New German legislation, which will become effective in 2015, has resulted in a drastic improvement of the climate performance of biodiesel produced in Germany. But the effects the new rules will have on the German and wider EU biofuels market are still highly uncertain, says Elmar Baumann, Managing Director of the VDB, the Association of the German Biofuel Industry, in an interview with Energy Post. “All we know is that they will be profound.”
Starting from the 1st of January, the rules in the German biofuels market will change radically. Until now, the oil industry has been required to put a minimum percentage of biofuels on the market (6.25% energy content of their transport fuel sales). From 2015 onwards, this requirement does not hold any longer in Germany. Instead, the mineral oil sellers must now reduce the greenhouse gas emissions of their products by 3.5% (4% in 2017 and 6% in 2020). (For now, they can only use alternative fuels to do this, later they can also reduce upstream emissions, e.g. caused by methane leakage.)
“It is a paradox. The better we perform, the less we sell”
What this means is that the greenhouse gas reduction performance of the various types of biofuels is going to affect their value. Up to now, it did not matter what the “climate performance” was of a biofuel, provided it met a 35% reduction threshold. Any biofuel that made this threshold was counted in the same way towards meeting the 6.25% obligation (although biofuels from waste, such as cooking oil, were counted double). In the new situation, however, a biofuel that reduces emissions say by 60% will be worth more to the oil companies than one that does so by e.g. 40%, because it will help them meet their target more quickly. Since biofuels are still more expensive than fossil fuels, oil companies have little incentive to go beyond the requirements imposed on them.
Germany is the only country in the EU to have adopted this kind of approach. Other countries have also adopted greenhouse gas reduction targets and have set up reporting systems, but at the same time they have retained the old quota system based on energy content. According to Elmar Baumann, Managing Director of the Association of the German Biofuel Industry, which represents 16 German biodiesel producers (Germany is a biodiesel rather than bio-ethanol country, as German cars and trucks use more diesel than petrol), what the German government wants to achieve with the new rules is the implementation of two EU Directives at once.
The EU Renewable Energy Directive requires a 10% “renewables in transport” share by 2020. The EU Fuel Quality Directive takes a different approach: it stipulates a 6% “greenhouse gas emission reduction” from the transport fuel sector by 2020. Transposing these Directives into national law, the German government has chosen to make the latter approach leading. Consequently, as Baumann notes, “it is not certain whether Germany in the end will meet its targets under the Renewable Energy Directive”. The German government believes that by meeting the 6 % GHG-reduction target it will meet the 10% renewable Energy target as well.
According to Baumann, the German approach has already proved extremely effective. In anticipation of the new 2015 legislation, German biodiesel producers have already worked hard to reduce the climate impact of their products. “The default emission reduction factor for biodiesel from rapeseed, which our members mostly use as feedstock, is 38%. But our producers can now actually deliver up to 60% emission reduction. That’s a huge improvement.”
Baumann says the producers managed to make this leap forward by looking into all parts of the production chain: the crushing process and the refining of the oil, but also the agricultural part. “All our producers have done this”, he says. “In view of the new rules we have already optimized our performance.”
So far so good. But the companies are also facing a number of problems and uncertainties as a result of the legislation, Baumann adds. Above all it is unclear how the new rules will affect the sales of biodiesel. Baumann: “First of all, the higher our greenhouse gas reduction values, the more our market will shrink. It’s a paradox: the better we perform, the less we sell. But we don’t know how much our sales will be affected. We lobbied for a high climate protection quota, but we only managed to have it increased from 3 to 3.5%. In 2017 it will go up to 4% and in 2020 to 6%. We have no idea as yet if these numbers are sufficient to maintain our sales.”
In addition, it is also unclear how the climate performance of biodiesel made from rapeseed will compare to other biofuels. And those alternatives are not only of domestic origin, they will come from abroad as well. “Germany is the only EU country to have adopted this kind of strict legislation”, says Baumann, “so what we expect is that biofuels with a high reduction value will flow to Germany whereas those with a lower reduction value will be used in other EU countries.”
Analysts expect that a “premium” will be added to the commodity prices of biofuels on the basis of their greenhouse gas reduction performance, says Baumann, but no one knows how high that premium will be. “Last year, Germany was a net exporter of biodiesel, now Germany might become a magnet for higher-value biofuels.”
Soy-based and palm oil-based biofuels are mainly imported to Europe from overseas producers. Palm oil based biofuels tend to have a higher emission reduction value than biodiesel from rapeseed oil, says Baumann, so they might increasingly find their way to the German market. On the other hand, waste-based biofuels will not count double anymore in Germany, but will do so in other EU countries, so they are likely to flow from Germany to other markets if the premium for high emssion reduction in Germany is not high enough.
Far too high
Clearly if there ever was a case for harmonisation of EU legislation, this seems to be it. “It would be very helpful if we got further guidance from the Commission on how the Directives should be transposed into national law”, Baumann notes.
The two Directives, he says, are “the main drivers” of the European biofuels market. Thus, for example, it looks as though in many countries count the use of biofuels will not grow significantly before 2019, as they will only then start feeling the pressure of meeting the 2020 targets.
He hopes the new European Parliament will “take a more rational approach” to the issue than the previous one
In this context it is important, says Baumann, that the complex debate on indirect land use change (ILUC) will be resolved. ILUC refers to the displacement of forest or other carbon-rich land by food crops grown for energy, which can even lead to net increases in greenhouse gas emissions in some cases. Just recently, on 9 December, EU energy ministers proposed to to limit the use of food-based biofuels to 7%. (That is to say, of the 10% renewable sources in transport fuel in 2020, 7 percentage points is allowed to be from food-based crops). Environmental NGO’s say this is far too high a cap. On the other hand there is a Commission proposal that sets the cap at only 5% and also includes a 0.5% non-binding target for “advanced” (“second-generation”) biofuels (i.e. not derived from food crops), which the NGO’s say is far too low to stimulate the development of next-generation biofuels.
The European Parliament, which in September 2013 voted for a 6% cap, now has to vote again in a “second reading”, which will take place in spring 2015. Baumann says that his main concern is that ILUC rules should not undermine investments that have already been made by biofuel producers. He says that if no targets are set for the time after 2020 there will not be any investments because the pay-off time would be too short “What we would like to see are rules for 2030 that allow reasonable development for existing and new biofuels.”
Advanced biofuels are still in a very early phase of their development, Bauman adds. “If the EU sets ambitious targets for advanced biofuels in 2030, there will be innovation in this area. But crop-based biofuels have to be the basis of any future development.” He hopes that the new European Parliament will “take a more rational approach” to the issue than the previous one.
A final piece of the biofuels puzzle that is still not fully in place, says Baumann, is adequate verification and monitoring of the climate performance of the various biofuels. After all, how can oil companies who buy biofuels be sure what their emission reduction value is?
The German biodiesel producers are afraid that their success in improving their products will go unrewarded if there is no legal certainty underpinning it. So far they are not reassured by the efforts of the European Commission, which is responsible for the different Sustainability Certification Schemes, and the German Government, which monitors the new greenhouse gas quota. They have asked the government for “stringent oversight of emission calculations”.
“It’s a bit ironical”, says Baumann, “but in this case it is industry which is asking for stricter controls from the government, rather than vice versa.”
“Fuels of the Future” conference in Berlin
The new German biofuels legislation will be one of the main topics to be discussed at the Fuels of the Future conference that will be held in Berlin on 19 and 20 January.
This 12th International Conference on Biofuels will be hosted by the German BioEnergy Association (BBE), the Union for the Promotion of Oil and Protein Plants (UFOP), the German Bioethanol Industry Association (BDBe), the German Biofuels Industry Association (VDB) and the German Biogas Association and supported by Rentenbank.
The organisers are expecting more than 500 participants from roughly 30 countries at the conference, and more than 20 companies will show presentations at the accompanying exhibition.