Global Biofuels Blog

 On Friday the U.S. House of Representatives approved the American Clean Energy and Security Act (H.R. 2454) by vote of 219 yeas to 212 nays.  The comprehensive climate change and energy legislation, which serves to advance President Obama’s environmental agenda, was 1,500 pages in length with more than 200 amendments considered.  The Senate now plans to take up climate/energy legislation this fall.

With respect to biofuels, only the democrats “manager amendment” was approved during the floor debate of the bill.  Proponents of the legislation, Rep. Henry Waxman (D-California) and Rep. Edward Markey (D-Massachussets), along with the House leadership cut a deal with Rep. Collin Peterson (D-Minnesota) who vowed he would not support the bill and take other democrats with him unless the legislation included a provision restricting the consideration of indirect land use change (ILUC) GHG emissions provisions in the current RFS2 proposed regulation.  (Mind you, Rep. Peterson was a co-sponsor and voted for the VERY SAME legislation that included these provisions, the 2007 Energy Independence and Security Act, but nobody except me seems to be pointing that important fact out!)

Peterson got his way.  The ILUC provisions restrict EPA from incorporating ILUC impacts when determining GHG lifecycle emissions for biofuels at least over the next five years while federal government agencies study the issue (plus one additional year for findings to be considered by Congress).  It makes sense to me to take a step back and fully study the best and most appropriate methodologies for analyzing such a controversial and complex issue(s).  Will the Senate do the same?  Who knows.  We speculate that the legislation as a whole will be much more controversial in the Senate and thus less likely to pass (ILUC or not) - at least this year.  What does that mean?  ILUC provisions in the RFS2 will stay in the final regulation to be released late this year, and I’m guessing, without many changes. 

Late last week Sunoco completed the acquisition of the 100 million gallon/year Northeast Biofuels ethanol plant in Volney, New York.  The price: $8.5 million - a downright bargain!  The cost to build the plant: $200 million.  Ethanol volumes from the plant are expected to meet about 25% of the company’s renewable volume obligations under the RFS2 regulation and is close to its operations in the northeast.  The move follows Valero, which recently acquired seven VeraSun ethanol plants for $477 million representing almost 800 million gallons/year in capacity.  Will oil companies continue to acquire ethanol plants?  You bet.  Who and how much remains to be seen.  Sure, it could be a major as much as it could be other ethanol producers both here…and abroad.

Ang Ding Li, our manager of Global Strategic Services for HEC, highlights the misconceptions for biofuels and CDM:

There are some critical fallacies on the relationship between biofuels and the complex Kyoto Protocol, which governed the issuance of Clean Development Mechanism (CDM) carbon credits. Many biofuels producers, even those regarded as the largest, are under the misguided understanding that the production of biofuels and the cultivation of biofuels feedstocks (e.g. jatropha) are eligible for carbon credits under the CDM scheme.

The Kyoto Protocol consists of 1) Annex 1 (developed) countries that have CO2 emissions reduction targets and 2) non-Annex 1 (developing) countries, the majority of which can benefit from CDM schemes through carbon credits (CERs) generated by engaging in activities that reduce CO2 emissions. Biofuels by virtue of their CO2 emission reduction abilities will be eligible for carbon credits under the broader Kyoto Protocol. Politics aside, this is certainly the case for Annex 1 countries that have CO2 emissions reduction targets - hence the huge case for biofuels mandates and subsidies in these developed countries.

The picture is very different for the developing non-Annex 1 countries where biofuels are being perpetuated under very different market dynamics. To date, there are no biofuels projects registered as CDM projects. As a result, no CDM carbon credits have been generated from the many biofuels projects in the developing world. This can be primarily attributed to 1) the lack of standardized accounting methods to calculate the carbon footprints of biofuels, 2) the non-eligibility of biofuels exported to Annex 1 countries for CDM, 3) ineligibility of vehicles using similar engine technology to those using fossil fuels for the CDM scheme, 4) poor operational consistency of first generation biofuels and 5) the existence of other cheaper projects that generate more carbon credits per dollar invested. These restrictions kept most of the biofuels projects out of the CDM scheme.

Another fallacy with the CDM scheme is the ease of obtaining carbon credits from projects involving the cultivation of biofuels feedstocks (e.g. jatropha) under the CDM scheme. Such projects, if conducted like quasi-reforestation projects on marginal lands, may be eligible for carbon credits under the CDM schemes. The first afforestation project was awarded carbon credits under the CDM scheme in March 2009 in India. However, given the complexities in accounting for greenhouse gas (GHG) abatement, the direct cultivation of crops on marginal lands may not be directly eligible as a CDM project. As such, it would be easier to generate carbon credits by using waste biomass generated from the land for power generation in place of fossil fuel if CO2 emissions are being avoided or reduced.

Particular opinion convergence has been achieved during the Poznan Climate Change Conference in Dec 2009 which set a precursor to the Copenhagen talks this December trying to finalize climate change policies for the post-Kyoto era.  This is further supported by the carbon finance markets which current offers CER futures well beyond 2012. It is expected that at the Copenhagen meeting, the registration process and regional distribution of CDM projects will be enhanced. Furthermore, eligibility of projects that are currently limited in scope within the CDM scheme such as energy efficiency, carbon capture and storage as well as forestation projects are likely to be further expanded. CDM has proven to be effective; its successes should be built on and further improved for global good, including for biofuels.

Our research manager for Asia Pacific and Middle East, Lucky Nurafiatin, highlights a sticky situation for ethanol in Asia:

In my recent participation at a bioenergy conference, I was involved in a discussion about the ethanol market situation in Asia. As we are probably all aware, ever since ethanol blended gasoline was mandated in the Philippines, ethanol demand in the country has climbed significantly. Although the driver behind that mandate was to boost ethanol production from the sugar industry, the Philippines’ government realized that local ethanol production will not be sufficient to meet the demand created by the mandate. Thus, ethanol imports are allowed and taxes are waived for fuel ethanol.

Similarly, the Indonesian government mandated ethanol blended gasoline usage nationwide effective in January 2009. The driver behind the mandate is similar to the country’s neighbor’s: to increase income from agro industry. The combination of both countries’ ethanol demand is resulting in sudden high demand for ethanol in the region.

Both countries have sugar industries and most of the ethanol feedstock they are using is molasses. In the wake of the biofuels mandates and regulations, both governments overlooked feedstock regulations. The case is different with coconut and palm oil, which have been regulated as commodities.  By contrast, molasses has never been an important feedstock and has never been regulated as a commodity. Molasses is a byproduct of the sugar industry and only used as feedstock for monosodium glutamate (MSG) production.

This sudden increase in ethanol demand creates a high demand for molasses as well which in a short time has become a very popular commodity. In addition, as there is no trade regulation on molasses, the price of molasses is currently very high. This condition impacts local ethanol production costs and as a result, the local ethanol price currently is higher than Brazilian ethanol, its competitor. This situation is a big concern for both countries’ ethanol and sugar producers associations, as it will negatively affect their industry.  Ethanol plants will even close down if these governments do not take steps to regulate the molasses market.  It’s another example in needing to fully consider these kinds of impacts before implementing a mandate and will be interesting to see what these governments will do.