Sustainability Regulations Effects on ethanol trade


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Presentation on effect of sustainability regulations on future world trade of ethanol made at the FO Licht World Ethanol Conference, Geneva 4th of November 2010

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Sustainability Regulations Effects on ethanol trade

  1. 1. Page 1/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – FO LICHT WORLD ETHANOL CONFERENCE 2011 Presentation by Hubert de Biolley Slide Two: Presentation Introduction and Outline To assess the future potential of markets for sustainable and non-sustainable biofuels we must first establish what “sustainability” means. An academic definition – like that of the University of California – focuses on the ability to provide an on going and uninterrupted supply without damaging ecosystems or compromising the capacity of future generations to meet their own resource needs. To paraphrase the old adage – it is about continuing to produce the golden eggs while preserving the health of the goose that lays them. But in practice, sustainability is not so easily defined – it means different things to different people. Definitions of what makes a biofuel sustainable and the processes under which sustainability is proven and then certified vary widely across markets. Today we will explore these various definitions of sustainability, identify and examin the sources of sustainable biofuels and look at the potential market impact of the splintered approach to sustainability across global markets.
  2. 2. Page 2/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – Slide Three: Biofuels Sustainability in California USA and California Biofuels policy has to date focused on meeting the incorporation targets set under the Renewable Fuels Standard. However, there has not been regulation of GHG emissions reductions or the sustainability of the production processes used to grow the feedstocks and transform them in to ethanol. This all changes from January 2011 when California introduces measures to reduce the carbon intensity of its transport fuels. The legislation developed by CARB (California Air Resources Board) imposes fuel suppliers or “regulated parties” to reduce the emissions of the fuels they supply by 10% by 2020. Sustainability requirements will not be restricted to simple emissions reductions. A committee was established in March 2010 to evaluate and develop more stringent sustainability criteria. The Committee will report back in May 2011 and deliver a first draft of the provisions to CARB by December 2011. Slide Four: Biofuels Sustainability under the US EPA In the USA, nationally, the EPA is also developing sustainability criteria for biofuels under its Renewable Fuels Standards 2 program. RFS2 provisions establish minimum GHG reduction requirements for each biofuel type. Like the Californian legislation, the EPA’s framework includes the treatment of Indirect Land Use Change but the calculations for each pathway are different to those established by CARB – leading to two separate, and at times potentially inconsistent, sustainability systems for biofuels within the one nation. Conventional (or Corn Based) ethanol must provide an emissions reduction of 20% to qualify for Renewable Fuel Identification Numbers (RINs). Advanced Biofuels, which
  3. 3. Page 3/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – could be met by existing imports of sugar cane ethanol, must reduce emissions by 50% and cellulosic ethanol must reduce emissions by 60% to allow them to count under RFS2. RFS2 is also focused on ensuring that biofuels are produced from “renewable biomasses”. To be classed as a “renewable biomasses”, it must be produced from feedstock produced on land that must have been cleared prior to December 2007. Slide Five: Emissions Grandfathering Suppliers who provide product that is produced in facilities that were built or planned (either in the US or outside) prior to December 2007 and use feedstock grown on agricultural or forest land that was cleared prior to this time do not need to meet the GHG emission reduction standards. Unlike the “grandfathering” provisions in the EU legislation, which we will look at soon, there is no phase out period for grandfathering in the US. In effect, if you are producing ethanol from a pre-December 2007 plant (which includes some plants that were not actually completed by that time) then you can produce ethanol without any restrictions on GHG emissions …..forever! But then again, aren’t the Elderly often to be excused for emissions?
  4. 4. Page 4/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – Slide Six: Key Elements of EU Sustainability The EU has been the leader in the development of sustainability criteria. Under the Renewable Energy Directive (RED - effective from December 2010), producers and suppliers may only supply renewable fuels that can prove to reduce GHG emissions by a minimum of 35% and although a “grandfathering” clause applies for existing facilities it is phased out by 2013. By 2017 emissions must be reduced by 50% and new plants are required to lower emissions by 60% or more by 2018. Emissions reduction requirements are only the beginning of the criteria with the RED establishing a range of ecological and social criteria that producers must also meet. Producers must demonstrate that land with high carbon stocks including Wetlands, high biodiversity land and Forests have not been converted to manufacture their biofuels. A range of social principles and criteria also need to be reported on including measures guaranteeing worker’s rights, safety standards as well as the rights of indigenous land holders. Slide Seven: Sustainability in Practice – the German Model As producers and suppliers are required to comply with EU RED, they have also to comply with their national legislations. Germany is the first to establish a biofuels sustainability framework under the European RED. Germany is to implement its sustainability system from 1 January 2011. By this date, all biofuel sold Key Elements of EU Sustainability Criteria • No raw material from undisturbed Forest • Highly diverse grassland • Nature protection areas • Cross Compliance with CAP • Soil, water, air quality • Monitor impact on food prices • No Conversion of • Wetlands • Forest •  Peat land • 35% reduction • 50% by 2017 • 60% by 2018 GHG Emissions Reductions Protect Land with High Carbon Stocks Protect Land with High Biodiversity Good Agricultural & Economic Practices
  5. 5. Page 5/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – into Germany must have their production and distribution process registered by the German Federal Institute for Agriculture and Nutrition (the BLE). To do so, producers or traders have to be certified by a recognized certification body and must after this obtain a Sustainability Proof of Compliance from the BLE for each parcel sold to German users. Already several bodies, such as ISCC and RedCert, have been recognized by the BLE as certification systems. Whilst the UK, the Netherlands, Belgium and France are likely to follow Germany early in 2011, the EU Commission is yet to set any penalties for failing to comply with the Directive – so it is likely that many other EU states will be slow in applying the directive and it will take most of 2011 or even longer to implement. Slide Eight: Diversity in Sustainability in Asia In Asia, while there have been progressive moves to ensure that biofuels exports from the Asia region will meet the sustainability requirements being implemented in the EU, there has been more limited progress in establishing domestic sustainability requirements. India and Thailand are yet to develop or adopt any formal certification process for biofuels or to implement specific GHG reduction targets for biofuels used in transport but they have each undertaken studies to determine potential feedstock availability and environmental planning. China also has introduced broad targets on GHG reductions but to date, they have not imposed specific targets for transport fuels nor developed a framework for other sustainability measures. In Korea, targets of GHG emissions reductions of 30% by 2020 have been announced but here again without specific GHG reduction targets for transport fuels.
  6. 6. Page 6/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – In Japan, the country’s ministry for Energy, Trade & Industry is closely watching developments in Europe and has committed itself to a minimum cut in GHG emissions of 50% by 2017 in line with the EU’s adopted strategy. The Australian state of New South Wales has adopted compliance with the Sustainability Criteria of the Lausanne-based Roundtable on Sustainable Biofuels as part of its mandated biofuels consumption while Queensland, which was to introduce a 2.5% mandate from 2011, just announced its decision to delay the introduction of a ethanol mandate, and is yet to indicate its approach to biofuels sustainability. Slide nine: Sustainability of Sugarcane Ethanol Sugarcane ethanol is one of the best commercially, economically and socially sustainable options available. Ethanol yields from sugarcane are in excess of 8,000 litres per hectare, production costs are competitive with existing fossil fuels and its GHG emission reductions can compete even with cellulosic ethanol. The sugarcane ethanol supply chain already emits 80% less CO2 than fossil fuel. Developing transport infrastructure in the form of rail lines and designated fuel ethanol pipelines will lower these emissions even more. Cane sugar bagasse provides a source of low emission energy produced for ethanol production and for co-generation electricity that is being fed into the grid for domestic and industrial use. Bagasse also provides some of the best prospects for a commercially sustainable cellulosic ethanol feedstock. Slide Ten: Sustainability of Corn & Grain Ethanol In a global market until recently dominated by export trade in sugar cane based ethanol, it is easy to forget that corn and other grains including wheat, barley and sorghum are the feedstock of choice in the majority of the world’s domestic production of ethanol. Sustainability of Sugarcane Ethanol Sugarcane Low Emissions Best prospects as a cellulosic ethanol feedstock Gov’t regulate environment & social outcomes Industry self- regulation Leader in national & multi- national initiatives Company sustainability & social Initiatives Bagasse provides low emissions renewable energy Emissions under the EU’s RED
  7. 7. Page 7/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – Agricultural yields of corn and grains have continued to grow over recent years – ensuring a constant improvement in the amount of land required to grow a gallon of ethanol and reducing the need for further land clearing. Recent studies argue that Indirect Land Use Change generated by corn ethanol production are negligible. Efficiencies at the factory level have also allowed for improved yield from a set quantity of corn or other grain. And by allowing production to be based closer to major fuel markets, grain based ethanol is able to reduce the amount of emissions created in transporting biofuels to end-destination. But perhaps the greatest contribution that the use of corn, grains and other sources of ethanol feedstock production can make, are their ability to increase the diversity of biofuels feedstocks. Slide Eleven: Diversification of Feedstock Supply No one feedstock alone can conceivably meet the growing demand for sustainable biofuels production and relying upon one feedstock alone will generate greater volatility of supply. As recent events have shown, having alternative sources of ethanol from different origins and feedstocks can help to protect the supply to key import reliant markets. When supply tightness in Brazil last season restricted the availability of product from the world’s major exporter, traders were able to source product from other regions like the US, Pakistan or Eastern Europe to ensure supply. This also helped balance prices paid by consumers, lessening the impact on market demand. The media often likes to categorize biofuels into good and bad varieties but that approach is naive and simplistic and it ignores the huge advances that have been made in recent years. There is no one biofuel feedstock that outcompetes all others in terms of sustainability and, as we shall see later, each has it’s place in meeting the growing demands for a sustainable low carbon future.
  8. 8. Page 8/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – Slide Twelve: Markets with No Sustainability Requirements To demonstrate the different emerging “families” of sustainable biofuels, we have adopted a simplified approach. Firstly those markets that have yet to impose specific restrictions on GHG emissions or sustainability criteria on the biofuels used in their markets. These include: Brazil, US - pre-2007 facilities, China, India, Pakistan, Philippines, Middle East, and Australia. Total consumption in these markets equates to over 77 million cubic metres or over 90% of total current biofuels consumption. By 2020, if none of these markets were to adopt sustainability measures then this market segment could grow to 120 million cubic metres or more. This is unlikely, given the growing focus on sustainability leading to a possible “domino effect” once sustainability rules become established and some harmonization in standards occurs. Slide Thirteen: Transitional Markets A number of countries are effectively sending a “warning signal” to suppliers, having imposed national targets to GHG reduction. We have categorized 1.66 Million cubic metres or 2% of the world market for biofuels in this group. However, these markets will have completed their transition to “fully sustainable” by 2020, most probably adding another 12.450 Million CBM of sustainable fuel ethanol demand.
  9. 9. Page 9/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – Slide Fourteen: Markets with Existing Sustainability Rules (2011) Countries and markets leading the charge to introduce sustainability requirements include segments of the US market as well as the EU and other associated Western European markets like Norway or Switzerland. They have combined annual consumption of around 7.035 Million CBM. That represents around 8% of total world consumption. By 2020, this could grow to at least 29.925 Million CBM. As we have indicated earlier, they will be joined by those countries currently developing their sustainability criteria and many of those who are yet to embrace GHG Emissions reductions requirements and additional sustainability criteria. While these markets only represent around 8-10% of current consumption they represent a much larger percentage of the current global trade in ethanol for use as biofuels – closer to 60%. Markets like the EU, Japan, California and the market for Advanced Biofuels in the US also represent the greatest growth potential for global ethanol trade. Slide Fifteen: Trade Flow Impacts What does this vast array of different legislations and variable timings give us? In short, it gives us chaos. Many markets are still giving a “green light” to biofuels without any form of definition of sustainability or guarantee of emissions reductions but, as we have seen, more and more markets are introducing new measures. It is important to recognize that while there is a high level of potential demand in many countries or groups of countries, many are looking to meet their domestic biofuel requirements from their own production. In fact, this may be a reason why some
  10. 10. Page 10/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – countries are slow to move on establishing sustainability requirements for their own domestic markets – they don’t want to risk placing a requirement on biofuels that may place their domestic production at risk from imports. Until there is a harmonization and streamlining in sustainability rules and regulations across continents, countries and markets; producers and traders will need to be aware of the different standards applicable in each country or region. The differing sustainability standards will present opportunities for arbitrage trades. During the transition phase to a more unified system, if ever, price premiums should develop for biofuels sold into markets with higher standards. Traders may then be presented with opportunities to target specific markets and standards with specific products. In times of limited supply, markets with the highest “sustainability premium” are likely to attract supply and other “non-sustainable” markets may be forced to pay more to attract product. However, if markets aren’t prepared to “pay up” for sustainability in times of limited supply, the trade will not be encouraged to supply these markets and countries may eventually fail to meet their expansion targets for biofuels consumption leading to an continued reliance on traditional fossil fuels or the development of non ethanol based alternatives to fossil fuels. Slide Sixteen: Review & Conclusion While a harmonized approach may develop with time, in the short-to-medium term, the wide variety of biofuels legislation requires producers and traders to constantly keep abreast of the latest changes, and to tailor their supply to meet the requirements of each market they are selling into. This creates an increasingly heavy burden for producers, traders and end user who are trying to comply with those regulations and compliance will be at a cost and will limit biofuels market development. Biofuels must remain an economically sustainable alternative to fossil fuels and these measures could make it increasing difficult for ethanol to compete on a fair playing field with their fossil fuel competitors that do not have to
  11. 11. Page 11/11 Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – meet the same obligations. This begs the question; Where are the unified and global sustainability rules covering oil exploration and extraction? A globally sustainable biofuels market will benefit all the actors in the industry; producers and traders alike. We have a moral obligation to assist in the development and implementation of sustainability legislation while at the same time ensuring that it will not stifle, with the erection of trade barriers, the industry it is aiming to develop and grow. . Slide Seventeen: Final Message We have demonstrated during this presentation that non-sustainable biofuels will not have a future, but that their global introduction and harmonization will take time. A lot of time. A native American Proverb says: “We do not inherit the earth from our ancestors, we borrow it from our children.” Biofuels offer hope in addressing the problems of climate change and finding alternatives to dwindling fossil fuel resources. To truly achieve this aim, it must be produced in an environmentally sustainable way. But unless the sustainability goals are approached in a practical fashion with an emphasis on free trade, then there is a risk of harming the very industry they aim to foster. In the long term, ecological sustainability will also depend on economic sustainability. Thank you for your attention.