Global Biofuels Blog

The CDM EB adopted a ground breaking methodology (ACM0017) in 2010 which allows for biodiesel production (not consumption) to be registered as a CDM project (generating CER) under the UNFCCC framework. This is a break from previous regulations and big step forward in recognizing the potential role of biodiesel in combating climate change. Not surprisingly, biodiesel¹ producers are optimistic about the positive impact of the new methodology in aiding the development of their industry.

The new methodology had various stringent criteria to ensure the GHG abatement potential of biodiesel from a life cycle perspective. Firstly, the feedstock for biodiesel production need to be from a new plantation on degraded/degrading land that has been dedicated to the production of biodiesel feedstock.  Secondly, this methodology is only eligible for biodiesel produced and used within the host country and for vehicles; it must be a captive fleet.  Lastly, stringent checks are expected at both the blending and consumption levels.

Looking deeper, the real benefit of the new methodology might not be as optimistic as most would have hoped for it to be. Dedicated plantations increase the business risks to plantation owners. Consumption criteria limit the market and stringent monitoring requirement add to business costs. The beneficiaries of this new methodology will most likely be biodiesel producers supplying to domestic public transportation, government vehicle fleets as well as hardy and locally consumed feedstocks that are more likely to grow on degraded lands such as jatropha. However, the eventual economic feasibility of this methodology in benefiting biodiesel production will depend on the relative cost of monitoring consumption and terra-treating of degraded land to achieve crop productivity and benefit that could be derived in the form of revenue from CER.

Furthermore, as this methodology is only applicable for blend levels above the mandated level in the host country, its adoption might somewhat have an impact on the implementation of biodiesel mandates in developing countries.

The Global Biofuels Center will analyze this issue further in its upcoming Special Report: Carbonomics 2 scheduled for release early 2010.

1) Biodiesel is defined as FAME produced by the esterification of vegetable and/or waste oil with alcohols from biogenic and/or fossil origin.

This week we will release our annual supply and demand projections for biofuels globally, our Global Biofuels Outlook study, which we have done as a group for the last four years.  Some of the great surprises for me revealed from our analyses were:

• The growth that we can still expect in the conventional biofuels arena driven primarily by mandates that currently being implemented around the world - demand for biofuels is going to double over the study time period (2009-2015);
• Asia-Pacific ethanol production will grow tremendously in the coming years and could represent as much as 20% of global ethanol production by 2015;
• Of note, if India’s own projections were realized, it could outpace Brazil in ethanol production and exporting by 2015. Nonetheless, despite India’s ethanol production expansion Hart projects that Brazil will remain the leading global biofuels exporter;
• The U.S. will have to rely on increasing volumes of Brazilian ethanol to meet current targets established by the federal RFS2 (advanced biofuels) and California Low Carbon Fuels Standard (LCFS), but could be in a position to export corn-based ethanol by 2015.

For more information about our study, see http://www.globalbiofuelscenter.com/Spotlight.aspx?Id=32.

Late last week, Waste Management announced it was joining Valero in investing in Terrabon, a company commercializing a technology to produce biocrude from waste using its MixAlco^TM technology. MixAlco is an acid fermentation process that converts biomass into organic salts. The resulting non-hazardous organic salts, or bio-crude, would be then shipped by truck, rail or pipeline to a Valero refinery or other centralized processing facility where it would be converted to a high-octane gasoline that can be blended directly into a refiner’s fuel pool and presumably would qualify as an advanced biofuel under the Renewable Fuels Standard (RFS2) program.

Assuming the process is commercially scalable, it could be an interesting win-win-win: Waste Management would probably get carbon credits under a looming cap and trade scheme; Valero gets an advanced biofuel that it can process and blend directly into the gasoline pool, avoiding some of the logistics issues blending ethanol can present, capturing an opportunity to sell valuable advanced biofuel renewable identification numbers (RINs) on the market and allowing it to more easily meet Low Carbon Fuels Standard (LCFS) obligations; Terrabon gets rich.  There would be no food v. fuel issues, sustainability concerns or complicated lifecycle analyses on land use change (LUC) with which to contend.  The very fact that there wouldn’t be LUC issues makes the product especially attractive.  Is waste where it’s at?

The Massachusetts Department of Energy Resources released this week its Program Design and Implementation Plan for implementing the biofuels mandate enacted under the Clean Energy Biofuels Act of 2008.  As previously reported by GBC (What’s New, July 28, 2008) the Act requires all home heating oil and diesel motor vehicle fuel sold in the state to include a 2% by energy content blend of advanced biofuels by July 1, 2010, increasing to 5% by energy content by 2013.

The most controversial aspect of the plan is a provision in which the department states that it will only accept Statement of Qualification Application forms (for purposes of compliance with the mandate) “for biofuels derived from waste feedstocks which, as defined and provided in the statute, are exempt from a detailed greenhouse gas reduction analysis, provided a preliminary analysis based on both CARB and EPA methodologies indicate such waste feedstocks will yield the 50% greenhouse gas reduction threshold in the Massachusetts law.”

The mandate has been postponed for a year and early action credits are permitted to encourage early compliance, but where the waste-oil biodiesel/heating oil will come from is anyone’s guess.  According to our production capacity database, there’s less than half a million gallons of capacity operating in Massachusetts right now, and less than 200 million gallons in the U.S.

Realistically, what is happening is the state is waiting for the RFS2 rulemaking to be finalized, including lifecycle assessment methodology, as well as for the state of California to conclude additional work in this area by the end of 2009 (for biodiesel pathways) so that it can utilize the methodology to assess whether advanced biofuels meet the thresholds established in the legislation (50% for diesel and heating oil substitutes).  Maybe a year’s delay brings the state that much closer to what it really wants: an LCFS…good luck with that!

As I noted in my last blog entry before a short summer hiatus, it would only be a matter of time before attention turned from the U.S. to other biodiesel producers and exporters, namely Argentina and Brazil.  It’s barely been a month and already the European Biodiesel Board is now “in dialogue” with the European Commission so that it can “react quickly” to evidence that U.S. and Argentinian producers and exporters are colluding so as to circumvent the recently imposed countervailing duties from the Commission.  Canada has been thrown into the mix as well.  Data from the International Trade Commission (ITC) through June 2009 suggests this is not the case.  Nevertheless, EBB maintains that there is an incentive to produce biodiesel in Argentina and export it to Europe because of the incentives available there which serve to undercut European biodiesel producers.

Canadian producers are now being watched also with EBB noting an increase in exports, but note there is no longer a federal excise tax credit or other advantageous incentives being applied that would impact exports to Europe.  The U.S. can export to Canada duty-free, which conceivably then re-export to Europe.  There is some evidence this could be the case as through June ITC data puts exports to Canada at approximately 761,000 gallons - hardly enough to foster a trade case!  What will it take to establish a level playing field for European producers, I still wonder?

 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.

Our European Biofuels Director wonders about the the implementation of the RED in the EU Member States: 

It took 12 months for Member States to agree on all the details of the Renewable Energy Directive (RED), but it was approved last December to the relief of the EU biofuels industry. Five months have passed since the European Parliament’s approval, more than one month since the Council approved it and Member States have yet to give an indication that they are working on adopting the 10% biofuels mandate in 2020. Actually, the steps that have been taken since the December vote are quite interesting: The Netherlands reduced their biofuels mandate in January 2009, the U.K. reduced its biofuels mandate in April 2009 and Germany is in the process of reducing its biofuels mandate too!

Some positive signs for the industry have come from Spain and Portugal, the first introducing a mandate in January 2009 and the second introducing a biodiesel mandate in July 2009. But, no Member State has yet unveiled plans about implementing the 2020 target. The RED will be published in June 2009 according to the Commission and only then will Member States be bound to implement it. However, considering the range of options available to meet the 10% mandate, it is surprising how little debate is ongoing. Is the renewable energy in the EU a victim of the economic crisis? Are Member States finding out that greening their energy sources and transportation sector is too costly right now?

Well, the Spanish renewable energy association APPA has just had enough waiting it seems, because they have translated the RED for the benefit of their rule makers and have drafted a law allowing its implementation in Spain! Will Spain take the lead and be the first Member State to implement the RED?