February 28, 2020

EU Energy Policy and Biofuels

In a Congressional Research Service (CRS) report from earlier this year (“The European Union’s Energy Security Challenges”- Jan. 30, 2008), Paul Belkin stated that, “Recent increases in energy prices and a steady escalation in global energy demand — expected to rise by nearly 60% over the next 20 years — have led U.S. policy-makers to engage in a wide ranging debate over how best to address the country’s future energy requirements. Similarly, energy security has become a policy priority for the European Union (EU) and its 27 member states. The EU imports about 50% of its energy needs. Barring significant changes, the European Commission expects this figure to rise to 65% by 2030. About half of the EU’s natural gas imports and 30% of its imported oil come from Russia. Europe’s growing dependence on Russian energy, and long-term energy agreements between Russian firms and some European governments have fueled speculation that Moscow is using the ‘energy weapon’ to try to influence European foreign and economic policy.

“The EU has traditionally exerted little if any influence over individual member state energy policy. However, in March 2007, in the face of increasing concern about Europe’s reliance on Russian energy, and growing public pressure to address global climate change, EU member states agreed to forge an ‘Energy Policy for Europe.’ They have agreed on a set of EU-wide targets — some legally binding — to increase the use of renewable energy, and reduce carbon emissions.”

The CRS report noted that, “At their March 2007 summit, EU member states moved to boost European coordination to help secure and diversify energy supplies, increase the development and use of renewable and alternative energy resources within the EU, and reduce energy demand and consumption. Although member state governments remain reluctant to cede national sovereignty over energy-security aspects of their foreign policies, they have set binding EU-wide targets for the use of renewable energies and biofuels, and have agreed to ambitious but non-binding energy efficiency and carbon emission reduction targets for the year 2020.”

Recall that a European Commission press release issued in January stated that, “The European Commission has today agreed on a far-reaching package of proposals that will deliver the European Council’s commitments to fight climate change and promote renewable energy. The proposals demonstrate that the targets agreed last year are technologically and economically possible and provide a unique business opportunity for thousands of European companies. These measures will dramatically increase the use of renewable energy in each country and set legally enforceable targets for governments to achieve them. All major CO2 emitters will be given an incentive to develop clean production technologies through a thorough reform of the Emissions Trading System (ETS) that will impose an EU-wide cap on emissions. The package seeks to deliver the European Union to reduce greenhouse gases by at least 20% and increases to 20% the share of renewable energies in the energy consumption by 2020, as agreed by EU leaders in March 2007. The emissions reduction will be increased to 30% by 2020 when a new global climate change agreement is reached.”

As part of this aggregate plan on climate change, a “Memo on the Renewable Energy and Climate Change Package,” was also by the EC in January, and specifically highlighted some issues associated with biofuels: “The 10% target for renewable energy in transport has been set at the same level for each Member State in order to ensure consistency in transport fuel specifications and availability. Member States which do not have the relevant resources to produce biofuels will easily be able to obtain renewable transport fuels from elsewhere. While it would technically be possible for the European Union to meet its biofuel needs solely from domestic production, it is both likely and desirable that these needs will in fact be met through a combination of domestic EU production and imports from third countries.”

Mr. Belkin, in the recent CRS report, provided an overview of this development, and stated that, “Hydro, wind, solar and bio-mass energy currently account for just under 7% of Europe’s total energy consumption and 15% of its electricity generation. In March 2007, EU member states agreed to a legally binding target mandating that 20% of total European energy consumption be fueled by renewable energy sources by 2020. In January 2008, the European Commission proposed individual national renewable energy targets intended to realize the EU- wide goal.”

The report added that, “Given that Europe’s oil-dependent transport sector accounts for roughly a quarter of the EU’s total carbon emissions, the EU has mandated that biofuels make up a 10% share of all European transport fuel by 2020…Whether the EU meets its renewable energy targets will likely depend on cost of production and the extent to which member states are willing to subsidize their development on a large scale.”

With this background in mind, the Associated Press reported yesterday that, “The British government’s top environment scientist warned Monday that plans to make all the country’s cars run partly on biofuels could actually harm the environment.

“Starting next month, all vehicle fuel sold in Britain will have to be at least 2.5 percent biofuel, a level due to rise to 5 percent by 2010. The move is intended to cut emissions of greenhouse gases caused by burning fossil fuels like oil.

“But Environment Department science adviser Robert Watson said some biofuels may not be environmentally sustainable. He called for the policy change to be postponed until a review of their impact is completed.”

The AP article added that, “Backers of biofuels such as ethanol made from plants say they are a green alternative to traditional energy sources. But critics say forests and food crops are being razed so land can be turned over to biofuels.

“Environmental groups including Greenpeace and Friends of the Earth called on the government Monday to halt its biofuel plan, saying ‘there is a very real risk that (it) will make climate change worse, not better.’”

Keith Johnson, in an update posted yesterday at the Environmental Capital Blog (The Wall Street Journal), stated that, “Long-time global warming guru Robert Watson, who formerly worked in the Clinton White House, headed the Intergovernmental Panel on Climate Change, and is now the top science advisor to the U.K. government, said Monday the U.K. might want to rethink a new biofuel policy until the environmental impact of alternative fuels is clearer.”

Mr. Johnson noted that, “The wrangling over alternative fuels and their environmental cost is made all the more difficult thanks to the sustained high price of oil. Many experts say the recent biofuel explosion around the world has helped shave about 15% off the price of oil. So a pullback from the biofuels push might add to consumer pain at the pump.

“Some recent academic studies have argued that biofuels actually cause more greenhouse-gas emissions because they lead to destruction of carbon-rich forests. Environmental groups like Greenpeace that campaign against biofuels applauded Dr. Watson’s comments. But the jury is still out: Many leading biofuel scientists question new studies that say biofuels have a much bigger carbon footprint than fossil fuels.

“The scientific back-and-forth is starting to shape policy—in Europe at least. European officials have tried to limit the import of biofuels that cause forest destruction. Earlier this month, the European Union said it would stop subsidizing many local biofuel crops, like sugar beets.”

In a related item, Brian Warshaw reported last week at the Ethanol Producer Magazine Online that, “On March 10, Nottingham became the first city in England to operate a regular bus service with ethanol-fueled vehicles. Three newly delivered E95 single-deck buses took over service on the city’s No. 30 route.

“Reading, England, is not far behind, awaiting the arrival of 14 ethanol-powered double-deckers for service in May. The two cities have been vying to be the first outside of Sweden to use ethanol-fueled vehicles. In Sweden, 600 E95-powered buses ply routes, including approximately 400 in the capital Stockholm.”

And with respect to biodiesel in the EU, DTN writer Todd Neeley reported yesterday from Berlin that, “In 2006 German politicians rolled the dice.

“They decided to begin taxing pure biodiesel, or B100, as a partial solution to budget deficits, banking on the belief that fossil fuel prices would continue to rise and take biodiesel prices along with them, keeping the industry profitable.

“Since then German biodiesel has virtually folded and is on the brink of collapse.”

Mr. Neeley explained that, “It is reeling from rising rapeseed oil prices and market problems that have combined to push what was the largest biodiesel industry in the world to its knees. The tax-free capacity-building boom of 2005 has stopped dead in its tracks and many companies have closed down production, laid off workers and are either selling their plants or at least considering such a move.”

The DTN article indicated that, “In September 2006 rapeseed oil was selling for about 650 Euros per metric ton, or about $950, according to the Union for the Promotion of Oil and Protein Plants, or UFOP, the German association representing oilseed producers and crushers. Since then prices have shot up to around 900 Euros, or about $1,320.

“To add insult to injury, estimates are that some 700,000 metric tons, or about 210 million gallons, of fully U.S.-subsidized B99 biodiesel was imported to Germany in 2007 in what has become known as ‘splash and dash.’

“In other words, foreign companies ship biodiesel to the U.S., ‘blend’ a drop of fossil fuel-based diesel into biodiesel to gain the tax credit and then ship it to the EU.

“There has been discussion in the U.S. Congress to close the loophole in the blenders’ credit, but nothing has been done yet. As a result, Sprick [Petra Sprick, managing director of the Association of German Biofuel Industry, which is based in Berlin] said, the EU Commission is considering bringing WTO action against the U.S. in what would be ‘a strong case.’”

Mr. Neeley also noted that, “And German biodiesel has fallen prey to biofuel critics who claim that the increased appetite for rapeseed to make biodiesel has driven up food prices, Sprick said. Similar criticism is leveled at the U.S. corn-based ethanol industry.

“‘The food industry is very strong in Germany,’ she said. ‘As a small lobby how could we fight against it?’”

And with respect to biofuel exports, Reuters writer David Brough reported last week that, “Africa has potential to become a major exporter of biofuels, but investors must factor in a need for costly new infrastructure and overcome red tape before the sector takes off, a biofuels expert said on Thursday.

“Meghan Sapp, managing director of Brussels-based HG Consulting, told a conference that southern Africa, Kenya and Nigeria were among countries with potential to produce sugarcane- and cassava-based ethanol biofuel for export.

“‘Biofuel production on a commercial scale in Africa is a fairly new idea but one that opens a lot of opportunities for both investment and local economic development,’ said Sapp.”

Mr. Brough noted that, “Europe was likely to become the main market for African ethanol exports because of Africa’s preferential trade agreements with the European Union.”

The article pointed out that, “Later, Sapp told Reuters it could take at least 10 years before biofuel production achieves critical mass in Africa.”

Food – Commodity Prices

Mike Hughlett reported in Sunday’s Chicago Tribune that, “Food prices generally have been rising at an annual rate of nearly 5 percent in recent months, a pace not seen since the early 1990s. Milk prices jumped 11 percent last year; chicken prices 6 percent, according to the Bureau of Labor Statistics.

“But neither can match eggs: Prices soared 29 percent in 2007, a pace that has continued this year. Consumers don’t like it, but eggs are such a basic item that they don’t appear to be changing their habits.”

And Associated Press writer Stevenson Jacobs reported yesterday that, “Agriculture futures shot up Monday, rebounding sharply after last week’s commodities sell-off sent investors in search of bargain-priced wheat, corn and soybeans.”

“Wheat for May delivery surged 32.5 cents to settle at $10.20 a bushel on the Chicago Board of Trade, after earlier rising as high as $10.62. Wheat fell below $10 a bushel last week for the first time since Feb. 13. It’s still well off its all-time high of $13.495 a bushel, reached Feb. 27…Other agriculture futures also traded sharply higher. Soybeans for May delivery added 50 cents to settle at $12.57 a bushel on the CBOT, while May corn climbed 17.25 cents to settle at $5.2475 a bushel,” the article said.

And Mr. Jacobs pointed out that, “Also pushing prices higher Monday were floods in midwestern and southern U.S. states that could delay corn planting, the latest in a string of bad weather to affect crops.”

Meanwhile, Tracy Wilkinson reported in today’s Los Angeles Times that, “With food and fuel prices soaring, the United Nations agency charged with feeding the world’s hungry has launched an ‘extraordinary emergency appeal’ to cover costs and avoid having to cut aid, a senior official said Monday.

“The World Food Program called on donor nations for urgent help in closing a funding gap of more than $500 million by May 1. If money doesn’t arrive by then, Executive Director Josette Sheeran said in a letter to donors, the WFP may be forced to cut food rations ‘for those who rely on the world to stand by them during times of abject need.’”

Planting Restrictions

Kevin Diaz, writing in yesterday’s Minneapolis Star-Tribune, reported that, “Jack Hedin calls it forbidden fruit.

“The organic fruits and vegetables that Hedin grows on his Featherstone Farm in southeastern Minnesota find eager buyers in co-ops all over the Twin Cities, frequented by urban dwellers hungry for fresh, locally grown food.

“But in Congress, where lawmakers are rewriting federal farm policy for the next five years, much of what Hedin and other small-scale farmers grow in the Midwest falls under federal planting restrictions that add millions to the tab shoppers pay at the register.”

The article noted that last year, Hedin planted “watermelons, tomatoes and vegetables” on “corn base” acres “meaning land enrolled in a federal subsidy program for corn, the landowners would have to forfeit the subsidies on that acreage, perhaps permanently. And the subsidies they received on their remaining acreage would be reduced by the value of the crop that Hedin was growing on their land.

“In all, Hedin had to pay his landlords $8,771, on top of the rent, adding substantially to his costs. To Hedin, that’s tantamount to a fine for growing an ‘illicit’ crop of fruits and vegetables. ‘This is a system that has been perverted in some way,’ he said.”

“The penalties kicked in only because the land was given over to fruits and vegetables, which are expressly restricted on commodity program acres,” the Star-Tribune article said.

Mr. Diaz explained that, “But what looks like a protection racket in the Midwest seems like fair play in places such as Texas, Florida and California, where big specialty crop growers get few, if any, direct cash benefits from the government. They don’t want to compete on price against produce grown on subsidized Midwestern farmland.

“‘It’s a simple question of competition,’ said Tom Nassif, president of the Western Growers Association, which represents the California and Arizona fresh produce industry. ‘The person who has the subsidy has the competitive advantage.’”

And later, the article pointed out that, “[T]he new farm bill is expected to leave much of the current subsidy system in place, along with the restrictions on specialty crops, despite the increasing demand for new acreage for locally grown fruits and vegetables.”


Reuters writer Raymond Colitt reported yesterday that, “The Doha round of global trade talks is close to reaching an accord in principle on industrial tariffs and farm subsidies and quotas, Brazil’s chief trade negotiator said on Monday.

“‘We’re closer to an agreement than ever before,’ Robert Azevedo told Reuters. ‘It is within grasp,’ he said.”

Keith Good

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