USDA has posted its annual review of EU biofuels policy. It points out that ‘the EU biofuels market largely depends on consumption mandates and incentives, … including tax incentives, mandates and penalties’. While considerable policy emphasis is placed on developing second- and third-generation biofuels, the USDA takes the view that these technologies are still in their ‘infancy and will take some years before [reaching] a significant volume’. The USDA notes that the EC is proposing ‘a balanced approach towards domestic biofuels production and imports’ (70% domestic and 30% imported feedstock) on the basis of transparent ‘sustainability criteria’. Within the EU, for biofuels to be eligible for support and count towards greenhouse gas (GHG) emission reduction targets, the sustainability criteria must be met. These include reducing GHG emissions by at least 35%, beginning in autumn 2010 (and further increasing the reduction target to 50% from 2017). Second-generation fuels using ligno-cellulosic, non-food cellulosic, waste and residue materials will receive a double credit.
Sustainability criteria will also apply to imports of biofuels, with stipulations being made on how raw materials for biofuel production should not be produced. The sustainability criteria to be applied to imports are still being elaborated, and there are concerns that the systems being developed could be used to protect European producers. According to the USDA analysis, sugar beet has one of the highest rates of greenhouse gas emission reductions among feedstocks currently being used in the biofuels industry.
In terms of recent developments the USDA analysis notes that ‘while the use of biofuels is trending upwards it is not expected that the EU will achieve its target of 5.75% of road transport fuel by 2010’. This situation arises as a result of a squeeze on the profitability of the biofuels sector, initially as a result of ‘high feedstock costs and competitive imports’, but since the summer of 2008 as a result of the decline in fossil fuel prices and changes in German biofuel policy. In addition, ‘bio-diesel imports increased stronger than anticipated’, while domestic bio-ethanol production from sugar beet also increased more rapidly than expected, as sugar prices did not rise in line with other arable crop prices during 2008. According to the USDA analysis, ‘in 2010, EU production as well as imports of bio-diesel and bio-ethanol is forecast to continue its upward trend’, based on existing biofuel mandates, which now include ‘the biofuel targets for 2020 laid down in the EU Energy and Climate Change Package adopted on April 6th 2009’.
Industry sources meanwhile indicate that the EU ethanol industry has been worse affected by the ‘food–fuel debate’ than by the consequences of the financial crisis. This is in contrast to Brazil, where the financial crisis has halted investments in new ethanol capacity. With new plants coming on line, the General Secretary of the European Bio-ethanol Fuel Association, Rob Vierhout, argues that in the EU ‘local supplies will be more than enough to address the local demand’. EU imports of ethanol from Brazil are expected to drop by a third to ‘around 1 billion litres, compared with 1.5 billion in 2008’. According to Vierhout, ‘there’s simply too much ethanol around in Europe’, with even major oil companies now selling supplies at ‘very, very low prices’ which are unlikely to be covering their costs. Future demand for ethanol will be critically influenced by the oil price, with US$100 a barrel needed to make ethanol production once more an attractive proposition.
The critical issue to note is the dependence of EU biofuel market development on policy positions adopted and maintained by EU governments within the framework of the overall ‘target’-based policy. It is within this policy framework that ‘market forces’ come into play. Given the importance of domestic policy measures, this means that imports from third countries tend to bear the brunt of any market adjustments. Against this background, while there may be certain short-term export market opportunities for ACP suppliers of biofuels, these are unlikely to be sustainable, particularly as GHG emission targets become more and more strict. This is despite the high level of GHG emissions attained by ethanol produced from sugar cane. In this context the main impact on ACP sugar sectors is likely to hinge around the extent to which the EU biofuel market provides an outlet for out-of-quota sugar beet production, and in the longer term a commercially attractive market for sugar beet produced in the framework of a quota-free EU sugar regime. The biofuel sector could potentially play an important role in keeping the EU sugar market in balance during the transition to a non-quota-based regime, thereby reducing pressures for a further round of price reductions.