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How to achieve the objectives and the benefits of the biofuel programme
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POSITION PAPER
How to achieve the objectives and the benefits
of the biofuel programme.
Introduction
In 2002, the European Union adopted two pieces of legislation aimed at promoting biofuels in the European Union. This decision was motivated by the fact that the EU’s energy dependency, especially in the transport sector, is growing fast while oil prices have increased tremendously in recent years. Another motivation is that such a policy would reduce the EU’s greenhouse gas (GHG) emissions while contributing to a much needed development of rural areas and create jobs in the EU. The biofuels programme offers a fabulous opportunity to put the Lisbon Agenda into practice (stimulating growth, employment and competitiveness) and is key legislation to implement the commitments taken under the Kyoto Protocol (reducing GHG emissions). The biofuel programme will also play a strategic role in reducing the impact on the economy of our growing dependency on expensive oil, which weakens the EU’s position on the international scene. Many other countries are following the same logic and implementation strategy and some (USA and Brazil) have been successfully working towards this objective for many years.
For all theses reasons, the EU’s challenge is not just to develop biofuels but to do so whilst achieving substantial industrial and rural development inside the EU. This does not preclude imports but, considering both the fact that the EU bioethanol industry is an infant industry and the unbeatable level of competitiveness of the world’s biggest ethanol producer (namely Brazil), it is essential to properly address the trade issue and take a coherent and balanced approach.
This paper intends to illustrate how to achieve the EU’s goals (reducing energy dependency, reducing CO2 emissions and developing the rural economy) whilst responding to our development agenda by sharing the benefits of an expanding market with developing countries.
Conditions to create a market/demand
Today, the EU’s fuel ethanol production is about 500.000 tons (in 2004) and is only produced in Sweden, France, Spain and Germany. Achieving the 2010 objective set out in the promotion directive (5.75%) would require some 11 million tons of fuel ethanol to be produced. It is estimated that, in order to achieve that level of production in the EU, some 6 billion Euros investment would be needed in the EU-25 to build 40 extra production units.
Under the promotion directive, Member States were asked to report to the Commission and define their 2005 individual objectives in terms of incorporation of biofuels in their markets knowing that the EU had proposed an indicative target of 2%. A number of Member States are targeting the 2% but many more are targeting a very low percentage (below 1%). This means that the market is being created not only in a disharmonious way throughout the EU but also at a much lower pace than expected. Although this represents a step forward, the lack of clear signals from most Member States and therefore of long term visibility is incompatible with the need for huge investments in order to achieve the objective.
UEPA is of the opinion that the only way to change this is by introducing measures of a binding nature. These measures have to be introduced in a way that a sustainable market is created where competition will stimulate efficiency. A sustainable market can be made by introducing mandatory targets.
This action will create the much needed strong commitment to stimulate investments. Furthermore, by generating economies of scale, this would stimulate and create cost efficiencies.
Finally, the introduction of a mandate would resolve the issues of vapour pressure2 and oxygen content as oil companies would have an economic incentive to do so. This would allow direct blending up to 10% which is essential to achieve the 5,75% objective as ETBE capacities are not sufficient.
Supporting a sustainable market
The present support for the biofuel market takes the form, inter alia, of a de-taxation which Member States decide to fully or partially grant. However, the bioethanol sector is confronted with a unique and awkward situation as it is an infant industry (receiving some financial support) which, at the same time, has to compete with the world’s biggest fuel ethanol producers. The de-taxation needed to promote fuel ethanol on the market also applies, at the same level, to less costly produced and most of the time subsidised imported ethanol. Consequently, the blender, meaning the oil company which gets the de-taxation, is over-compensated and so more inclined to import instead of purchasing local/EU production. It is also a fact that oil producers are financially less interested to blend ethanol when oil prices are high because their profits are higher in that latter case.
Furthermore, taxation and de-taxation levels are different from one Member State to another, which means various systems coexist in the EU. Those Member States offering the most favourable market conditions with full tax-exemption are the ones that are more exposed to imports. In addition, certain Member States only grant tax-exemptions to EU producers and the number of years that de-taxation is granted varies considerably in the EU. These discrepancies limit fair competition in the EU.
Therefore, it can be said that the existing de-taxation mechanism has favoured production and consumption of fuel ethanol in some Member States. However, the same level of de-taxation applies to less costly imported ethanol which is a disadvantage to the building of an EU industry. Member States might then be less likely to accept the financial cost of promoting fuel ethanol if it does not generate national growth.
UEPA believes that creating a market through binding measures together with a balanced global ethanol import policy would resolve this key issue. Over-compensation would automatically be a non-issue because it would be fully integrated in a comprehensive strategy to develop biofuels in the EU.
Balancing imports
Promoting green energy is a decision that a government fundamentally takes for environmental and long term economic strategy planning. It is not expected that green energy will be competitive today but political orientations and investments will contribute to changing this situation. As a consequence, given that fuel ethanol is a product that is immediately available to reduce the EU’s energy dependency in the transport area, it should be considered as strategic issue in trade talks.
In the EU, ethanol (whatever use is made of it) can be imported duty free in unlimited quantities from a considerable number of countries (ACP and GSP). Over the last years, these imports have increased significantly.
However, in Sweden (the only country where direct blends are produced and where the consumption is higher than the national production), imports from Brazil are developing tremendously, representing now 70% of the Swedish consumption of fuel ethanol. These imports are not made under the CN Code 2207 applicable for ethanol which bears a duty of 19 Euros/hl (undenatured ethanol 2207.10) or 10 Euros/hl (denatured ethanol 2207.20) but under the CN Code 3824 which bears a 6.5% ad valorem duty. This gives an extra competitive advantage to Brazilian ethanol over EU ethanol. In order to correct this situation, the Swedish government is considering to limit the de-taxation of fuel ethanol to undenatured ethanol CN Code 2207.10.
In the UK, because the level of de-taxation is too low compared to the EU ethanol production costs, the bioethanol market is developing in this country exclusively with imported Brazilian ethanol. If this situation continues, there will be no investment in this country nor competition from the EU industry as Brazil will dominate.
In France and Spain, the import issue has so far not arisen but this could happen.
Because imports are not balanced, the EU industry cannot develop as this situation brings a huge financial uncertainty to the profitability of future investments. The EU fuel ethanol industry is at an early stage and therefore it cannot compete with the largest world ethanol producer .
However, UEPA considers that a reasonable level of imports could have a positive impact on the overall cost of promoting biofuels in the EU. We therefore recommend that all imports in the fuel sector be limited to a fixed percentage of the total EU fuel ethanol consumption.
The USA have managed imports in a different way but without these measures being implemented, their industry would never have reached today’s size (2nd largest world fuel ethanol producer).
Establishing such a system might be time consuming. Considering the threat certain EU fuel ethanol producers are under because of imports, UEPA would urge the Member States to limit tax exemption to undenatured ethanol CN Code 220710, as this is the case in Germany. This would resolve the over-compensation issue and establish a fairer level playing field.
Creating a balanced import policy finally means that the matter is brought up in bilateral and multilateral trade negotiations. Maintaining a sufficiently high enough import duty is fundamental to level the playing field, develop a fuel ethanol industry in the EU and reduce the EU’s energy dependency.
Monitoring the development of the market
The current lack of clarity in the statistics brings further uncertainties on the market. In effect, the official EU statistical data do not report imports which were made in Sweden under the CN Code 3824. Furthermore, under the existing customs classification, it is impossible to know if imported ethanol has been used in the EU fuel ethanol sector.
In order to properly monitor the fuel ethanol market and avoid circumvention of import duties, it is necessary to create a specific tariff code for ethanol destined to the fuel sector.
Generating revenues and growth
Promoting biofuels has a cost today but not promoting biofuels would have an ever higher cost for society in the near future. To assess this cost, a number of benefits associated with fuel ethanol production must be taken into account.
Firstly, a significant number of jobs in many different economic sectors (agriculture, industry, research etc.) will be created which fully supports the Lisbon Strategy. It is generally recognised that, for 1000 tonnes of fuel ethanol produced, 6.3 jobs are created in the agro-industry . This would create substantial revenue to the Member States in income taxes and other taxes. Studies made in Europe and third world countries conclude that the fiscal balance of biofuels is above 70% and others, such as in the USA, estimate that the benefits are superior to the costs.
Secondly, the cost of fuel ethanol should be compared to the cost that society would have to bear if the EU continues to be more and more dependent on ever more expensive oil. Oil prices have more than quadrupled over the last 6 years (from 10$ a barrel in December 1998 to 50$ now) and our growing dependency combined with oil resource scarcity can only exacerbate this trend. Fuel ethanol is an alternative fuel which can curb this trend and in the USA, it is proven that if fuel ethanol were not used on the market, oil prices would be higher.
Finally, fuel ethanol is a green fuel which helps improve the air quality. Pollution is more and more a concern in urban areas and a number of reports have concluded that pollution has a tremendous impact on health expenditure. Using green fuels is a sound shift in this respect and those costs will substantially reduce as we improve air quality. When assessing the overall cost of promoting biofuels and comparing it to the existing oil source, UEPA recommends that those external costs be included in the cost of oil.
Conclusion
It is a generally accepted fact that the production and the consumption of biofuels must be promoted in the EU. Stimulating consumption is good for the environment and also contributes to reducing our growing energy dependency. Stimulating production is good for the economy and for jobs creation: it is a sound way of reducing our energy dependency by exploiting our agricultural resources; it is a sound way of bringing the cost of biofuels down by generating revenues.
However, the fuel ethanol industry cannot expand up to the expected ambition for two main reasons. Firstly a lack of clear political signals that would create confidence in the creation of a market and uncontrolled import policy which obliges the EU fuel ethanol infant industry to compete with the most mature ethanol industry in the world namely Brazil. This freezes investments and interest by the Member States, hence the lukewarm ambitions expressed by many Member States.
In order to kick start the programme and fully exploit the many benefits associated with it, UEPA recommends that the following initiatives be urgently examined:
- Create a sustainable market by the introduction of national mandatory measures. A transition period could be envisaged for certain Member States but this would have the merit of creating long-term confidence in the market and hence stimulate investments. Given that the development of a new fuel ethanol industry will take decades to generate the desired impact it is essential that Europe takes the bold step and ensures that the 5.75% requirement is met by all countries by 2010.
- Implement a balanced global import policy to prevent very competitive products destroying the infant industry. This should be in the form of a percentage of the EU fuel ethanol consumption. This approach can be accepted by certain countries such as Brazil as they have understood that the EU market cannot develop with EU citizens’ money and Brazilian ethanol. Therefore, we recommend that the EU starts negotiating with its WTO partners on the basis of security of supply and environmental grounds. Given the strategic nature of fuel ethanol, it should be subject for specific treatment in trade negotiations. We consider that the percentage may always be negotiable but not the level of import duty.
- Establish a specific tariff Code for fuel ethanol and products containing fuel ethanol. This is key to avoiding fraud/abusive practices which are only motivated to circumvent the import duties on ethanol. The EU industry cannot develop in these circumstances and the EU is loosing significant revenue in the circumvention of the duties which basically increases the overall costs of promoting biofuels.
- Immediate enforcement that a tax-exemption shall only apply to undenatured ethanol CN Code 220710 (19.2 Euros/hl).
The combination of these actions would lead to the creation of a fuel ethanol market and the development of an EU industry whilst allowing for a balanced level of imports that would harmoniously grow together with the EU consumption. This would establish sustainable conditions to achieve the three objectives set out in the biofuel programme, meaning the reduction of GHG emissions, reduction of our energy dependency and the development of rural areas.
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24/06/2005 |
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