Biofuels, Trade and Sustainability
The lack of internationally-agreed criteria for sustainable biofuels production and the muddle of different government measures aimed at sheltering domestic markets are holding back growth in the global biofuels trade and could stunt EU progress towards its goal of gradually replacing oil for transport.
Europe relies on oil for 98% of its transport needs and the two most important liquid biofuels currently available are ethanol and biodiesel, made from agricultural crops such as corn, sugar cane, palm oil and rapeseed. But there is increasing concern that a surge in the production of such fuels within the EU would have serious negative implications for the environment, including biodiversity loss and food and water shortages.
Despite a report by the European Commission's Agricultural Department highlighting the "relatively modest" impact of the 10% biofuel target on land use in the EU (EurActiv 30/07/07), the Commission acknowledges that reliance on domestic agriculture alone is unlikely to meet the objective and that an increase in biofuel imports will be needed.
Currently, 90% of world biofuel production is consumed domestically. But international trade in biofuels is beginning to grow, as industrialised countries find they lack the capacity to meet growing demand and turn towards the likes of Brazil, Indonesia or Malaysia to fill the gap.
Although increased trade levels are expected to drive the deployment of new, potentially greener fuels, there remain strong concerns that current trade regimes are not yet fit to maximise the positive contributions of biofuels or to minimise the risks.
Concerned about the environmental impact of biofuels, the EU has committed to 'second-generation' biofuels as a cleaner alternative and has been busy drawing up sustainability criteria that also apply to imported biofuels.
The sustainability criteria were incorporated in the EU's new directive on renewable energies, agreed in December 2008 by EU leaders during a summit in Brussels (EurActiv 05/12/08). Under the deal, the EU agreed satisfy 10% of its transport fuel needs from renewable sources, including biofuels, hydrogen and green electricity, by 2020.
The new directive obliges the bloc to ensure that biofuels offer at least 35% carbon emission savings compared to fossil fuels. The figure rises to 50% as of 2017 and 60% as of 2018.
But there are concerns that the EU's sustainability criteria for biofuels are too strict and could lead to tensions with large producer countries, such as Brazil, which threatened during the negotiations to challenge the directive before the World Trade Organisation (WTO).
As the directive has now been adopted, the general framework is clear. However, many issues remain to be settled, which could still expose it to a challenge before the WTO.
For example, the EU will have to define the geographical range of concepts such as "highly biodiverse grassland" and "severely degraded land". Moreover, the Commission will have to report on how and if it intends to tackle the impact of indirect land-use change on greenhouse gas emissions by the end of 2010.
Biofuels' high production costs, combined with their allegedly greener properties in comparison to conventional fossil fuels, mean governments have tended to encourage producers to enter the market through the use of incentives, such as tax exemptions and subsidies.
With no internationally-agreed or even EU-wide criteria governing biofuel support regimes, countries have each set up their own schemes, creating a non-uniform market that hinders trade both worldwide and within the bloc.
What's more, incentives are often geared towards the promotion of domestic agricultural feedstocks and interests, rather than the promotion of biofuels with economic, energy-related or environmental advantages.
In France, for example, tax exemptions are available only for biofuels that are both produced and sold on the French market. Producers from other EU countries are thus excluded, leaving them at a competitive disadvantage.
The high tariffs that both the EU and the US have placed on ethanol, as well as certain tariff escalation schemes to encourage developing countries to export unprocessed feedstock rather than fully-converted biofuels, are another example of these protectionist tendencies.
Lack of global classification (WTO)
The lack of a clear classification for biofuels within the multilateral trading system is another key factor restricting global trade. Import standards vary from country to country and it is not even known whether agrofuels should be considered as an agricultural or industrial good.
Trade classification has important implications for countries' tariff reduction commitments as well as the national support schemes they can apply.
Thus far, fuels made from crops, such as ethanol, are classified as agricultural goods in the World Customs Organisation's Harmonised Coding System for commodities (known as 'HS'). This enables farmers to benefit from relatively high tariff protection for them. Biodiesel, on the other hand, is considered to be an industrial product.
At the same time, Brazil was pushing hard, under the now-stalled 'Doha Round' of multilateral trade negotiations, to get biofuels classified as an environmental good. This would have qualified it for an accelerated phase-out of tariffs. On the other hand, a joint EU-US proposal to fully eliminate tariffs on a list of 43 products identified as "environmentally friendly" by the World Bank, including solar panels and wind turbines, does not include biofuels (EurActiv 10/12/07).
One argument put forward by the EU and the US is that in the context of constantly changing technology, they must take into account the question of "relativity" of green products – the so-called "clean vs. cleaner" debate. What may seem environmentally-friendly now may not be perceived the same way in five years' time.
The concern is that if tariffs are fully eliminated on relatively green products such as ethanol, cleaner technologies that become available in the future, such as second-generation biofuels made from non-food, woody crops, will lose the possibility of enjoying additional trade advantages.
But Brazil and other bioethanol exporting developing nations, including Pakistan and Egypt, say the EU and US are merely being protectionist and attempting to put their own producers at an advantage.
The debate is linked to another key question that will need tackling: Whether different types of biofuels should be considered as "like products" or not, seeing as they present different benefits and flaws in terms of greenhouse gas reductions, energy efficiency and sustainability.
According to the principles of 'non-discrimination' and 'Most Favoured Nation' (MFN), WTO law demands that its members apply the same tariff rates to all imports of products that are close substitutes, regardless of their country of origin. This applies both to external tariffs and internal taxation policies. Countries that do not respect these principles are liable to legal action in the WTO.
Sustainability criteria: 'Green imperialism'?
The proliferation of different technical, environmental and social sustainability standards for biofuels production – without a system for mutual recognition – causes even more difficulties.
Purely technical specifications in the EU already illustrate how standards can operate as barriers. For example, by fixing maximum levels of iodine for vegetable oils used in biodiesel, based on the argument that these are more suitable for the cooler European climate, the EU is placing a de facto ban on biodiesel produced from palm and soya oils and largely favouring its main biofuel crop: rapeseed.
The introduction of additional environmental and social standards has the potential to create even bigger barriers if they are not developed globally, with the participation of both industrialised and developing countries.
But it will be difficult to reach an international consensus. Many developing nations view attempts to introduce sustainability criteria as a form of "green imperialism". Stakeholder interests are extremely diverse, ranging from purely commercial aims to rainforest protection, banning the use of genetically modified crops or preventing child labour. A compromise could thus in fact result in overly detailed rules which lead to compliance difficulties, or to standards so general that they become meaningless.
In August 2008, the 'Roundtable on Sustainable Biofuels' - an international initiative bringing together farmers, companies, NGOs, experts, governments and inter-governmental agencies - nevertheless presented its 'version zero sustainability standards' - the first attempt at reaching an international standard for biofuel production. The proposed standards include the respect of international treaties on labour conditions and human rights, the need for "significant" lifecycle greenhouse gas emission reductions compared to fossil fuels, the respect of local communities and land rights, the need to guarantee food security, and the minimisation of soil degradation, water depletion, air pollution and biodiversity loss.
Following a seven-month stakeholder feedback, a draft for a revised and more detailed 'version one' of the standards is now being discussed within the organisation. But the roundtable has no plans to establish a stringent certification system at this time due to implementation costs and the difficulty of proving the source of blended biofuels.
In the meantime, the EU has been seeking to establish its own criteria amid strong internal divisions. On the one hand, the Commission proposed, in its draft Renewables Directive of 23 January 2008, a ban on biofuels planted in protected areas, forests, wetlands and "highly biodiverse" grasslands as well as an obligation for biofuels to deliver life-cycle CO2 savings of at least 35% compared to fossil fuels.
But MEPs insisted on tougher conditions. In September 2008, the Parliament's industry and energy (ITRE) committee backed a report demanding that biofuels offer at least 45% carbon emission savings compared to fossil fuels – a figure that would rise to 60% in 2015. They also insisted on additional social and environmental criteria to protect natural resources, guarantee the respect of human rights and adequate working conditions in biofuel plants, and to take account of CO2 released during feedstock cultivation and land-use changes.
In an attempt to garner a compromise between the 27 member states on the issue, a special ad hoc working group was set up at the end of February 2008, with the aim of drafting "core criteria" for biofuels (EurActiv 01/04/08). After months of infighting, EU ambassadors appeared to have reached a consensus, centering on a two-phased approach, initially requiring a 35% CO2 saving, which would then be scaled up to "at least 50%" in 2017 (EurActiv 01/09/08).
The approach was confirmed in December 2008 when EU leaders adopted the final text for the new Renewables Directive (EurActiv 05/12/08). It stipulates that biofuels and bioliquids taken into account in the 10% target must not be produced from raw materials from land with "high biodiversity value", land that has a high carbon stock, or peatlands.
The final life-cycle CO2 reduction requirement decided by the EU is crucial to the biofuel industry. Indeed, typically, biodiesel made from European-grown rapeseed results in a greenhouse gas saving of 44% while the typical figure for ethanol made from EU sugar beet is 48%. According to EU figures, palm oil biodiesel produced in countries like Malaysia and Indonesia typically offers much lower savings, ranging from 32-38%.
It nevertheless remains unclear whether the EU's sustainability criteria will be allowed by the World Trade Organisation, which is generally opposed to attempts to develop mandatory certification systems. Even voluntary schemes are only allowed under conditions of free competition and provided that no measures are taken to inhibit trade in non-certified goods. What's more, while certain environmental standards may be deemed acceptable, social issues, labour standards or human rights criteria are inadmissible under WTO rules.
Potential for trade spats
If WTO members fail to address these issues proactively, it is likely they will be addressed in a piecemeal fashion through litigation. Signals that the next WTO trade dispute could be about biofuels are already emerging.
In June 2008, the Commission launched an investigation into US biodiesel imports after its biodiesel producers filed a complaint regarding hefty subsidies and dumping of the product on the EU market at unfairly low prices (EurActiv 17/10/07). As a result, the EU imposed in March 2009 provisional duties on biodiesel imported from the US, which were extended to five years in July.
And Brazil has already hinted that it would be ready to challenge the legitimacy of any excessive sustainability criteria imposed by the EU on its trading partners at the WTO, and indeed insists that Brazilian biofuels respect environmental, social, and labour-related criteria.
"Purely domestic sourcing of biofuels is neither likely – given current trade rules, and the increased trade liberalisation we hope to see in future – nor desirable," says Energy Commissioner Andris Piebalgs. He therefore concluded that the EU needs to ensure that its "biofuel standards create no unnecessary obstacles".
"Europe should be open to accepting that we will import a large part of our biofuel resources," agrees former EU Trade Commissioner Peter Mandelson, adding: "We should certainly not contemplate favouring EU production of biofuels with a weak carbon performance if we can import cheaper, cleaner, biofuels. Resource nationalism doesn't serve us particularly well in other areas of energy policy – biofuels are no different."
Mandelson said he was confident that developing countries would eventually gain from expanding their biofuels production thanks to their spare agricultural capacity and their comparative advantage in production. "They also have the climate and land profile that suits energy-rich biofuels," he said.
But Brazilian President Lula Da Silva notes that, despite the fact that building strong biofuel markets in poor countries represents an important potential source of job creation, biofuel production remains unviable for many developing nations, due to rich countries' agricultural subsidies and high tariffs.
Brazil’s trade chief, Roberto Azevedo, agrees that Brussels is seeking to protect the interests of European agriculture – notably by excluding biofuels from its planned WTO zero-tariff "green pact". "The exclusion of biofuels is particularly striking. It raises serious concerns about the true intentions of the proponents in relation to the environment," he said.
Malaysia's Minister for Plantation Industries and Commodities Datuk Peter Chin has called on the EU to ensure its criteria are "based on sound science and are non-discriminatory", pointing to evidence from the Malaysian Palm Oil Council (MPOC) that the data and methodology in current EU biofuels proposals "result in an unfair disadvantage for palm oil-based biodiesel, understating typical CO2 emission savings by at least 20%." According to MPOC CEO Dr. Yusof Basiron: "Certified sustainable palm oil is available in Malaysia. We trust that the EU will allow us to bring it to the European market."
But Mandelson insists that the development of a biofuels market "must be tempered by environmental reality," defending EU sustainability criteria proposals. "Europeans won't pay a premium for biofuels if the ethanol in their car is produced unsustainably by systematically burning fields after harvests or if it comes at the expense of rainforests. We can't allow the switch to biofuels to become an environmentally unsustainable stampede in the developing world," he said.
"Not by any means are sustainability criteria for biofuels an indication of green protectionism on the part of the EU," agreed the Commission’s Director of International Affairs Soledad Blanco, saying they were "linked to the legitimate environmental concerns European and global citizens have".
But the World Bank predicts that the certification of biofuels for environmental sustainability could become "arguably the greatest technical barrier to trade in the coming years". It therefore urges industrialised countries to analyse the global impacts of their domestic policies on biofuel production and trade, particularly for developing countries.
In a report entitled 'Sustainability Criteria and Certification Systems for Biomass Production' drafted for the Commission's DG Transport and Energy, the Biomass Technology Group (BTG), a consultancy and research firm specialising in biomass energy production, asserts that the establishment of certification systems should be left to the market and remain voluntary. "WTO difficulties can be avoided and other goals regarding environmental and social impacts can be achieved more readily under voluntary systems," it claims.
The BTG further notes that if only the EU has standards, exporters will simply shift to markets that do not certify.
But NGOs such as Friends of the Earth, Biofuelwatch and Corporate Europe Observatory have questioned the legitimacy of voluntary certification programmes, saying they are often heavily dominated by economic interests.
What's more, Almuth Ernsting of Biofuelwatch says he does not think certification can address threats to food sovereignty, water, soil and forests: "Certifying biomass production is always assumed to be possible. No-one ever seems to ask whether it really is feasible to develop a system that can address the issues. We do not believe that it is."
European farm leaders also reject the idea that opening the EU up to imports of cheap biofuels will benefit the environment. "Mandelson must get his facts right on biofuels," said EU farm lobby Copa-Cogeca's secretary-general, Pekka Pesonen, accusing the former commissioner of closing his eyes to economic realities in developing countries.
"The international cost advantage of, for example, Brazilian production is based firmly on cheap land, won by destruction of rainforests and pristine savannahs, and exploitation of workers even to the point of using slave labour," he stressed, adding: "Mandelson must understand that biofuels policy is also about promoting EU energy independence. No one says that the EU should seal itself from imports. But rejecting out of hand, as Mandelson does, the contribution European farmers can make to meeting the EU's energy needs in a sustainable way, is something to be expected from a Brazilian minister for exports for example, not the EU's trade commissioner," he concluded.
Nevertheless, Henry Lee, director of Harvard University's environment and natural resources programme, believes that setting too high a standard could prevent any meaningful advances. "Certification standards could significantly enhance biofuels development or seriously retard it," he said, according to the Worldwatch Institute.
"The main concern is people try to deal with all problems - land, air, environment, child labour - with a biofuels requirement, and people are not going to do that." What's more, he pointed out, leaders in the developing world see proposed international standards "as a very typical developed-country attempt to keep developing countries from profiting off a commodity," said Lee.
- Apr. 2007: EU, US and Brazil agree on a 'Biofuels Standards Roadmap', delineating necessary steps to achieve greater compatibility among their biofuel standards.
- Feb. 2008: Ad hoc working group set up by EU Council with a view to establishing consensus on "core criteria" for sustainable biofuels.
- Aug. 2008: The 'Roundtable on Sustainable Biofuels' - an international stakeholder initiative - presented its first attempt at reaching an international standard for biofuel production.
- Dec. 2008: EU leaders approve revised directive on renewable energy, agreeing a 10% target for 'green fuels' by 2020 (EurActiv 05/12/08).
- 5 Dec. 2010: Deadline for all EU countries to comply with new Renewables Directive. Greenhouse gas savings from biofuels to reach minimum 35%.
- 2012: EU countries to submit first report on national measures taken to respect the sustainability criteria for biofuels.
- By Dec. 2014: Commission to review greenhouse gas emission saving thresholds for biofuels, taking available technologies into account.
- 2017: Greenhouse gas savings from biofuels to reach minimum 50%.
- 2018: Greenhouse gas savings from biofuels to reach minimum 60%.
- 2018: Commission to present renewable energy roadmap for post-2020 period.
2020: Transport sector mandated to source 10% of its energy needs from renewable energy, including sustainable biofuels and others.