Rising food and fuel costs are pushing several EU countries to freeze or lower 2022-2023 low-carbon blending mandates for transportation fuels. That will likely mean a rise in emissions, but only in the short term, says Cornelius Claeys at Stratas Advisors. However, the same policymakers understand that ending imports of fossil fuels from a belligerent Russia is an opportunity to raise low-carbon targets for the medium and long term. So, right now, cropland for biofuels will have to take second place to using it for food. But at the same time REPowerEU, the EU’s “plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition” is setting in motion higher targets over the decade and beyond. Claeys summarises the economic pressures being faced and the legislation being reviewed, citing changes at the national and EU level. He assesses road, shipping and aviation, as well as the nations at the forefront. As Claeys points out, previous recessions combined with high fossil prices have accelerated rather than slowed down shifts towards alternative solutions. Today, that alternative is low carbon energy.

The crisis in Ukraine has further added to pre-existing inflationary pressures around the world. Although no sector of the economy is fully sheltered, fuel and food prices are impacted most visibly. European policymakers find themselves between a rock and a hard place, trying to counter politically sensitive price increases whilst also reducing dependence on cheap Russian imports. The short-term impact on biofuel uptake could be negative, as several countries consider freezing or waiving blending mandates to put a cap on prices (as has been the case in some Latin American and Asian countries too).

In the longer term, the crisis will likely be an accelerator of the energy transition in Europe. The view that fossil import dependency can be weaponised while leading to undesired price volatility is now shared across EU countries. This has given proponents of renewables a stronger hand, just as ambitious energy and transport legislation for the coming decades is being finalised.

The U.S. is different

In the US in contrast, a policy response to increasing prices has been to strengthen biofuel incentives by allowing year-round E15 use. The philosophy there, is that a higher share of ethanol will reduce the price per gallon of gasoline. Factoring in ethanol’s lower energy density and depending on the distance and logistics from production to retail, this will not necessarily reduce the cost per mile driven, but the perception with voters would be lower fuel retail prices.

Europe stalls Biofuels

Perhaps counterintuitively, an opposite approach is taken to reach a similar goal in Europe. EU and national policymakers intend to (temporarily) waive or freeze biofuel blending to reduce prices. This can be partly explained with the European debate having focused more on food than on fuel prices. Fuel retail prices in Europe are less sensitive to crude price fluctuations due to higher excise duties – many of which are now temporarily lowered. Moreover, relatively expensive biomass-based diesel is most used in Europe, while in the US cheaper, corn ethanol is the primary biofuel.

In March, the European Commission published a communication stating it “supports Member States in using possibilities to reduce the blending proportion of biofuels which could lead to a reduction of EU agricultural land used for production of biofuel feedstocks, thus easing pressure on the markets for food and feed commodities”. Although countries still need to comply with the minimum obligations under the EU RED and FQD directives, this opened the door for a series of reductions in national blending mandates.

In Finland, the 2022 and 2023 blending obligations were reduced by 7.5 percentage points. Swedish lawmakers consider freezing 2023 obligations at 2022 levels, while in Norway, governmental discussions are ongoing to undertake similar measures. These Nordic countries can afford to reduce their blending mandates while still complying with EU directives, because they generally over comply anyway. In Germany, policymakers would like to do the same, but a reduction in the blending obligation is more complicated there because it would risk under-complying with EU law, and because of the domestic procedures to change the relevant law. Instead, German (and Belgian) policymakers may be reducing the allowed contribution of crop-based biofuels towards blending mandates. On 17 May, the German Federal Government even published a working paper in which it sets out to cap crop-based biofuels at 2.5% in 2023 and phase them down to 0% by 2030. In Central and Eastern Europe, directly reducing blending mandates would also risk undercompliance with EU directives. Nevertheless, some countries plan to do so anyway, sometimes creatively. In the case of Croatia, penalties for fuel suppliers that do not meet the obligations will be waived.

Less crop biofuels in Europe means more fossils (in the short-term)

If all eight countries mentioned above continue with their planned reductions, this could lead to a reduction of up to 2 billion litres biofuel demand in 2023 – compared to a reference baseline where mandates are not waived or frozen. Ironically, this would likely increase demand for fossil fuels, just as discussion are ongoing to ban EU imports of Russian oil and refined products by the end of the year. In addition, an accelerated shift from crop- to waste-based biofuels seems likely because of the above measures, adding further pressure to an already tight waste feedstock market.

Despite these short-term bearish signs for (crop) biofuels, legislative incentives in the longer term appear to be strengthening as an indirect result of the Ukraine war. This is exemplified by Finland; despite being the first country to reduce short-term blending obligations and by the largest margin, it simultaneously announced an increase in its 2030 blending obligation from 30% to 34%.

RepowerEU plan to reduce dependency on Russia

The European Commission was quick to announce its RepowerEU plan to reduce dependency on Russian oil and gas, with (among other things) the ambition to increase EU biomethane production tenfold by 2030. Follow up legislation to this plan, announced on 18 May, included increase of the 2030 renewable target to 45%, up from 40%, which in itself was already an increase announced in last year’s Fit for 55 Package from previously 32%.

As is common practice with EU legislation, the proposals tabled by the European Commission can now be amended by the European Parliament (EP) and later by the Council of Ministers (the member states) as was the case with the 13 changes to directives and regulations of the Fit for 55 Package. Eventually, these three institutions will need to agree on the final legislation – which is directly applicable in the case of regulations and needs to be transposed into national legislation by member states for directives. The current context will certainly have an impact on the proposed amendments tabled by these institutions.

Discussions in the EP appear to be going in the direction of elevating the earlier mentioned 40% renewable energy target by 2030 – to 45%. Moreover, the parliamentary rapporteur on this file proposed to elevate the 2030 emission reduction obligation for transport fuel suppliers to 20% (compared to 13% proposed by the Commission), as well as raising the Annex IX-A submandate for that year to 5% (a more than doubling of the 2.2% proposed by the Commission). The submandate of hydrogen-based fuel is also bumped up significantly under the (tentative) parliament proposal, although here a significant change is that low carbon hydrogen (e.g., nuclear, biomass or CCS based hydrogen) can also contribute, whereas under the Commission proposal the submandate was specifically for renewable fuels of non-biological origin (i.e., produced from renewable electricity that is not biomass).

No major change is proposed to the emission reduction obligation for shipping operators, although the 6% reduction obligation by 2030 tabled by the Commission, rising to 75% by 2050, is generally already considered quite ambitious.

The only expected numeric change to the calorific sustainable aviation fuel (SAF) mandate, is that the e-fuel submandate kicks off in 2025 rather than 2030 – albeit at a low level of 0.03%.

Emission standards for new vans and cars were strengthened in an earlier EP proposal, but eventually the relevant committee voted not to increase the standards, although supporting the Commission deadline on banning new ICE vehicles. In the tentative EP proposals, the deadline for inclusion of the road and shipping sector in the EU ETS is brought forward by one year. However, private road transport would be exempt up until 2029.

The politics: Ukraine War is creating a rare momentum

Traditionally, the EU Council of Ministers is more conservative than the Parliament when it comes to decarbonisation and renewable energy policies. This time too, the Council is expected to somewhat try to water down some of the Commission and Parliament proposals. However, the war in Ukraine may have created a rare momentum for far going climate and energy measures with broad support among national governments.

France is currently holding the rotational presidency of the Council of Ministers, and recently re-elected President Macron is eager to make his mark as the most climate conscious and pro-EU French leader in modern history. In Germany, the Greens hold several senior government positions, including the Foreign Ministry, the Ministry of Economics and Climate Protection and the Ministry of Food and Agriculture.

Central and Eastern European countries usually oppose most EU climate legislation, but the need to find alternatives for Russian gas, oil and coal imports is highest in these countries and signs appear that even Poland is starting to embrace EU green energy initiatives.

Sweden, Denmark and Finland have always been strong advocates of elevated environmental ambitions. The Netherlands, Belgium, Austria, and Portugal all have ruling parties that campaigned around climate.

Spanish policymakers intend to capitalise on the country’s geographic potential as a renewable energy provider. Italy is still not a strong proponent of climate legislation, but the pro-EU Draghi legislation will likely take a more neutral stance than previous governments.

Volatility and unpredictability on the markets will likely continue for as long as the war in Ukraine does. Increasing interest rates are already a reality, and some form of economic recession cannot be excluded in Europe. In this context, the most capital-intensive aspects of the energy transition may be faced with headwinds.

That said, previous periods of recession combined with elevated fossil oil have generally accelerated rather than slowed down the shift towards alternatives. On the policy side, the trend is clear. Immediate policy responses to cushion price increases do not always align with climate objectives. In the medium- to long-term however, a wide variety of European lawmakers share the view that climate objectives and energy independence should be accelerated by firm legislative action.

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Cornelius Claeys is a Manager, Low Carbon Fuels, at Stratas Advisors