors take the risk of investing in 2G given what happened with 1G? What is to say that the same couldn't happen to 2G+ down the road when some other issue catches the attention of the Commission and NGOs? Moreover, NGOs are not likely to let up in their pursuit of a ban on non-food based biofuels and that will create uncertainty and questions in the minds of consumers.

What does it really mean? With a cap on 1G and with the outlook for some 2G+ producers and their ability to produce large-scale commercial volumes murky at this point, we could end up seeing more fossil fuels in the pool, an odd result the Commission doesn't want to see happen. Some of this will depend on whether EVs take off in the European market as well. The Commission is gambling that the advanced biofuel volumes will be there by 2030. For those

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producers with already commercialized, large-scale operations like Neste, they will gain market share in the intervening years of the legislation (2020-2030). They will be able to have their pick of the most high-value markets either in the EU or U.S. for road, aviation and even shipping fuel. But one challenge for these producers will be securing sufficient quantities of non-food feedstock. In short, the road will continue to be rocky for biofuels stakeholders in Europe.