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Biofuels: EU should meet renewable targets despite production problems

Despite the problems faced by European biofuels producers, the EU should reach its biofuels targets.

Over the last 12 months, many European biofuels producers have faced bankruptcy as a result of rising costs and reduced subsidies. However, as imports from countries such as the US are taking the place of domestically produced biofuels, the failure of European companies will not affect member states' ability to meet their targets.

In Europe, there has been substantial press commentary regarding the financial woes of European biofuel producers. Some analysts have even claimed that, as a result of supply issues, the EU risks missing its goal of replacing 10% of transportation fuel with non-fossil fuels by 2020.

It is true that European biofuels producers suffered a difficult year during 2007, largely as a result of increased costs. The principal factor behind the rising costs was the phasing out of tax breaks by many European governments.

Petrotec in Germany, which makes biodiesel from used cooking oil, saw its share price fall by 50% in the second half of 2007. In the UK, Biofuels Corporation also narrowly avoided bankruptcy after reaching a deal with Barclays Bank to swap a proportion of its debt for 94% equity in the company.

The financial difficulties faced by European biofuels producers have been compounded by the fact that US biodiesel producers receive a large tax credit from their government, which has recently been extended to 2010, thereby enabling US producers to undercut their European counterparts.

Furthermore, European leaders seem to be showing increasing acceptance of the fact that imports will make a significant contribution to Europe's targets. In a recent speech, Peter Mandelson, one of the EU's main trade negotiators, stated: "Europe should be open to accepting that we will import a large part of our biofuel resources."

As a result of the increasing acceptance of biofuel imports, the problems being faced by European producers are unlikely to affect overall consumption and therefore Europe's ability to meet its renewables targets. Furthermore, weak biofuels industries in France, Germany and Sweden have not prevented these countries from achieving their most recent biofuels targets.

In essence, while Europe's biofuels industry has been adversely affected by the phasing out of subsidies, this should not prevent member states from meeting their renewables targets. This is especially the case as there appears to be increasing acceptance by political leaders that imports will make up a sizable proportion of the biofuels consumed in Europe.

Brazil has proposed to create an environmental seal for its biofuel exports. The Brazilian government has proposed a scheme whereby it would offer an environmental seal of approval for its biofuel exports. While this is a response to possible punitive measures against current production methods, the certification scheme provides an innovative approach to the biofuels problem, and offers fuel retailers a means of differentiating themselves from their competitors.

In order to counter the dwindling support for biofuels, Brazil, the world's largest exporter of the alternative fuel, has proposed the creation of an environmental seal of approval for its ethanol exports. The seal would provide importers with a guarantee that the biofuels have been produced in an ethical manner while following the strictest environmental regulations.

The government scheme is a response to criticism of biofuels, which has been mounting over the last few months. Indeed, a number of European countries have voiced concerns that rather than being an environmentally friendly policy, the EU's target to raise the use of biofuels to account for 10% of road fuel use by 2020 could actually damage the environment.

In the UK, a government committee on the environment has recently published a report that calls for the production of biofuels in their current form to cease until the environmental impact of their production improves. Concerned about claims that current biofuels production methods are damaging the environment, the French government has also asked the agency for environment and energy to review the technology available for second generation biofuels.

The EU also seems uncertain of the long-term effects of the fuel, and has proposed that only biofuels that cut greenhouse gasses by at least 35% relative to fossil fuels should be sanctioned, thereby potentially outlawing certain corn-based ethanols.

Nevertheless, even if the EU or national governments decide against clamping down on current biofuels production methods, the Brazilian government's seal scheme is likely to be popular. Despite consumer demand for biofuels, users have shown concerns about the potential damage to the environment caused by the fuel. As such, certified biofuels could be promoted in fuel retailers' marketing campaigns.

Ultimately, the Brazilian government's plans to provide an environmental guarantee on biofuel exports offers an innovative approach to concerns raised at both national and EU levels that biofuels are doing more damage than good. Furthermore, even if these concerns are not acted upon, selling 'ethical' biofuels provides fuel retailers with a means of differentiating themselves from their competitors.

Biofuels: Germany abandons plans to increase blend to 10%

Germany has ditched plans to raise the level of biofuels to be blended into petrol and diesel. The German government has cancelled plans that would oblige refineries in the country to blend petrol and diesel with 10% biofuels. Although German environment minister Sigmar Gabriel has stated that this does not change Germany's commitment to reaching the EU's target of 10% biofuels by 2020, the plans raise doubts about the country's ability and willingness to achieve the EU's goals. Germany has reversed plans to increase the current obligation to blend petrol and diesel with 5% biofuels to 10%. The decision follows complaints from automobile associations, which have stated that the increased blend could damage up to three million cars.

Struggling biofuels producers in Germany, whose plants are currently running at only 10% to 20% capacity, have stated that, in order to achieve the 10% biofuels target, the government should encourage the use of pure biodiesel vehicles. This, they say, will compensate for the lower blending levels in regular petrol and diesel.

However, the widespread use of vehicles that run on pure biofuels is unlikely. Firstly, although the number of cars running on high-blended biofuels is increasing, the overall proportion of the total car parc that they represent remains minimal. This indicates that large sections of the public are still to be convinced of the merits of owning these vehicles.

Secondly, few mainstream fuel retailers seem eager to undertake the expensive process of replacing tanks and hoses with the equipment needed to sell E85 flex-fuel or pure biodiesel. In Germany, it is not the large oil companies that sell B100, or pure biodiesel, but rather independent retailers and the 'Deutscher Raiffeisenverband', a farmers' trade association. This equates to just 13% of the country's fuel retailing network.

Furthermore, given that the production of biofuels has become a politically charged issue, with many critics pointing out that the benefits accrued from the alternative fuel have largely been replaced by negatives, politicians are unlikely to be willing to place pressure on motorists to convert their vehicles so that they run on pure biofuels.

In essence, the German government's decision to scrap the automatic blending of 10% biofuels into petrol and diesel appears to raise serious concerns about the country's ability to reach the EU's 10% biofuels target. Furthermore, although officially the government remains committed to the target, it is clear that the enthusiasm for this renewable road fuel has waned.

Related Research

• The Biofuels Market Outlook: Market drivers, growth opportunities and regulatory change

• European Landscape for Biofuels in the Transport Sector

[edit] Sources

• Datamonitor