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Europe's import dilemmas

The EU must import significant volumes of biofuels to meet stringent, self-imposed requirements for their use, but increasing imports raises difficult questions for European policymakers, writes NJ Watson

BRAZIL's President Luiz Inácio Lula da Silva opened last month's European Union's (EU) International Conference on Biofuels with a bold prediction. He said second-generation biofuels – which will be derived from straw, timber, manure, rice husks and other agricultural waste – will help reduce the gap between rich and poor nations by enabling more countries – "more than 100" -- to become energy exporters. Today, just 20 countries produce biofuels for over 200 countries.

Given the experience of Brazil, the world's biggest bioethanol exporter, Lula has good reason to sound optimistic: the development of a biofuels industry has allowed the country to reduce its dependence on fossil fuels by 40%, created 6m jobs and cut deforestation by half. In addition, judging by the number of deals the country signed before and during the conference, continued rapid growth looks assured.

Globally, over $400m was invested in the biofuels sector in 2006. Ernst & Young's renewable energy group predicts annual industry growth of 30% in the medium term. According to the United Nations, global biofuels production has doubled in the past five years and will "likely double again" by 2011.

The country's export earnings from bioethanol, derived in Brazil's case mainly from sugarcane, should more than double between 2005 and 2010, from $0.6bn to $1.3bn, largely thanks to agreements signed with Japan and Sweden. In June, Brazil's agriculture ministry said this year's sugarcane crop could produce a record harvest of 20bn litres of bioethanol, which would help it equal or surpass last year's export record of 3.5bn litres.

New ventures

The day before the Brussels conference, Petrobras, Brazil's state-controlled energy company, finalised a venture with Portugal's Galp Energía that aims to produce Petrobras' second-generation biodiesel, H-Bio, for export to Portuguese and other European markets. Galp will commit about $300m to the venture.

In April, Petrobras signed a memorandum of intent with the Danish government to co-operate in biofuels, as part of Denmark's plans to raise the volume of biofuels used in vehicles to 10%. A more detailed agreement will be signed in September. Also in April, Brazilian chemicals company Caldic said it would spend €20m ($27.4m) to build bioethanol storage tanks at the port of Rotterdam. The tanks will have a capacity of 120,000 cubic metres (cm) and should be ready by the end of 2008.

European money is also flowing into Brazil. In April, Epuron, a German investment company specialising in renewable energy, announced plans to build bioethanol plants in Brazil as part of its international expansion. Managing director Nikolaus Krane said the investment would probably be similar to a €130m project to build a 200,000 cm/y bioethanol production facility in Germany.

Germany's Manferrostaal is teaming up with Brazil's Etanalc and the US' Sempra Energy to create the largest ethanol-export company in Brazil. The project plans to spend $8.4bn building 24 distilleries that should recoup $53bn in export revenue over a 20-year period. The first deliveries are forecast from 2010.

And Italy's Eni and Petrobras are studying a collaboration on biofuel production in Brazil and other countries after signing a memorandum of understanding on integrating their biofuels production technologies. Sub-Saharan Africa is a possible region for such projects, with production likely to meet rising European demand.

"Historically, companies involved in ethanol production in Brazil have been predominantly owned by local Brazilian families," says Juliette Kerr, an analyst with Global Insight, a consultancy. "But growing interest around the world in the potential offered by biofuels means more foreign capital is entering Brazil's booming ethanol sector."

However, there are worries that the necessary reforms to the market structure and regulatory framework of the biofuels industry are not keeping pace with the large investment flowing into the business. According to financier George Soros, investment in Brazilian ethanol production, some of which comes from his Quantum fund, could create an oversupply unless consumers such as the US and EU significantly reduce import tariffs.

"Unless the markets of the world are opened up, you probably have too much production coming on line," Soros told Brazil's annual gathering of ethanol producers in June.

The EU is addressing the issue. Speaking at the International Conference on Biofuels, the president of the European Commission, Jose Manuel Barroso, and the EU trade commissioner, Peter Mandelson, agreed that Europe would have to slash its tariffs on biofuel imports -- which stand at 70%. The EU has set a binding target of 10% of all vehicle fuels to come from biofuels by 2020 and the Commission predicts the EU will need to import 10-30% of its biofuel needs by 2020 to meets this target.

No to favouritism

"Europe ... will have to import a large part of its biofuel needs ... we should certainly not contemplate favouring EU production of biofuels, with a weak carbon performance, if we can import cheaper, cleaner, biofuels," Mandelson said. "Resource nationalism doesn't serve us particularly well in other areas of energy policy. Biofuels are no different."

However, cutting tariffs to raise EU consumption could be at odds with other environmental commitments. Environmentalists worry lower tariffs will ramp up farming in developing countries, which in turn could increase the destruction of ecosystems such as rainforests – particularly in Brazil, but also in large palm-oil producing countries such as Indonesia and Malaysia.

Policies incompatible

"It is difficult to see how an emphasis on protecting rainforests and curbing deforestation is compatible with using biofuels as a solution to climate change when there are no policy instruments that guarantee biofuels expansion without accelerating deforestation," says Simone Lovera, managing co-ordinator of the Global Forest Coalition, a worldwide coalition of non-governmental organisations and indigenous-peoples organisations.

A surge in biofuels imports may also meet opposition from Europe's powerful farming organisations. EU farmers see biofuels as a potential new source of revenue at a time when farm import tariffs and subsidies generally are being cut. 

Brussels pushes ahead

THE EUROPEAN Union's (EU) commitment to sourcing biofuel feedstocks from outside the continent has been reinforced by a new roadmap for energy use in the transport sector, writes Ian Lewis.

EU leaders decided in March that biofuels should comprise 10% of transport-fuel use within the Union by 2020, while acknowledging a previous 5.75% target for 2010 would be missed (PE 7/07 p20). Now they face the tricky task of working out how the 2020 target can be met while balancing the demands of competing lobbies.

Many of the EU's farmers – a major force in dictating policy in Brussels – are eager to grow rape, wheat and other crops as biofuel feedstocks to offset dwindling returns from the food industry. But biofuels manufacturers and users in Europe will be campaigning to use feedstocks from the cheapest sources, and these may turn out to be from developing-world exporters with access to much larger swathes of cheap agricultural land. The UK's transport ministry estimates the cost of producing and processing ethanol in the UK is more than twice that of production in Brazil.

Meanwhile, environmental pressure groups draw attention to evidence that extensive tracts of forest – which absorb carbon dioxide – are being cleared in some exporting countries, such as Brazil and Indonesia, to make way for biofuel crops. This and other factors involved in producing and transporting biofuel feedstock could negate any direct saving in carbon emissions over conventional fuels, they argue.

Against this complex background, the EU took another step towards defining its biofuels policy in June with the adoption by transport ministers of a series of conclusions on the shape of an energy strategy. These were drawn up by Germany while it held the rotating presidency of the EU council in the first half of the year.

Described by Wolfgang Tiefensee, the German transport minister, as "the first roadmap for a European energy strategy for transport", the council's conclusions encompassed a number of measures to cut greenhouse-gas emissions, including improved fuel efficiency and changing passenger behaviour, as well as reinforcing the role biofuels should play.

However, with ministers well aware of potential controversy, the draft conclusions on biofuels were loaded with caveats. The conclusions states: "The council welcomes the dynamic development of the biofuels market. It points out, however, that this development must not lead to consequences that are undesirable in terms of the environment, climate change, the economy or society, and therefore requests the [European] Commission to submit, as soon as possible, a proposal on the certification of biofuels on the basis of sustainability criteria and their contribution to reducing overall greenhouse-gas emissions, designed in a simple, operational manner that avoids any side-effects in the form of unjustified barriers to trade."

The certification proposal, intended to ensure feedstocks come from environmentally friendly sources, has long been held up as a way of limiting damage from large-scale biofuel crop farming. However, it has received a lukewarm reception from environmental pressure groups favouring a moratorium on EU incentives for biofuels production until more is known about its wider implications.

In Agrofuels – towards a reality check, a report published in July, a group of 11 non-governmental organisations, including UK-based Biofuelwatch and EcoNexus, say many issues remain to be addressed in devising a credible, unified EU system from the range of national, supra-national, mandatory and voluntary schemes being developed. Certification would not prevent expansion of production, while World Trade Organization rules could prevent implementation of certification systems if they were deemed anti-competitive, the authors claim.

Opec's warning

The uncertainties surrounding biofuels do not stop at feedstock sourcing and environmental issues, as Opec secretary-general Abdalla El-Badri has been eager to point out. He told the Financial Times in June that greater use of biofuels could push oil prices "through the roof", if this meant demand for oil – and, therefore, investment in exploration – was cut. A rise in oil prices would also mean a rise in the price of fuel with an oil-biofuel mix.

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