ILUC is a little-known acronym that strikes fear into the heart of biofuels producers.
It stands for Indirect Land Use Change and describes a change in land use, for example in Brazil as a result of a change in land use somewhere else. In other words, if farmer ‘A’ moves into soybean for biodiesel production, farmer ‘B’ on a distant continent might cut down some virgin forest to take advantage of the slack left in the soybean-for-food market. Farmer A is held responsible, albeit indirectly.
Does that sound harsh? It is. It’s near impossible to draw direct lines of causation between land use change in Europe and those on a different continent, but ILUC is nonetheless a logical extension from real situations in which measures to expand biofuel use, such as blending mandates, have resulted in environmentally bad outcomes, for example deforestation in Indonesia for palm oil production.
More importantly, the EU has gone to war on the issue, targeting food and feed crops used to produce biofuels, which it considers at high risk of ILUC. However, the new legislation -- designed to decarbonise transport - looks more likely to sustain conventional oil demand than reduce it.
RED II, the EU’s new Renewable Energy Directive, will phase out biofuels made from high-risk ILUC food and feed crops entirely by December 2030. Which biomass feedstocks are considered high risk and which are low risk will not be formalised until a report is submitted on the subject to the European Parliament by the European Commission on or before February 1, 2019. Palm oil is certain to be in the firing line, while soybean biodiesel is also under threat.
This is not the only line of attack. RED II, which has more than a hint of environmental extra-territorialism about it, will usher in a tightening of the greenhouse gas (GHG) savings to be achieved by different biofuel production processes, affecting both EU production and imports.
Minimum GHG savings for biofuels are fixed at 50% for production capacity installed before 5 October, 2015, rising to 60% for installations up to end-2020 and 65% thereafter. This will hit corn (maize) ethanol and other cereals that use natural gas for heat and power, as well as rape seed, sunflower, soybean and palm oil biodiesel, according to the EU’s own figures in Annex V of the legislation.
Use of food and feed crops will also be limited to 7% of the final consumption of energy in road and rail transport as part of an overall target of sourcing 14% of road and rail energy use from renewables by 2030.
Blending of conventional food-based biofuels is expected to reach 4.1% in the EU this year, according to estimates made by the US Department of Agriculture, well short of the 7.0% cap, which comes into effect in 2020. At 4.1%, conventional biofuels blending would be lower than in 2012.
As such, RED II may set the scene for short-term expansion. 7% is a maximum one-time ‘use-it-or-lose-it’ offer. Fail to get there by 2020 and the cap nationally for EU member states will be set at one percentage point above the share of such fuels at that time.
However, expansion may not be on biofuels producers’ minds because RED II confirms that the EU is a hostile regulatory environment when it comes to first generation biofuels. Individual member states can set a lower limit on food and feed crop biofuels, and can introduce harsher restrictions still on high-risk ILUC feedstocks should they want to. Hardly a sector promising regulatory certainty.
But the real problem with RED II is that it jumps the gun. By restricting what are the most prolific forms of first-generation biofuels, with the exception of sugar cane ethanol, it under-estimates the availability of alternative, more sustainable feedstocks and the technological readiness of the advanced biofuels sector.
The EU is not on course to meet its 10% target for renewable fuels in transport by 2020 in any case. Total biofuels blending is estimated for 2018 at 5.2% on an energy basis, although the EU calculation will come in a bit higher as a result of its double counting rules for advanced biofuels. What has been achieved is down almost entirely to the first generation biofuels RED II seeks to curb.
An additional 1% comes from ‘advanced’ biofuels made from waste fat and oils. They are not so much advanced as easy. They are already oils and need purification rather than chemical conversion, and have neither food competition nor ILUC implications. The problem is that the feedstock is limited and inelastic, inhibiting expansion.
That leaves a meagre 0.2% coming from genuinely advanced non-crop biofuels, which RED II mandates expanding to 3.5% by 2030.
That perhaps doesn’t look too ambitious, but advanced biofuels have been two to three years away from commercial development for more than two decades. Less than 1% of announced worldwide advanced biofuel capacity has actually been built, producing “a volume so small as to be irrelevant”, according to ethanol producer Ethanol Europe Renewables.
As a result, there are only two likely scenarios under RED II; something else fills the gap, or the target is simply missed.
The EU has taken one measure to guard against this latter possibility, but it is not one that is particularly useful. If EU member states’ food and feed biofuels cap is below 7% in 2020, then the overall 14% target is reduced commensurately, rather than advanced biofuels having to make up the additional shortfall.
Meanwhile, the problem with both electricity and hydrogen - the primary alternatives to biofuels - is that unless they have dedicated renewable energy behind them, they aren’t renewable.
The EU is undoubtedly keen on green electricity, offering not just to double count it towards the 14% target, but under RED II quadruple count when it comes to road transport. So even if the transport target was met largely by renewably-backed electrification, it wouldn’t represent 14% of road and rail energy use anyway.
The policy response to RED II may be for EU governments to throw their weight behind electrification and hydrogen as the only possible means of reaching the legislative target. This needs to be kept on the radar screen. But ‘option two’ – a missed target one way or another – looks the more likely outcome.
As a result, RED II’s impact on European oil demand is unlikely to keep oil sector suits awake at night.