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Use Biofuels EU

Use Biofuels EU

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Energy Policy 34 (2006) 3184–3194
Stimulating the use of biofuels in the European Union:Implications for climate change policy
Lisa Ryan
Ã
, Frank Convery, Susana Ferreira
Department of Planning and Environmental Policy, University College Dublin, Richview, Dublin 14, Ireland 
Available online 28 July 2005
Abstract
The substitution of fossil fuels with biofuels has been proposed in the European Union (EU) as part of a strategy to mitigategreenhouse gas emissions from road transport, increase security of energy supply and support development of rural communities. Inthis paper, we focus on one of these purported benefits, the reduction in greenhouse gas emissions. The costs of subsidising the pricedifference between European bioethanol and petrol, and biodiesel and diesel, per tonne of CO
2
emissions saved are estimated.Without including the benefits from increased security of energy supply and employment generation in rural areas, the current costsof implementing European domestic biofuel targets are high compared with other available CO
2
mitigation strategies. The policyinstrument of foregoing some or all of the excise duty and other taxes now applicable to transport fuels in EU15 on domesticallyproduced biofuels, as well as the potential to import low-cost alternatives, for example, from Brazil, are addressed in this context.
r
2005 Elsevier Ltd. All rights reserved.
Keywords:
Biofuels; Greenhouse gas emissions; Transport policy
1. Introduction
Currently
1
transportation fuels pose two importantchallenges for the European Union (EU). First, under theprovisions of the Kyoto Protocol to the Climate ChangeConvention, the EU has agreed to an absolute cap ongreenhouse gas emissions; while, at the same timeincreased consumption of transportation fuels has resultedin a trend of increasing greenhouse gas emissions from thissource.
2
Second, the dependence upon oil imports fromthe politically volatile Middle East generates concern overprice fluctuations and possible interruptions in supply.Increasing the use of alternative fuels can addressboth these challenges, by providing an opportunity toreduce greenhouse gases and other polluting emissions,and by improving the security of energy supply.Additionally, the development of biofuels may createnew employment opportunities, especially in decliningrural areas.Given that legislative efforts in the EU to promotebiofuels (discussed later) are recent, the policy implicationsof their use remain largely unexplored. Biofuels arecurrently commercially uncompetitive with fossil fuels(petrol and diesel) in Europe. However, can they becomecompetitive once their external benefits to society, namelythe CO
2
emissions reduction, security of energy supply andrural development are accounted for? This paper addressespart of this question by focusing on the first externalbenefit, the reduction in greenhouse gas emissions.The commercial price of transport fuel in theEuropean market before taxes and duties is assumedhere for simplicity to be equivalent to its privatemarginal costs. This number is compared with theprivate marginal costs of supplying biofuels in order to
ARTICLE IN PRESS
www.elsevier.com/locate/enpol0301-4215/$-see front matter
r
2005 Elsevier Ltd. All rights reserved.doi:10.1016/j.enpol.2005.06.010
Ã
Corresponding author. Tel.: +35317162676;fax: +35317162776.
E-mail address:
lisa.b.ryan@ucd.ie (L. Ryan).
1
The analysis in this study uses data from 1998 to 2004. The term‘‘current’’ is used to refer to these data. More specific dates areprovided in the relevant tables.
2
The European Commission’s White Paper ‘‘European transportpolicy for 2010: time to decide,’’ advanced the prospect of a rise of 50% in CO
2
emissions from transport between 1990 and 2010 under‘‘business as usual’’ policies.
 
derive a threshold value per tonne of CO
2
reduction thatmust be achieved if biofuels are to compete in price withpetrol and diesel in Europe. The gap between themarginal costs of biofuels and traditional fuels moti-vates the analysis of different instruments that would beneeded to encourage the uptake of biofuels: an exciseduty reduction, a subsidy to the production of biofuelsand/or relaxation of tariffs on imports from cheapernon-EU producers.
3
In addition, this threshold value, orthe cost of reducing a tonne of CO
2
emissions usingbiofuels, can be contrasted with the marginal costs of achieving CO
2
emission reductions elsewhere. It can becompared, for example, with the cost of technicalmeasures in the transport sector to reduce greenhousegas emissions or with the price of buying allowances inthe CO
2
emissions trading market.The remainder of this paper is structured as follows:Section 2 provides the policy and technical contextsurrounding the adoption of biofuels in Europe. Section3 computes the threshold value per tonne of CO
2
reduction that needs to be achieved for biofuels to becompetitive with conventional transport fuels in Europe.Section 4 outlines the policy implications and Section 5summarises our conclusions.
2. European policy and technical context
In accordance with the ‘‘flexible mechanisms’’ of theKyoto protocol, the EU has introduced a CO
2
emissionstrading scheme that commenced on a pilot basis inJanuary 2005.
4
Although not included in this pilotphase, reducing the transport sector’s emissions, and inparticular emissions from road transportation, is apressing issue as the latter currently represent 19% of total EU CO
2
eq. emissions and are expected to increase(European Environment Agency, 2004)
5
. The EuropeanCommission foresees that three alternative transportfuels, hydrogen, natural gas, and biofuels, will replacetransport fossil fuels, each by 5% by 2020 (Commissionof the European Communities, 2001).Biofuels are an alternative motor vehicle fuel pro-duced from biological material and are promoted as atransitional step until more advanced technologies havematured. Hydrogen and natural gas are seen as mediumrather than short-term solutions, due to infrastructural,cost and technical challenges.Biofuels are viewed as an essential element in thedevelopment of alternative fuel markets, and someinitiatives have already been introduced to promotebiofuels in the EU. Under the European Directive on thepromotion of the use of biofuels or other renewablefuels for transport (European Parliament and Council,2003), Member States are instructed to ‘‘ensure that aminimum proportion of biofuels and other renewablefuels is placed on their markets,’’ and reference valuesfor national targets are given as 2%, by 2005, and5.75%, by 2010.
6
Furthermore, Member States arepermitted to reduce excise duties on biofuels
7
(Councilof the European Union, 2003). The Green Paper‘‘Towards a European Strategy for Energy Supply’’supports this initiative, and it also serves the reforms of the Common Agricultural Policy to support ruraleconomies; by decoupling some subsidies from foodproduction, land is released for potential energy cropproduction (Commission of the European Commu-nities, 2003).The EU directive lists 10 products that should beconsidered as biofuels. Of these, there are two that havebeen most frequently employed to date: (i) Biodiesel,produced from plant oils, such as rape seed, soybean orpalm, or from organic waste material; which can be usedin a modified diesel engine or processed to be used in aconventional diesel engine; and (ii) bioalcohol, such asmethanol and ethanol, which can be produced fromcereal crops or sugar beets and can fuel modified petrolengines.These categories of biofuels have gained the mostattention in the EU as they are produced from materialsthat are suitable for agricultural production in the EU,or are widely available waste products. Currently, otherpossibilities are either prohibitively expensive or energyintensive in their production,
8
due mainly to the smallscale of operation derived from the lack of marketdevelopment for these fuels. Economies of scale mayreduce these prices significantly in the future. For ageneral overview on biofuel choices and their character-istics seevan Thuijl et al. (2003)orFulton et al. (2004). There are many challenges facing alternative fuels beforethey can gain widespread acceptance in the transport
ARTICLE IN PRESS
3
There are other schemes possible to promote biofuels, such ascarbon-based fuel taxes, investment incentives, biofuels obligation, ortender schemes. We are grateful to an anonymous reviewer forpointing this out. In this paper we only deal with the three mostcommon schemes currently in place.
4
Directive 2003/87/EC of the European Parliament and of theCouncil establishing a scheme for greenhouse gas emission allowancestrading within the Community and amending Council Directive 96/61/EC. This text will apply to the existing 15 Member States, thoseAccession States who joined in May 2004 and other countries (such asIceland, Norway and Switzerland) who choose to participate.
5
In the first pilot phase (2005–2007) trading is confined to CO
2
emissions from power stations in excess of 20MW (except incinera-tors), oil refineries, smelters, manufacture of cement (
4
500tonnes/day), ceramics including brick, glass, and pulp, paper and board(
4
20tonnes/day). See footnote 2.
6
Directive 2003/30/EC. Although these targets are indicative ratherthan mandatory, failure to meet them requires Member States toexplain the discrepancy in their annual biofuels progress reports.
7
Directive 2003/96/EC.
8
In the medium term, technological advances in the thermochemicalprocessing of biomass could produce biodimethylether, synthetic fuelsand hydrogen, to take a few examples.
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
3185
 
fuels market. The existing petroleum infrastructure isstandardised and has extensive coverage, and the costand therefore selling price of biofuels is significantlyhigher than that of mineral oil fuels.
3. Biofuels vs. conventional fuels: the value of reducingCO
2
emissions
Although the amount of biofuels produced in the EUis growing, the quantities remain small compared to thetotal volume of mineral-based transport fuels sold— approximately 0.3% of all EU petrol and diesel fuel in2003 (Kavalov, 2004).Production costs of biofuels vary and are dependenton the prices of raw materials, the method of produc-tion, the extent of refining undertaken, and thesupplementary utilisation of by-products and waste.The European biofuels cost estimates utilised in thispaper, reported inTable 1a, come fromJungmeier et al. (2005)
9
who reviewed 73 academic, public and industrystudies to provide a comprehensive collection of costand CO
2
-equivalent (CO
2
eq.)
10
emissions estimates forbiofuels. The costs are highly variable depending on thevarious combinations of feedstock and country of production. For this reason,Table 1areports a rangeof cost estimates including the lowest, the most likelyvalues (‘‘best estimates’’), and the highest values fromthe studies. Overall, the best estimates inTable 1aare atthe upper end of values reported in other studies (see forexampleden Uil et al. (2003),Edwards et al. (2004)or Kavalov (2004)), while the full range of values fallswithin the range of the literature. Although the bestestimates inTable 1arepresent the most likely values, itis evident that some producers in Europe are producingwith costs at the lower margin at this time. Jungmeier etal. estimate the future costs (post-2010) as significantlylower and these are represented inTable 1b. Note thatbecause both biodiesel and bioethanol contain lessenergy per litre than the corresponding fossil fuel, thetotal cost per litre inTables 1a and bis given as a costper energy-equivalent litre.
11
Table 1ashows that using current productiontechnology the cheapest bioethanol produced in Europecomes from starch crops. Overall, however, the cheapestbioethanol, comes from sugarcane in Brazil.Table 1aalso shows that biodiesel is cheapest when producedfrom waste oils and fats.To be profitable, biofuel prices must cover productionand distribution costs and be competitive in price with
ARTICLE IN PRESS
Table 1Costs of biofuelsBiofuel Cost at filling station (
h
2004
/1000L)Feedstock Low Best estimate High(a) Costs of biofuels produced using current technologySugar crops 875 1265 1855Starch crops 809 1173 1572Lignocellulosic crops 1148 1448 2435Lignocellulosic residues 1052 1316 2232Brazilian sugarcane 117 294 351BiodieselOil seeds 755 945 1092Used oil/fat 354 454 545(b) Costs of biofuels produced using future technologySugar crops 671 954 1432Starch crops 653 963 1287Lignocellulosic crops 699 884 1469Lignocellulosic residues 638 802 1358Brazilian sugarcaneBiodieselOil seeds 753 888 1068Used oil/fat 317 395 504
Notes
:1. Source of data isJungmeier et al. (2005), who reviewed 73 studiesto provide a range of estimates for environmental performance andeconomic costs for biofuels within the VIEWLS project. Data areexpressed in
h
2004
.2. Current technology refers to technology of production utiliseduntil 2010. Future technology refers to technology after 2010.3. Costs include production, transportation, conversion anddistribution.4. Biodiesel costs estimated per litre of energy-equivalent diesel. Weassume the energy density of petrol to be 34.3MJ/l (Nommensen,2005).5. Bioethanol costs estimated per energy-equivalent litre of petrol. Weassume energy density of petroleum diesel to be 39.4MJ/l(Nommensen, 2005).
9
This project was undertaken as work package 2 of the VIEWLSproject (Clear Views on Clean Fuels), which was funded as EC ProjectNNE5-2001-00619 from February 1, 2003–January 31, 2005. Moredetails on the project and the consortium involved can be found atwww.VIEWLS.org.
10
The emissions of CO
2
and other greenhouse gases (N
2
O, CH
4
,HFC, PFC, SF
6
) are combined and represented as with ‘‘CO
2
eq’’.emissions units by multiplying the different emissions (in metric tons)by the global warming potentials of the individual greenhouse gasesand summing together.
11
Bioethanol contains 67% as much energy per litre compared withpetrol and biodiesel contains 87% as much energy per litre comparedwith diesel (Fulton et al., 2004). The energy-equivalent cost is therelevant variable since the targets contained in the EU biofuelsdirective are given on an energy basis. In addition, if consumers(
 footnote continued 
)substitute a biofuel for a fossil fuel, the difference in energy contentwill most likely translate into increased fuel consumption and thereforethis real cost must be taken into account when comparing fossil fueland biofuel prices. For this study, we consider it appropriate to convertthe biofuel costs from an energy basis to energy-equivalent litres, sincewe would like to compare the prices of fuels at the filling station andthe effect of excise duty rebate on prices (per litre).
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
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