Europe's new biofuels regulations may please industry and greens

13 January 2009 00:00  [Source: ICB]

The green movement and manufacturers are united, for once, in giving a cautious welcome to Europe's latest biodiesel incentive proposals

IT IS already clear that, as far as the European biodiesel market is concerned, 2009 will be all about tax.

This will not signal any great change from 2008, which saw the end of "splash and dash" tax loopholes for US producers, after a long and acrimonious battle with their European counterparts.

The surprise for 2009 is that the European producers have found an ally in the green movement in their quest for what have been criticized by some outside of Europe as protectionist measures.

This new alliance was in evidence in the latter months of 2008 when the German government passed legislation that made it possible for soy and palm-derived biodiesel to no longer receive the same tax breaks, nor count toward biofuel quotas in the same way as rapeseed-derived product. While environmental concerns over sustainability of production were the driver for this legislation, many in the market voiced their belief that the law was more concerned with protecting German rapeseed farmers from outside competition. Both the European producers and the green movement were pleased with the outcome.

While ostensibly green, biodiesel has been blamed both for soaring food costs and for promoting irresponsible land-use. The EU climate-change bill, passed in December 2008, addressed the second point by outlining guidelines for sustainable land use, and falling commodity prices since the summer have reduced the pressure on food prices.

However, the green movement continues to claim that some biodiesel products, in particular those derived from soy and palm, are not green at all.

Summer-grade biodiesel includes larger amounts of soy and palm-derived biodiesel due to the relative cold filter plugging points (cfpp) of the products. This is the lowest temperature at which fuel will flow in engines without problems.

Rapeseed oil methyl ester (ROME), which has a low cfpp of around -12, is the most expensive grade of biodiesel in Europe and is largely produced in Germany. So buyers switch between blends, using fatty acid methyl ester (FAME) in the summer. This uses a mixture of mainly soy and palm oil and is priced significantly cheaper than products with a lower cfpp point.

Soy methyl ester (SME) comes in to Europe predominantly from the Americas, while palm methyl ester (PME) arrives from Asia, mainly from Singapore and Malaysia. EU producers of biodiesel have long complained that these imports undercut prices in Europe, and the green objections may help them to secure legislative sanctions, most likely in the form of higher import duties, against the products.

US STILL DUMPING?

Amandine Lacourt, project manager for the European Biodiesel Board (EBB), said: "Despite the end of 'splash and dash' B99, imports from the US are still undercutting European material. Our priority is to get rid of the B99 product being dumped into Europe and endangering the reality of biodiesel trading in Europe."

The US subsidizes B99 to the level of $300/tonne. When the product arrives in Europe, it benefits from EU programs to encourage use of biodiesel. Europe is the world's largest importer of biodiesel, while the US is its biggest net exporter.

Palm oil methyl ester (PME) from Southeast Asia is also much cheaper than European-produced material. Up until now, this has only affected summer grades of biodiesel, and those destined for warmer climates. However, there are pilot programs now in place in Asia to produce PME with a lower cfpp point, and this could bring the Asian product into direct competition with cold-weather blends sold in the EU.

While producers complain that there is no way that EU biodiesel production can attract investment when they are prevented from charging higher prices by the cheaper US and Asian material, the green movement points to the poor sustainability track record of these imports.

Massive deforestation has taken place in Malaysia, where entire islands have been given over to the production of palm oil.

A trader in Europe said: "We do not expect tax to be increased on both SME and PME - it will be one or the other. It seems more likely that it will be PME, because people really don't seem to like it, probably because of the bad publicity over deforestation."

The worry is that producers will import crude soy or palm oil to use in the esterification process in Europe. This negates many of the green benefits of biodiesel due to amount of fuel used in transporting large quantities of crude vegetable oil around the world.

"There is a major diesel deficit in Europe, and it is still growing," said Lacourt. "We don't anticipate this changing so there will be demand for biodiesel."

While demand is high, most is demand is currently being met by imports rather than domestic production.

"It is important that there is enough legislative support at an EU level to trigger production," she said. "At the moment, production capacity is about 15m tonnes, but much is not being used." Industry participants agreed that a provisional estimate of biodiesel production in Europe indicates that only a quarter of the current capacity is in use. This is because its higher price means it relies on government subsidy.

A broker at Starsupply said: "Biodiesel really does have green credentials if you look at the carbon cycle. However, if you look at the amount of biomass which is produced, the problem at the moment is that we need to figure out how to collect and best utilize all of it. The full potential of biodiesel will not be seen by our generation - this is a long-term plan."

Second-generation biofuels have yet to be proven commercially viable. Environ-mentalist producers both stress that for biodiesel to reach its potential it needs legislative support to encourage investor confidence.

The EU climate-change bill, voted on at the end of 2008, was greeted with muted enthusiasm by biodiesel producers. Despite lowering interim targets and stressing the importance of unproven second-generation fuels the legislation did maintain a commitment to renewable fuel targets.

"In the view of the European biodiesel industry, the confirmation of the 10% target for renewable energy in transport is a very important move but it will be equally important to ensure that the future implementation of the Directive does not undermine its content," said Raffaello Garofalo, EBB Secretary General, stressing that, "as part of the long road ahead, the need is now to elaborate a new and transparent EU scientific reference for assessing the green house gas savings of the different biofuels pathways and of the fossil fuels comparators."

GET IT RIGHT THIS TIME

A renewable energy expert for Greenpeace said: "We believe that good and credible sustainability clauses are essential for the future of bioenergy in Europe. It is so important that the EU are cautious and get the legislation right this time as it is bad for the industry as a whole for legislation to keep changing."

On this last point industry is certainly in agreement with the environmentalists. The debate over targets, sustainability requirements, tax breaks and incentives and quotas was instrumental in undermining confidence in biodiesel in 2008, with very thin trading seen in the last quarter.

"Contracts can be written so that if a law changes retrospectively with regard to taxation, then liability has already been assigned to either the buyer or the seller," said a trader. "However, this is not easy to do, and the uncertainty puts off anyone who doesn't have an urgent need for product from coming into the market."

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By: Rachel Howat
+44 20 8652 3214



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