Biofuels in Europe
October 17, 2006
At the end of September, the European Commission released feedback from a three-month public consultation exercise on the progress made by EU Member States in implementing the 2003 Biofuels Directive, ahead of its first progress report to be released by the end of 2006. This On The Subject looks at the EU’s actions on biofuels, the current requirements imposed on Member States by the Biofuels Directive and the implications for fuel producers of the upcoming Commission report.
What are biofuels?
Biofuels are liquid transportation fuels made from plant matter rather than from petroleum. They may be used as road fuels on their own, but at present they are more commonly blended with conventional petrol or diesel fuel. The two principal forms of biofuel in use today are ethanol, used as a substitute for gasoline, and biodiesel, used as a substitute for petroleum diesel. In the EU, biodiesel dominates biofuel production, representing around 80 per cent of total production.
First and second generation biofuels
A distinction may be drawn between first generation biofuels, fuels produced from farmed crops such as oilseed rape, and second generation biofuels, fuels made from any residual organic matter such as straw (and technically known as lignocelluloses). Second generation biofuels are not currently in common use due to a lack of production technology and the high cost of production; however, they are likely to replace current biofuel production methods within a decade. Second generation production technology is predicted to more than double yields without straining the food chain, since it may allow biofuel to be produced from any organic material. A senior EU energy official recently stated that the Commission is unlikely to make any distinction between first and second generation biofuels when making proposals for legislative action.
EU action
Biofuels have been identified by both the United States and the European Union as a future source of energy which may provide a partial solution to current over-dependency on oil supplies. In addition, particularly in the EU, they are seen as a possible means of tackling climate change.
While key to the EU’s policy on renewable energies, biofuels have been, and increasingly will be, affected by three other areas of EU policy: State aid (subsidies), merger control (antitrust) and the Common Agricultural Policy (CAP).
With respect to the CAP, the EU Wine Management Committee announced earlier this year its decision to turn 5.5 million hectolitres (2 per cent of world production) of surplus French and Italian wine into bioethanol at a cost of around €131 million. This month, the EU opened tenders to sell off unwanted wine lakes in five EU Member States for the exclusive purpose of bioethanol production.
In terms of merger control, in September the Commission cleared Veolia Environment’s acquisition of Cleanaway Holdings Limited, both leading providers of waste management services. Veolia in particular has been producing biofuel for more than ten years.
In the area of State aid, the Commission has permitted Member States to offer tax exemptions as incentives for biofuel production(including the United Kingdom, Germany and Austria in 2004; the Netherlands, Lithuania and Czech Republic in 2005; and Sweden and Spain in 2006).
In developing its policy on renewable energy, in 1998 the EU released its first Strategy and Action Pan for renewable energies, which aimed to double the renewable energy supply share of the EU energy balance from six per cent to 12 per cent by 2010. At the same time the European Parliament called for a target increase in the market share of biofuels to 2 per cent over five years.
The Commission gave more consideration to biofuel use in a 2001 Communication on Alternative Fuels for Road Transport, which identified three main fuels with a potential for development (biofuels, natural gas and hydrogen). The legislative proposals, arising out of the 2001 Communication and Strategy and Action Plan, were adopted in a series of directives, including Directive 2003/30/EC, the “Biofuels Directive”.
The Biofuels Directive
The Biofuels Directive requires the 25 EU Member States to set indicative targets for ensuring that a minimum proportion of biofuels and other renewable fuels for transport are placed on their markets, based upon the following:
- 2 per cent of all petrol and diesel for transport purposes (calculated on the basis of energy content) to be placed on the market by 31 December 2005
- 5.75 per cent to be placed on the market by 31 December 2010
Biofuels are permitted to be made available as pure biofuels, as biofuels blended in mineral oil derivatives, or as liquids derived from biofuels.
Member States were further required to:
- Monitor the effect and use of biofuels in diesel blends above 5 per cent by non-adapted vehicles.
- Take measures to ensure compliance with relevant EU legislation on emission standards.
- Ensure information is given to the public on the availability of biofuels and other renewable fuels.
- Require specific labelling at sales points where biofuel percentages in mineral oil derivatives exceed certain levels.
Member States were required to report to the Commission before 1 July of each year on:
- Measures taken to promote the use of biofuels or other renewable fuels
- Allocation of national resources to biomass production
- Total sales of transport fuel and share of biofuels and other renewable fuels placed on the market
The Commission stated that its aim was to draw up by 31 December 2006, and every two years thereafter, a report for the European Parliament and EU Council on progress made.
Further EU action
In the lead-up to publication of its first progress report (expected in December 2006), the Commission released several key documents, notably the Biomass Action Plan in December 2005 and a Communication on an EU Strategy for Biofuels in February 2006. In April it announced a review of the Biofuels Directive, launching a public consultation which closed at the end of July.
The feedback just released on the public consultation revealed a generally positive attitude towards the objectives of the Biofuels Directive (particularly amongst governments and industrial stakeholders) but also a strong scepticism towards achievement of the 2010 target of 5.75 per cent market share. There was an overwhelming response in favour of amending the Directive to some degree.
Most respondents were also in favour of a system of certification of standards being introduced, although the suggested extent and nature of such a system varied.
In addition to the second progress report on the Biofuels Directive for 2006, a strategic energy review document will be published in early 2007. It is expected that this will include concrete recommendations on biofuels and legislation on renewable energy.
There is unlikely to be any change in the trade regime for biofuels since senior EU energy officials have recently identified non-EU biofuel suppliers as significant to the EU’s biofuel strategy, with perhaps some 50 per cent of biofuel supply coming from outside the EU.
Implications for fuel producers
If the Commission accepts the feedback from the public consultation exercise and confirms statements made by senior Commission energy officials, it is very likely that amendments to the Biofuels Directive will be proposed either in the Commission’s 2006 report or as part of its energy package to be delivered in early 2007.
These developments point to a revision of Member State targets for biofuels and/or other renewables to make them mandatory, and a system of standards and certification applied to biofuel production. A certification system is more likely to be designed to ensure that the cultivation of raw materials for biofuel production meets minimum standards, rather than be extended to other areas such as certification of greenhouse gas emissions. Requirements for a monitoring scheme in each Member State may precede or accompany such a system.
EU Member States may also be required to impose biofuel obligations on fuel suppliers as a tool to achieve national targets, which would require suppliers to include a given percentage of biofuel in the total amount of fuel placed on the market. A mandate at EU level, requiring all fuel sold in the EU to contain minimum proportions of biofuel, is an outside possibility. Finally, labelling requirements disclosing the proportion of biofuel contained in a fuel, currently limited to fuels containing more than 5 per cent of biofuel, may be extended to cover all fuels.
A further system of incentives for the development of second generation biofuels, beyond possible support at the R&D stage, is unlikely. Whilst most respondents were in favour of second generation development, senior Commission officials have recently indicated that at present the Commission does not intend to distinguish between the two types of production.
What is clear is that most respondents are in favour of continuing the EU’s policy on the promotion of biofuels beyond 2010, even though current Member State 2010 targets are unlikely to be met.
