clean energy: the brazilian ethanol experience - Embassy of Brazil ...

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clean energy: the brazilian ethanol experience - Embassy of Brazil ...

CLEAN ENERGY:THE BRAZILIAN ETHANOL EXPERIENCEEMBASSY OF BRAZILLONDON2007


The articles in this publication are based on presentations givenat a seminar on biofuels organised by the Embassy of Brazil inLondon in November 2005. A first edition was published in March2006. Given the great interest in the theme and the excellentreaction the book received, we decided to publish a second,revised, edition.The editor would like to thank the authors for revising andupdating their original contributions. We hope this publicationwill make a significant contribution to the ongoing debate aboutthe role the biofuels sector can play in creating wealth,enhancing energy security and minimising environmentalproblems.The editorMinistry of External RelationsEmbassy of Brazil in LondonEditor: Paulo WrobelDesign: Zeca Alkmim


ContentsPrefaceJosé Mauricio Bustani, Ambassador of Brazil to the Court of SaintJamesFrom Fossil to Biofuels: Reasons for the Use of EthanolRoberto Rodrigues, Co-Chairman, The Inter-American EthanolCommission, BrazilEthanol: A Brazilian Successful StoryLuiz Carlos Corrêa de Carvalho, Chairman of the Ethanol SectorialChamber at the Ministry for Agriculture, Livestock and FoodSupply, BrazilEthanol from Sugarcane: Development and theEnvironmentLaura Tetti, São Paulo Sugar Cane Agroindustry Union (UNICA),BrazilAn Overview of Ethanol Derivatives in BrazilCarlos José da Costa André, Banco do Brasil Securities, Brazil.The Successful Experience of Ethanol in the USAlberto Peixoto, Tate & Lyle, United KingdomOil in the World Energy MixRobert Skinner, former Director of the Oxford Institute for EnergyStudies, United KingdomSustainable Mobility: How Biofuels and Ethanol canContributeRobert Saunders, BP, United KingdomThe Development of EU Biofuel PolicyPaul Hodson and Kristine Kozlova, Energy and TransportDirectorate-General, European Commission, Brussels


PrefaceJosé Mauricio BustaniAmbassador of Brazil to the Court of Saint JamesBrazil’s extensive use of ethanol made from sugarcane is themost ambitious and successful initiative developed to date forproducing a biomass-based, renewable liquid fuel. Biofuels arekey components for diversifying the energy mix – crucial forenergy security – and have positive economic, social andenvironmental impacts.It has been estimated that between 1976 and 2004, Brazil savedover US$ 60 billion by producing and consuming ethanol insteadof importing oil. It is also worth noting that by 1999 Brazil hadphased out all government subsidies to the sector; Proálcool, theprogramme originally developed to establish an ethanol sector inBrazil, was abolished, and the sector has since been free toadapt volumes and prices to market conditions. The only controlexcercised by the authorities is through the mandatory blendingof ethanol to petrol, which is set at between 20 to 25%.Brazil’s experience in using biofuels for transport purposes couldprove useful to other countries. Brazil has become self-sufficientin oil production and the use of biofuels, which accounts for 40%of petrol consumption, has helped achieve that goal. Biomassgenerates 14.5% of the total energy consumed in the country.Sugarcane agribusiness is a sustainable economic activityresponsible for 1.6% of GDP, and 3.6 million direct jobs. Thereis no competition between food crops and energy crops. Thanksto biofuels, farmers have a great opportunity to raise productionand income. In 2006, the sugarcane growing area correspondedto less than 10% of the total area under cultivation, a smallpercentage of the country’s total fertile land and only 0.7% of4


the 850 million hectares that constitute Brazil’s landmass. Theexpansion of sugarcane cultivation has taken place in areaswhere soil fertility is low, such as in degraded pastures and thecentral savannah area. The use of vinassse as a fertilizer, asugarcane by-product rich in potassium, calcium and sulphur,contributes to the replacement of nutrients in the soil.About half of the sugarcane grown in Brazil is used to producesugar - Brazil being the largest producer and exporter - and theother half to produce ethanol. In 2006, 17.2 billion litres ofethanol were produced. There are currently 330 sugar andethanol mills in operation and a further one hundred or so arenow being built. Brazil is the most efficient producer of ethanolin the world. The cost of producing ethanol from sugarcane inBrazil is significantly lower than that of the ethanol producedfrom maize in the United States and from wheat and sugar beetin Europe.Eighty-five per cent of sugarcane production takes place in thesouthern central region of Brazil and the remaining 15% in thenorth northeastern region. No sugarcane is planted in therainforests of the Amazon region and the main areas undercultivation in the southern central region are several thousandmiles distant from the rainforests. Neither the climate nor thesoil of the Amazon region are suitable for large scale sugar caneplantations. The sugarcane plant requires a relatively dryclimate in order to produce sucrose. In wet climates, sugar caneacts like a sponge, absorbing water and hindering the formationof sucrose. Studies have shown that it is possible to more thandouble the area planted with sugarcane without occupying newland; the use of degraded pastures and the substitution of lessprofitable crops for sugarcane have been the route taken byproducers to expand the sugarcane planted area.Brazil has developed a comprehensive research & developmentsystem in the sugarcane/ethanol sector. Research programmeshave been established on the whole production chain ofsugarcane/ethanol, from variety selection to industrial processesin the mills. Variety selection has been the most influential factorin improving sugarcane yields. Average yields increased from65t/ha in the 1960s to 85t/ha in 2001; it is expected that variety5


selection will continue to be the most significant factor inimproving yields. Technology has also been developed to allowthe use of co-products and energy co-generation from bagasse.The Centro de Tecnologia Canavieira (CTC) is one of the leadingsugarcane research centres. Along with other research centres,such as the Escola Superior de Agricultura Luiz de Queiroz andthe Universidade de Campinas, it has contributed to substantialachievements in plant breeding, the introduction of newvarieties, and technological innovations at the sugar/ethanolmills.A key technological breakthrough in the consolidation of thebiofuels sector in Brazil was the introduction in 2003 of flex-fuelvehicles. The consumer has been afforded the flexibility tochoose at the pump between petrol, ethanol or any combinationof the two. By early 2007, well over three million flex-fuelvehicles had already been sold in Brazil; today 85% of newvehicles are flex-fuel.The large scale production of sugarcane in Brazil has positiveenvironmental impacts. Only small amounts of pesticides arerequired, it has the lowest soil erosion rate of all the country’scommercial crops and recycles all its waste. Virtually all Braziliansugar cane is produced without the need for irrigation. Brazil hasstringent environmental regulations in place; since 1986,Environmental Impact Studies and corresponding EnvironmentalImpact Reports are required before any licensing can beobtained for any activity that might have an impact on theenvironment.The use of ethanol in Brazil has led to significant improvementsin air quality through the elimination of lead-based additives inpetrol and the reduction of greenhouse gases, contributing to areduction estimated at 20% for the energy sector as a whole.The relationship between the energy produced and fossil fuelsconsumed in the sugarcane ethanol productive chain is of 8.3 to1. This means that for every unit of energy used in the ethanolproducing process, more that 8 energy units are generated.The United States has recently announced its aim to substituteabout 15% of its petrol consumption for ethanol in the next ten6


years, creating a potential demand for 35 billion gallons a yearof biofuels. The European Union has also announced a target ofusing 10% of biofuels in its transport fleet by 2020. From Asiato Africa to the Americas virtually all countries are implementing,or considering the implementation of policies to foster theintroduction of biofuels in their transport systems. Multilateralorganisations such as the World Bank and the Inter-AmericanDevelopment Bank are developing programmes to fund orsupport with technical assistance the implementation of biofuelsprogrammes throughout the developing world. Brazil’sexperience has shown that it is crucial to the success of suchprogrammes that mandatory petrol-ethanol blending ratios beimplemented. By doing so, governments give strong and clearsigns of their commitment to biofuels, thus allowing the privatesector to make the long term investment decisions needed tothe success of biofuel programmes.For all these reasons Brazil’s experience in the large scaleproduction and consumption of ethanol should be more widelydisseminated. We hope that the articles in this book willcontribute to the ongoing debate on the role biofuels can play indiversifying our energy sources.7


From Fossil to Biofuels: Reasons for theUse of EthanolRoberto RodriguesCo-chairman, The Inter-American Ethanol CommissionOne of the most important themes on the current global agendais the search for alternative sources of energy that will allowhumanity to move away from fossil fuels such as oil and coal. Itsimportance derives not only from economic reasons associatedwith high oil prices, but also from the need to control theemissions of green house gases into the atmosphere caused bythe burning of fossil fuels.The most obvious solution is the widespread use of theresources nature provides. It is imperative that, as soon aspossible, we find and exploit these new sources of energy. In thiscontext, biomass will play a crucial role in the transition fromfossil to renewable fuels. Biomass is renewable, available inlarge quantities, and helps to recycle the carbon alreadyreleased into the atmosphere.Ethanol is the most prominent natural resource, particularlywhen produced from sugarcane. Added to petrol, ethanol is usedas a fuel in a large number of countries, and for this reason isconsidered one of the most viable options to reduce theexcessive reliance on fossil fuels.Several factors explain the attraction of ethanol as a fuel. First,its intrinsic qualities such as a) safety, both for vehicles andconsumers; b) efficiency when added to petrol; c) the ease withwhich it can be produced in large amounts (only 150 thousandhectares of sugarcane are required to produce 1 billion litres ofethanol); d) its competitive price, particularly when comparedwith current oil prices (in the last three years the price of8


gasoline exported by Brazil was, on average, 30% higher thanthe price of ethanol exports).Second, the process of adding ethanol to petrol isunproblematic: it can constitute up to 10% of the mixturewithout requiring any adaptations to the engine. It is alsoconvenient to supply: it can be distributed and transported inthe same containers as those used for petrol, meaning there isno need to undertake major investments in infrastructure andequipment.Third, it makes obvious environmental sense. Adding ethanol topetrol oxygenates the fuel and improves combustion, leading tolower emission of polluting gases. In replacing fossil fuels,ethanol reduces the emissions of carbon into the atmosphere.And it also contributes to the preservation of limited resources,for only one litre of fossil fuel need be used in order to produceeight litres of ethanol.Brazil, given its climatic and environmental conditions,abundance of fertile land, and long experience in the use ofsugarcane biomass, is the world leader in the field of ethanolproduction and use in transportation, and a pioneer in searchingfor renewable sources of energy. The country is very proud totake the lead in responding to the challenges we all face in orderto preserve our planet and transform biomass into a new energyreference to the world.9


Ethanol: A Brazilian Successful StoryLuiz Carlos Corrêa CarvalhoChairman of the Brazilian Chamber of Sugar and EthanolMinistry of Agriculture, Livestock and SupplySince the beginning of the twentieth century, Brazil used ethanolin gasoline, adding it to petrol at addition rates that varieddepending on the availability of the raw material and on thesugar market. Until 1970, ethanol was an important way ofbalancing what was then a no competitive sugar product.It was only in 1972 that a coordinated national R&D programmein sugarcane was implemented. In 1975, Brazil launched anethanol production and consumption programme known asPROALCOOL. The figures indicating the impact of the two oilshocks of the early 1970’s and early 1980’s on the country’seconomy, more specifically on its balance of payments andforeign debt, were the main reason for the launching of theworld’s largest renewable energy programme. However, it wasonly in 1993 that a federal law defined a mandatory use of fuelethanol in Brazil, in a band of 20 to 25% +1%.The development of large-scale production and use of ethanol inBrazil can be divided into different stages. Firstly, it was basedon ethanol production to meet the increase in demand resultingfrom the use of gasohol, followed by the launch of ethanolfueledcars (E 100) upon the second oil shock, with a dramaticincrease in consumption at monthly rates of up to 95 percent forthese vehicles alone. Upon the oil prices slump after 1985,energy prices in Brazil lowered, supported by the expansion ofsugar production for external market.In 1997 the sector was deregulated and after 2003 twoextremely important events took place:10


- the flex-fuel vehicle (FFV), which today represents around 65%of all car sales in Brazil;- the expansion of the international ethanol market.The sugarcane sector in Brazil is complex and diverse. There aresixty thousand suppliers of sugarcane to 324 industrialproducers, in the great majority producing simultaneouslyethanol and sugar. Representing roughly 2.2% of the country’sGDP, the sector generates eight hundred thousand direct jobsshowing, in the last thirty years, agricultural and industrialefficiency gains of 2.6% per year.It is a long production chain that includes virtually all vehicle andcomponents manufacturers and oil companies.11


It is important to note that there is no gasoline in use in Brazil– only gasohol. Some numbers show the importance of ethanolas fuel for the Brazilian economy:Total Consumption: ~ 230.000 barrels/day in gasolineequivalent; available in 30 thousand fuel stations all over thecountry;Represents 40% of the Brazilian Otto Cycle;Balance of Payments: savings of US$ 60,7 billion (or US$ 121,3billion if one considers the international interest rate) from 1976to 2004;Fleet: 18 million gasohol vehicles, 2,4 million E100 vehicles, 1,3million FFV, 3,5 million motorcycles.Ethanol is used as a fuel in a wide variety of transportationvehicles. From national to international vehicles, motorcyclesand boats, the share of ethanol in the Brazilian fuel market isextremely important.12


After the launch of the FFV in March 2003, internal demand forethanol is increasing very fast. In the last three crops, theinternal consumption of ethanol increased by more than 1 billionlitres because of the FFV fleet.Since the launch of the PROALCOOL in 1975, it is possible toidentify three different phases: the first ten years, when a hugeincrease in sugarcane production for ethanol, after the two oilshocks, took place. The second phase lasted for the next tenyears, when ethanol production stagnated because of the freefall in oil prices in the international market and the very lowprices for energy in the internal market during Brazil’s attemptto control inflation and search to increase the foreign market forsugar. The third phase of the last ten years tells a very differentstory, that is, the return of sugarcane expansion for both ethanoland sugar.Sugar production capacity in Brazil is now around 170 thousandtons per day, while ethanol capacity is around 105 thousand m3per day. The great majority of the sugar mills are flexible, andthere are around 200 days as the crop season period. TheCentre-South region concentrates production – 85% of totalproduction.13


It is worth noting the large distance between the mainsugarcane production areas and the environmental protectedareas of Western and Northern Brazil. Within the total Brazilianland area, agriculture and livestock represents 297 millionhectares, where agriculture in fact occupies only 60 million ha,while 464 million ha are occupied by forests. Savanah and fieldsare responsible for 73 million ha. Cities, rivers and others use 17million ha.The actual sugarcane production area represents only 0.7% ofthe total Brazilian landmass, but the potential is actually around30% of the total area (last study conducted by UNICAMP).Moreover, during the last ten years, in 94% of the cases,sugarcane expansion occurred within existing mills.So, it is quite clear that new investments in ethanol projects, allin the Centre-South region, are very far from protected areas.The adaptation of the sugarcane in Brazil was reallyextraordinary. Thanks to high investment in technology, gains in14


yields/year and important cost reduction programmes, thehorizontal expansion in the total area planted was lower thananticipated.In function of the gains in efficiency (around 3% per year in thelast thirty years), the planting area proved to be smaller thanexpected. This means not only that the sector became morecompetitive, but it reduced the need for the occupation of 2million hectares for the production of the same quantity ofsugarcane.It is expected that in the forthcoming years, the growth will takeplace in the Center-Southern region, particularly in the West ofthe state of São Paulo, areas in the boundaries of the states ofSão Paulo and Mato Grosso, the state of Minas Gerais and thestate of Goiás.Efficiency gains are the most important certificate ofcompetence of the sector. Without these gains, it becomes verydifficult to compete with the fossil energy sources.15


The results may be summarized in the analysis of the evolutionof prices of ethanol paid to producers, as a superior estimate ofthe production cost. The comparison with the international priceof the production of gasoline in the corresponding years is shownbelow. As it is the case of prices (not of costs) the data reflectsvariations in the market; it is of note, for example, that in 1999there was excess of supply of ethanol in the market, but arecovery took pale in the following years.As one can see, ethanol has prices lower than those of gasolineand, when blended to it, reduces the final price to the consumer.Some important economic comparisons: to the average price ofthe ethanol in the market (and they are remunerating prices),the cost of petroleum could go down to US$ 25/barrel. Whenplacing the price of gasoline, it is easy to see to what extentethanol is competitive in Brazil.16


Ethanol and GazolineCompetitive PricesEthanol Gasoline Petroleum35 US$/b 65 US$/b 63 US$/bThe second table shows a comparison of costs between ethanolproduction in Brazil (sugarcane), the USA (corn) and theEuropean Union (wheat and sugar-beet).Brazilian Ethanol ProductionCostsand Other Costs*CountryUS$ / LitreBrazil 0,20 – 0,22USA 0,30 – 0,35E.U. 0,45 – 0,55* Henniges, O.; Zeddies, J.: Fuel EthanolProduction in the USA and Germany – a costcomparison, F.O.Lichts World Ethanol andBiofuels Report, vol 1, nº 11, 11/02/2003.Important cost-reductions in Brazil took place as a result ofextensive debates about the political-economical conditions ofsugarcane production, and the set up of specific policies forliquid fuels. It was also fundamental the set oflegislation/regulation for investment (production/logistics)taking into consideration environmental issues.In Brazil, the sugar cane stalks/ stems are processed to produceethanol and sugar. Milled, the juice is separated from the cane17


fibers (bagasse) that, treated, generates the production ofsugar. One part of the non-crystallized sugars and impurities(molasses) are separated. This residual honey is, generally,much more rich in sugar and, in blending with the broth, it isfermented and distilled. That is, there is flexibility in the plantsto produce high quality sugar from the first broth and, from theothers, ethanol. The results are better quality and lesserconsumption of energy besides lower investments in equipment.This is, in synthesis, the Brazilian model.The new world of biofuels has specific rules: there must beclearly positive life-cycle energy and life-cycle greenhouse gases(GHG) emissions. Concerning raw materials, the first case showssugarcane with a great advantage. For every input energy unit,the production is, on average, 8.3 times higher, reaching even10.2 times! The study was conducted taking into considerationthe whole process, since the production of the equipment usedfor sugarcane and ethanol production until the surplus ofbagasse.18


As a result, when emissions are compared upon replacement ofgasoline and fuel oil with ethanol and sugar-cane bagasse, thereis a saving or uptake of 2.6 tons of CO2 equivalent for anhydrousethanol, and of 1.7 ton of CO2 equivalent for hydrated ethanol.This is the key for the success of biofuels.The results are very impressive. For the Brazilian consumptionof fuels in 2003, ethanol was responsible for the reduction of27.5 million tons of CO 2 equivalent.Another way to analyze the result is that an equivalent of 13%of GHG emissions reduction was mitigated from the energysector in Brazil.Another appealing impact is the relation between the jobscreated in the petrol supply chain and those created in theethanol supply chain when vehicles are produced. Thedifference, which is several times more favorable to ethanol, is19


a decisive factor in the option to using FFVs running on ethanol.It is always important to analyze the entire supply chain.In relation to the trends in new technologies under development,the current system in Brazil allows the production of 7.200 litresof ethanol per hectare; with the production of ethanol frombagasse celluloses (sugar cane fibers), and part of thesugarcane straws collected and also generating ethanol in thesame way, through acid hydrolysis one would attain 12.850 litresof ethanol per hectare (or more than 70% rise in production inthe same area). In the developed countries, the efforts inresearch are concentrated in the enzymatic hydrolysis.Another fundamental aspect is the search for synergies. In thecase of sugarcane, it is possible to use oil producing plants inrotation with sugarcane generating biodiesel, and from the20


energy surpluses, selling bioelectricity. This is the vision thatwill be expanding in scale during the next five years.Furthermore, a series of by-products will be obtained from theresidues of the productions of sugar and ethanol, aggregatingvalue to the enterprise.There are two main questions that stand out in the discussionabout synergies. The first concerns a possible market relationbetween foodstuffs and energy. The second relates to whetherthere is enough land available that would allow this level ofexpansion. Some examples will clarify the issue.There is a clear correlation between the price of sugar (inethanol equivalent) and that of gasoline: higher petrol pricesincreases the international price of sugar. This is an effective andimportant example.Based on this, LMC International has prepared, in January 2006,a graph setting up the correlation between the prices ofpetroleum and sugar. The graph shows that when petroleumprices are higher than US$ 60 a barrel, the price of sugar would21


e close to around US$ 16 US$ a pound. And this is exactly whatis happening now.In sum: the energy agriculture increases the prices of thefoodstuffs agriculture!Another important development is the growth of theinternational ethanol market. Probably by 2010, 26 billion litresof ethanol will be added to global production. Taking into accountthe proportion in which domestic markets for ethanol areexpanding in several countries, there is a fantastic opportunityof consolidating ethanol as an international commodity.22


One way of looking at new opportunities is in the evolution thatis expected from the sugar and ethanol markets in Asia. Theneed to increase supply is so high that many Asian countries willbecome importers very soon. But take note: different frompetrol, this will be the case with a renewable product that mightbe produced in the entire world, that will reduce local and globalemissions of greenhouse gases, will bring jobs, add value andincome to rural areas, reduce economic insecurity, promotedistribution of wealth and attend the globally requiredsustainability.To answer the second question (land for expansion) threeexamples are given, based on the substitution of 10 % of worldgasoline, or in some regions regions, with ethanol.In the first example, to attend the demand from all developingcountries it would be necessary to use the current area plantedwith sugarcane in Brazil; in the second example, only thecountries of the OECD are considered, in this case it would benecessary an area equivalent to the sum of the current areas ofsugarcane and of cattle grazing of the state of São Paulo inBrazil; in the third example, it was supposed that 10% ofethanol would be added to the fleet of the entire world: theneeded area would be the equivalent of the current area plantedwith soybean in Brazil. That is to say, this is doable!23


Some important aspects must be considered in regard to keystakeholders. As an example of an advertisement from an oilcompany (in this case Chevron) says: “the world consumes twobarrels of oil for every barrel discovered …… and then thequestion: so is this something you should be worried about?”There is no doubt that many changes will be observed in theforthcoming years: the developing countries, in volume ofconsumption of energy, will be surpassing the developedcountries. Actually, the goal of the developing countries is toreach the same level of demand of the industrialized countries.This is logical and normal. But the difficulty is that of attendingthis enormous expansion of demand at low energy prices.The reality on which we live in is that of the addiction to oil,either by the rich countries or by developing countries. Thequestions that afflict us today are: How can one change thisattitude? How to cure this addiction?24


Vehicles are the basis of the transport sector, which isresponsible for the highest rate of contribution to the rise of theaverage temperature of the planet. There is a direct correlationbetween the carbon emissions and the elevation of thetemperature.In the following image, of the three thirds of the vehicle, one ispast; that of the middle is the transition that we are livingthrough (FFV; Hybrids) and the final third represents the futurevehicles moved by electric energy generated by hydrogen. In thelast case, it will probably be charged by renewable sources forcontrolled emissions.if conservative projections are right by the middle of this centuryone third of the energy consumed will be renewable. The factorsmentioned as basis for this evolution are “intensity and25


availability of renewable sources; maturity of renewabletechnology; market rules and government”.In March of 2003, the vehicles assembling plants in Brazilintroduced in the market a new concept of vehicle – the flex fuelvehicle. It is a car that might run with either ethanol or petrol,or by any combination of the two that the consumer wishes. Itwas a true revolution in the internal market of fuels in Brazil.Between May and December 2005, one million new vehiclespowered by flex fuel engines generated an additional demand of1.1 billion litres of ethanol. This occurred because in thepumping station the ethanol is, in the case of São Paulo, 60% ofthe price of petrol. Until the price difference of 70%, it iseconomically more advantageous to consume ethanol.In the short term, the sales of FFV will dominate the market, andthe expectation is that 90% of the total sales of new vehicles willbe of FFV. Thus, it is predicted that by 2011 1.7 million of FFV26


In this context, it is important to emphasize the technologicalperspectives of the production and use of ethanol, included theuse of the product in thermoelectric plants, that is, in replacingdiesel oil and fuel oil, through the use in blends or as a singleproduct. The technology, a simple one, is already known.Several countries, in the Americas, Europe and Asia, haveimplemented the addition of ethanol to gasoline, and are gettingprepared to use biodiesel through mandatory legalrequirements. It is an effective formula of accelerating theproduction and the use of ethanol in large scale.There is no time to lose, and neither there is any reason toimagine that high initial costs will be maintained forever. Thesuccessful example of Brazil has shown that the learning curveof ethanol will take place everywhere. After all, where is oursense of urgency?28


Ethanol from Sugarcane: Developmentand the EnvironmentLaura TettiSão Paulo Sugarcane Agroindustry Union (UNICA)The very title of this article contains an interesting equation:how can development and the environment be the result ofsugarcane? If we ask this question today, in a global survey, tocitizens who are well-informed, and readers of newspapers andspecialized publications (such as this one that is now in yourhands…), probably most of them would point out to acontradiction in the title because, after all, historically speaking,sugarcane farming has never been associated withenvironmental improvements, and still less with development.If the question was limited to bioethanol, however, very fewwould have any doubt about the existence of a positiverelationship between the use of ethanol and the environment, aswell as the need for a more balanced development betweencountries.For several reasons, it is a fact that the use of ethanol isenvironmentally sound. Ethanol replaces toxic fuel componentswhen added to gasoline, ethanol-fueled vehicles have a lesserpollutant impact on the atmosphere and helps to fight thegreenhouse effect, and ethanol is renewable.Ethanol and its strategic and environmental advantages is theproduct of sugarcane (and we know, based on the Americanexperience in this field, that other raw materials, such as corn,do no provide —not to the same extent, at least— thoseadvantages).So why do we still have environmental fears and doubts aboutsugarcane farming? Why does sugarcane continue to be a kindof antithesis to modernity, environmental quality anddevelopment?29


Sugarcane and developmentThe need to develop, to fight poverty and to preserve nature andenvironmental quality are those generic, superficial unanimitiesthat gives us little or no help at all to move towards a betterquality of life and a more rational natural resources consumptionpatterns.In fact, it would be very useful, as a starting point, for us tohonestly face our traditions and the fact that we have beengiven, over the history of our civilization, a cultural trainingcompulsively focusing on competition between peoples, cities,countries, blocs of nations, beliefs and in connection witheverything else.Even though every piece of evidence demonstrates in a moreand more dramatic way that the world is small and everythingaffects everyone, deep down inside we still believe that theneighbor’s “garbage” and “disease” are not going to affect us.Some of the activities that we consider to be paradigms ofmodernity and symbols of development either were (or are)based on devastation or have major environmental and humanimpacts (either on our own backyard or on those of our“neighbors”).We, in principle, advocate what is called “sustainabledevelopment,” but we seem to be totally unable to devisepolicies that value activities that can lead to it. Actually, we dosomething much worse than that: we systematically deny,disregard and impair those activities. This is exactly the case ofthe energy biomass agribusiness.In any forum where the theme of biofuels and renewable energyis debated, an endless number of doubts and socioenvironmentalissues are raised as factors that either prevent orretard a more intensive use of renewable energy. Ratherironically, this is happening when not only the current fossil fuelbasedenergy model shows clear signs of depletion, but whenmore and more consistently it proves to be the most destructivethreat of our day.30


It is in this context that it is worth reflecting on the sugarcaneculture. The “sugarcane product” bears the burden of havingbeen one of the main products of the European colonizationprocess in the tropical areas of the planet, in which poverty andall sorts of social and economic problems are now concentrated.Not without some degree of cynicism, sugarcane ends up havinga negative image, as we associate it with the problems causedby the kind of colonization in which it historically originated(slavery, social injustice, large agricultural estates,dependence).Debates, projects and programs relating to the promotion ofethanol (and, as a result, sugar-cane) are very often“contaminated” by prejudice and unwillingness. We associatesugarcane —and, more generally, large-scale agriculture— withthe vices inherited from colonialism.The mistake underlying this line of thinking is evident, but, onthe other hand, this sort of preliminary “unwillingness” is true,and recognizing it can help us to understand the systematicdisregard of one of the activities that can contribute the most inthe short term to development and sustainability.In a strict sense, every human activity has an impact on theenvironment. But that would not lead us to consider proclaimingthat a part of humanity shall be deprived (which, in fact, theyalready are…) of production and its fruits. Bigger and bigger are31


the challenges and the need to make choices and come up withpolicies that can “guide” the production process by selectingalternatives that can enable the material aspirations of humanityto be met, while preserving environmental quality and, alongwith it, the quality of life.The environmental impact of the production process can bestructural (without any known or feasible solution and causingirreversible damage —as clearly noticeable in the case of oil andfossil fuels), but it can also be circumstantial, allowing thedamage to be reversed or neutralized, with solutions limited tocost-related issues and, therefore, a political decision prioritizingthe implementation and use of environmentally desirabletechnologies.For the most part, environmental problems resulting fromsugarcane growing for energy purposes belong in the set ofcircumstantial impacts: a proper management, investments incontrol, and the use of more environmentally sustainableproduction techniques (which are all known and available asBrazil’s successful experience demonstrate) could enableproduction and the environment to coexist in harmony.32


In the context of environmental and social sustainability,sugarcane stands out from the world’s farming activities. Today,in spite of a policy that, in practice, often conflicts withenvironmental care and economic survival, the results ofsugarcane planting in Brazil are quite impressive:Sugarcane displays one of the lowest rates of agrochemical usein world agriculture;Sugar-cane features one of the lowest soil erosion rates in worldagriculture (which is not negligible at all considering that erosionand desertification are two of the world’s most serious problems,as twenty-five percent of the soils on the planet are desertified,according to data provided by the UN);Sugarcane in Brazil (because, among other reasons, of its lowerosion and chemical use rates) is the activity that has the leastnegative impact on water resources (which is another essentialcontribution considering that more than ten percent of theworld’s water supply are hopelessly compromised by pollutionand erosion, once again according to data provided by the UN);33


The major contribution of the sugarcane growing activity to thecreation of rural jobs is well known, but it is worth pointing outthat while it creates the best-paying rural jobs in the country,virtually all sugarcane growers have access to social benefitsunder current labor legislation with a unique, unprecedentedrate of formal employment in Brazilian agriculture. In addition todirect social benefits, the labor-intensive jobs created by thesugarcane industry also have an obvious positive effect on thereduction of migration flows to the cities (and, as a result, thereduction of the urban population “swelling” and all of itsnegative environmental results).Sugarcane and the environmentThe international negotiations concerning the Kyoto Protocol andthe measures aimed at mitigating the problems caused by thegreenhouse effect and climate change have recently put Brazil’ssugarcane industry into a positive, environmentally prominentposition. To give some idea of its environmental positive impact,34


sugarcane for energy use allows Brazil to withdraw from theatmosphere more than twenty percent of all the CO 2 emitted bythe total fossil fuels that are burned in the country every year.Based mainly on the use of sugarcane for energy purposes,Brazil already has the world’s largest and most successful fossilfuel replacement program, which has been recognized, exaltedand increasingly studied in developed countries. Sugarcane isgrown widespread in virtually all countries in the tropical world,most of which suffer from poverty and underdevelopment, andwhere conflicts are aggravated exactly by the problematicenergy model that is currently in place.Therefore, in view of so many potentialities, one major questionthat remains to be answered before the actual use of bio-ethanol35


and biomass can be widespread implemented: what else musthappen (terrorism, war, world misery, intense migrationprocesses, economic and population unbalance, catastrophes,sudden climate changes, etc.) before we become aware of theadvantages of bio-fuels and biomass?Or, in other words, how far must the damage to the planet goesbefore we seriously consider the alternatives that can turn“sustainable development” from just a piece of technical jargoninto the reality we all desire?36


An Overview of Ethanol Derivatives inBrazilCarlos José da Costa AndréManaging DirectorBB Securities Ltd.ObjectiveThis text intends to give a brief overview of the Ethanol FutureContract traded on the Brazilian BM&F (“Bolsa de Mercadorias eFuturos”), and its applications as a hedging instrument againstundesired fluctuations on the commodity prices.Futures ContractsBefore we go into the details of the Ethanol Future Contract, itwould be useful to refresh our minds of the general definition offutures contracts:“Futures Contracts are contracts where two parties agree to buyor sell for physical delivery and/or cash settlement, on a futuredate, a specific amount of a certain asset (commodity), countingon the payment/receipt of margins for daily settlement of gainsand losses (daily margins).”Usually, when someone enters into a future contract, it issearching for some sort of price protection or financial arbitrage,and not for physical delivery of the underlying commodity.General Advantages of Futures ContractsAvailability and Price Transparency: usually you have atleast 7 months in the calendar year available to trade, which37


makes it easier to find a date suitable for the hedging/tradingstrategies of the players. Bid and offer prices need to be placedthrough the exchange in a transparent manner.Hedge Effectiveness: the future prices hold a strongcorrelation with cash/spot market prices, making it much easierto construct efficient hedge strategies through the trading offutures contracts.Flexibility: Players can get in and out of positions throughopposite transactions to offset the original positions.Counterparty risk: The financial and credit soundness of theclearing houses behind the future exchanges is crucial to makethe markets work smoothly.Market ParticipantsEntities involved in the production and commercialization of thecommodity, which are seeking for hedging alternatives;Speculators are also very important as they will provide liquidityto the market. In that category we can find: fund managers,hedge funds, financial institutions and profit oriented investors.Of course, sometimes, speculators can cause imbalances in theprices through aggressive intervention in the markets.Rational for Using Futures ContractsProducers of commodities will usually sell contracts in thefutures market to guarantee a certain level of price, before theactual sale of the physical product. When the physicalnegotiation is concluded, then it is possible to “reverse” thefuture position (through an opposite transaction);Buyers of a certain commodity will be buying contracts in thefutures market to try to avoid adverse excessive costs;For either buyers or producers, using futures contracts is likecontracting an insurance against undesired price movements;38


In both cases, settlement can happen by physical delivery or viacash.Physical deliveries are less common than cash settlement. It isalways necessary to give prior notice to the exchange beforeengaging in any physical delivery settlement.Ethanol Futures ContractsThe use of Ethanol Futures Contracts is relatively new. Tradingstarted on the BM&F in March/2000 and more recently inMay/2004 on the NYBOT - New York Board of Trade and inMarch/2005 on the CBOT - Chicago Board of Trade.As in many other derivatives markets, Ethanol Contracts can betraded either electronically or on the trading floor.Ethanol Futures Contracts – Main Specifications:1. Underlying Commodity2. Price quotation: Brazilian Reais per cubic meter (1,000liters) to two decimal places, free of any charges3. Minimum price fluctuation: R$ 0.20 (twenty cents ofBrazilian Reais) per cubic meter.39


4. Maximum daily price fluctuation: As established by BM&Fin Circular Letters.5. Contract size: 30 cubic meters (30,000 liters) at 20º C(Celsius).6. Maturity months: All months.7. Number of authorized delivery months: Minimum ofseven, as authorized by BM&F.8. Last trading day: The sixth business day of the deliverymonth. On that day, neither opening of new short positions norday trading will be allowed.9. Business day: A trading day at BM&F shall be considered asa business day for the purpose of this contract.10. Hedgers: Mills, refineries, producer cooperatives, fueldistributors, importers, exporters, and suppliers of agriculturalequipment.11. Margin requirements: A value per contract, published byBM&F in its Daily Bulletin, which may be altered at any time, atthe Exchange’s discretion. Hedgers shall be granted a 20%discount on the initial margin. Margins shall be due on the firstbusiness day following the trading day12. Assets eligible to meet margin requirements: Forresidents, cash, gold, shares of the Fund for Broker Financing(FIF), and upon prior approval by BM&F, federal bonds, privatesecurities, letters of credit, shares of stocks, and equity fundunits. For non-residents: USD cash and upon prior approval byBM&F, U.S. T-Bonds, T-Notes, and T-Bills.13. Trading costs• Basic Commission Rate: Regular trading: 0.30%; daytrading: 0.07%.• Physical Delivery Fee: 0.90% of the delivery cashsettlement value.40


• Exchange Fee: 6.32% of the basic commission rate and 30%of the physical delivery fee, if any.• Registration Fee: A fixed value established by BM&F.TaxationForeign investors who trade on BM&F’s agricultural commoditymarkets have the same tax treatment granted to non-residentscollective investment schemes and investors in securitiesportfolios. Thus, profits resulting from trades carried out byforeign investors on these markets will not be subject to incometax.BM&F Ethanol Futures Contracts – Some Graphsand Numbers:Trading Volumes (USD):Source: BM&F41


Number of contracts tradedSource: BM&FBreakdown by Market Participants:Source: BM&F42


ConclusionsThe Ethanol Futures Contracts traded on BM&F, althoughgathering all the necessary inputs to be an efficient hedgeinstrument, is still bellow expectations in terms of volumestraded and general use by market participants.Several reasons might be used to explain this: imbalancesbetween supply and demand on the spot market; to muchconcentration of bargaining power in the hands of buyers ofethanol; the incipiency of the ethanol as an internationalcommodity. Also, there is the well-known paradox of “whatcomes first, the chicken or the egg?”, so that potential marketparticipants don’t feel encouraged to trade because of the lackof liquidity which, of course, creates by-it-self, a less liquidmarket.All the necessary conditions for the Ethanol Futures Contract togain momentum and importance are already in place. As long asthe relevance of ethanol as an internationally traded commoditykeeps growing, together with the key-role that Brazil plays asthe word’s major producer of ethanol, it will be inevitable to seethe volume of the Futures Contracts traded in the BM&F increaseat a substantial rate.43


The Successful Case of Ethanol in theUnited StatesAlberto PeixotoHead of Tate & Lyle Global Sugar and Alcohol TradingThe story in the US of ethanol goes back a long way but certainlythe main root is traced back to Henry Ford who designed thefamed Model T Ford to run on alcohol. He said it was "the fuel ofthe future". The oil companies thought otherwise, however, butthe oil crisis of the early 1970s gave ethanol fuel a new lease oflife…….so Henry Ford was right, it took only sometime for thefuture to become the present.44


U.S. Ethanol Industry ProgressThe major facts for the progress of the US Ethanol Industry canbe described as:1920 - Alcohol has been used as motor fuels since early day ofthe automobile industry.1930 - Gasoline became readily available and inexpensive -Ethanol markets lost its significance.1970s – Oil Crises, Ethanol become more established as analternative fuel.Mid-70s - Many countries developed national programs topromote domestic production of Ethanol…especially Brazil.1980 – Ethanol is seeing as a source of octane.1990 – Clean Act Amendments passed congress requiring theaddition of oxygenates to gasoline in the most polluted areas –MTBE and Ethanol.1998 – Growth of Ethanol domestic production due to supportfrom Federal and State Governments leading to Ethanol taxsubsidies and the mandated use of high-oxygen gasoline.2001 – USDA has implemented a bio-energy program toencourage production of bio-energy (bio-diesel and ethanol).2004 - California, New York and Connecticut discontinued theuse of MTBE increasing and establishing internal demand,creating incentive to the industry.It’s extremely important to understand the close link of ethanolwith gasoline and the fragility of the current supply & demandfor gasoline due the current installed refining capacity.It’s estimated that in 2004 the USA counted with less than 10%of spare Oil refining capacity while the rest of the Worldexperiencing similar circumstances, with an estimated spare45


capacity of less than 13% of the yearly production, and bothtrends are still down.The following chart shows the decline of spare Oil refiningcapacity in the US due to mainly the lack of investments whichis the main reason for other parts of the World too.46


Reason for the strong support for ethanolindustry development in the USReduces the U.S trade deficit and the need to import oil – around65% of the oil consumed is currently being imported;Ethanol emits less carbon monoxide than gasoline thereforeadding oxygenates like ethanol to gasoline reduces carbonmonoxide emissions;Ethanol is water soluble, non-toxic and biodegradable;Ethanol reduces Global warming emissions – 10% Ethanolblends, reduces greenhouse gas emissions by 12-19%;Ethanol production supports U.S. farmers and creates jobs;Government support the industry through Tax Incentive…30% ofall gasoline in the U.S. is blended with a certain percentage ofEthanol;Ethanol may lower gasoline prices in some regions.Strong installed capacity and growing!The US ethanol Industry is growing due to large investmentsfrom many different companies. There are already 107 plantswhich 19 are being expanded or came to production in 2006.Expansions of existing plants are increasing annual producingcapacity for 2006 to 19 billion litres from current 15 billion litres.ADM has been by far the largest believer and investor in thisIndustry. They are investing $ 900 millions over 2006/07 toboost their production by 1,9 billion of Ethanol and Bio-Dieselfuels rising their current production from 4,5 t o 6,4 billion litres(+/-30% of the USA total production).47


The following chart shows the U.S. Ethanol Production Facilitiesmainly in the Middle West.The production of ethanol in the US was expected to reach 19billion litres in 2006 but the demand remains strong and stocklevels low. The current estimated stock level is close to 7% ofthe annual demand an extremely tight market highlydependable of its production capacity and corn prices.48


One can not talk about ethanol in the US without talking aboutcorn which is almost 100% of the raw material for it. The UShas lived for the past years with large corn productions and lowprices, stimulating the speed of growth for the ethanolproduction vis-à-vis the prices for gasoline.The price advantage should remain if the coming crops maintainits success rate, as any drought or heavy rain at the wrong timecan affect the corn supply and its price.Corn prices were low in 2005 and 2006 due to the stock levelsin relation to its demand, estimated in 20% of the annual needs.Strong demand in 2006 and 2007 are raising the prices for cornand triggering ethanol imports beyond traditional levels whichbenefited Brazil as 87% of the US ethanol imports came directlyor indirectly (via the Caribbean and Central America) from Brazilin 2006.49


The price for ethanol in the US is extremely linked to gasolineand corn prices and ethanol prices in Brazil are linked to sugarprices and to a certain degree to export prices. Brazil exporteda vast amount to the US in 2006 and it’s expected that 2007may be even higher.ConclusionsThe US ethanol demand is here to stay and to grow. The mainsource remains locally produced corn and corn stocks are lowand prices are rising and are leading to greater ethanol imports.The Bush administration set very high levels of bio-fuel demandby 2017 i.e. 35 billion gallons or 132 billion litres and althoughthey would prefer it to come from other crops than corn, it maytake time for it to happen.The production in 2008 is expected to reach 9 billion gallons or34 billion litres.The management and success of US Ethanol Industry, as well inBrazil, is adding “fuel” to similar programs elsewhere but both50


markets are dependent on agricultural commodities like Caneand Corn which are regularly threatened by changes on thenormal weather patterns. There are various plans and projectsto develop ethanol production from other crops but we are stilla few years from it.We expect the US to continue supporting the Ethanol Industrybut also look for alternatives which long term can fit the US fuelneeds, its commitment to the environment and delicate supply& demand for its Oil and Corn productions.One can’t ignore the needs of a Nation and its commitment tothe Globe and Human Kind. The US is doing its share, on its ownway and speed but for sure the benefits are noticeable and theexample that Brazil provided so far is also been noted and copiedon various forms. Ethanol is not a short term measure for the Oilor the environment but a long term project which is working wellwith many other projects around the Globe.51


Oil in the World Energy MixRobert SkinnerFormer Director of the Oxford Institute for Energy StudiesIntroductionOil prices have tripled since the beginning of the century andenergy is now top on the policy agendas of all nations. EnergySecurity will be the theme of the G-8 Summit when it convenesunder the chairmanship of President Vladimir Putin later thisyear in St Petersburg, Russia. The politics of meeting the world’sfuture demand for oil have been drawn into sharp focus by therecent disappearance of spare crude oil capacity and themismatch between available crude and refining capacity andabove all the stark geographic disparity between oil and gasreserves and their markets. The international politics of energywill only increase. Diversifying fuels and more efficienttechnologies to meet our transportation needs will increasinglydominate energy policies.How we got to $70 OilThe story of oil is determined by economics, technology andgeopolitics. It is also about information, its interpretation andmisinterpretation. It is generally held that this current price‘shock’ was demand-led and Asian and US-based. In 2004 worldGDP expanded by 5%, a level of growth last experienced in themid-seventies. In simple terms this largely stemmed fromChina, importing and transforming commodities and exportingmanufactured goods to American householders. The latter,emerging from a post 9/11 slump, feeling wealthier fromelection-year stimuli, seduced by historically-low interest rates,refinanced their home mortgages and went on a spending spree.52


Whether this wave of consumption is sustainable remains to beseen, particularly as the resulting record household debt in theU.S. confronts the prospects of ever-rising interest rates.China’s double-digit economic growth was mirrored by thegrowth in its oil demand, elevating it to the rank of the secondlargest oil consumer in the world, after the United States. Chinais the top consumer of copper, zinc, tin, steel, rubber, raw wool,cotton, oil seeds, wheat, rice and coal. Its growth influencedexpansion in the Asian neighbourhood, including the world’ssecond most populous country, India. Migration from rural tourban centres in the region was accompanied by a shift fromtraditional (biomass) to commercial fuels. This gearing ofpopulation and higher incomes accelerated energy demand.China’s oil demand increased by over 1 mb/d since 2003,primarily in transport, and mostly diesel to move goods by rail,barge and road, but also given the electricity supply crisis, togenerate electricity in diesel generation units and to truck coalto power stations owing to the congested rail system. Global oildemand grew by nearly 3 million b/d in 2004. This compareswith an average 1.27 mb/d per year since 1965, or a fairlysteady 1 mb/d per year since 1982.While this surge in demand certainly was important and, givenAsian oil demand trends since 1990, should have beenanticipated coming out of the Asian Financial Crisis, numerouspolitical and technical factors elsewhere in the world erodedglobal spare supply capacity. These include,The 2002/03 strike in Venezuela’s national oil company andsubsequent failure to restore production;The nuclear accident in Tokyo Electric and closure of seventeenof its reactors, necessitating increased oil imports to generateelectricity;Invasion of Iraq and subsequent deterioration of supply ratherthan the almost universal expectation that this ‘regime change’in Iraq would restore and even increase its oil output;Strikes among oil workers in Nigeria and later in Norway at acritical time in the annual oil demand cycle;53


Terrorist attacks in Saudi Arabia and Qatar;The Yukos Affair in Russia and threatened interruption of its railbasedoil exports to China;Introduction of strict sulphur specifications for gasoline anddiesel when the marginal crude available was heavy and sour—the so-called ‘mismatch’ between crude and refinery capacity;Fires and upsets in refineries, oil sands plants and offshoreproduction platforms;Hurricanes in the Gulf of Mexico that removed oil production andrefining capacity compounding the refinery/crude qualitymismatch.The loss of supply since 2003 actually exceeded the increase indemand—the most compelling feature of the current pricepicture is the disappearance of spare capacity, not only inproduction but also all along the oil supply, transport andrefining chain. With capacity so tight, recent factors such asstepped-up attacks on oil installations in Nigeria, uncertaintyabout the new Hamas government in Palestine, reaction to Iran’snuclear aspirations and Russia’s handling of its gas exports toWestern Europe have all compounded market nervousness.Are prices likely to revert, like post-1973?When we look to the future, barring some cataclysmic eventsuch as pandemic, we have little reason to believe that oil priceswill quickly revert to their mean historic levels. In other words,this is not simply like post-1973 when oil demand shrunk andnon-OPEC supply increased, leading to the price collapse of1986, when OPEC was left with over 11 mb/d of spare capacity.The industrialized economies, which account for over 90% ofworld GDP, are half as oil-intensive as they were in 1973. Todaythere are two billion more people just getting onto the risingcurves of electricity and oil consumption per GDP, underpinningmomentum to energy demand. Monetary policy responses, the54


educed power of trade unions, the readiness of OECD firms torestructure and migrate, the spending power of the BabyBoomer generation versus their indebtedness in the seventiesand the changed structure of the oil market with electronictrading and instruments to manage market risk are just a few ofthe differences between then and now.Short-term supply outlookOn the supply side, annual increments of non-OPEC productionoutside the Former Soviet Union have steadily declined since themid nineties. Russia’s impressive recovery offset this decline butnow appears to have topped out—owing to recent changes inresource policies and taxation that have turned off investmentby the industry. New supply is coming from the deep offshoreareas off Brazil, Gulf of Mexico and West Africa, from the Caspianand from unconventional oil such as the Canadian oil sands, gasto-liquids(GTL) and Biofuels. However the underlying base ofproduction from mature basins is declining at a much faster ratethan the combined incremental output from these new sources.Moreover it is important to stress that none of these new sourcesis in response to the recent rise in oil prices. The deep water oilcame out of exploration ideas developed over twenty years ago;new developments in seismic to ‘see’ beneath salt and detectreservoirs in complex continental margin sediments, and majorbreakthroughs in drilling technology enabled development inwater depths greater than 500 metres. The oil sands andOrinoco developments—nearly 2 mb/d of new supply since1990—were made possible by attractive fiscal regimes and newtechnologies, especially in horizontal drilling and reservoirstimulation using steam. The Caspian and Russian supply reflectmore a geopolitical shift than any special technologicalbreakthrough. Together they are unlikely to proportionatelyduplicate the increased supply that came from Alaska, Mexico,the North Sea, Australia and elsewhere post-1973.OPEC members meanwhile, principally Saudi Arabia, have goneto great pains to announce and report on their investments in55


additional capacity. But if demand continues to grow at itsrecent pace, exceeding 1.6 mb/d per year, the world could be infor a period of sustained higher prices. Until a comfortable levelof spare capacity of crude of the right quality has been restored,the market will be jittery, prone to technical upsets and overreactionto news and geopolitical developments.Longer-term energy outlookStepping back and examining these oil market developments ina broader context, we must confront some worrisomeconclusions of respected institutions and agencies such as theInternational Energy Agency, US DOE/EIA and OPEC thatregularly publish world energy outlooks. While there arevariations among them in the details stemming from differentassumptions regarding oil prices and economic growth rates, inthe absence of major policy changes, they agree on severalstylized trends for the next quarter century. These include,World primary energy demand will continue to grow in line witheconomic growth at a coefficient of around 0.5 to 0.6.Emerging economies, especially Asian, will underpin the largestshare of the growth in global primary energy demand.Fossil fuels will continue to account for over 85% of demand andalmost 90% of the growth in energy demand—in other words, a‘fossil fuel future’.Oil will continue to account for the largest share of primaryenergy, followed by coal and natural gas, but gas will grow thefastest, eventually surpassing coal, owing mostly to itsattractiveness for power generation.Electricity will be the fastest growing form of final energyconsumption as it underpins modern economies.Oil will continue to concentrate in the transport sector where nosignificant alternative to oil is likely to be deployed within thetimeframe of most outlooks; oil demand remains relativelyinelastic to price.Over two thirds of the growth in oil demand will be in thetransport sector and of this nearly 60% will be in Non-OECDcountries.56


Increasing shares of oil and gas will be traded internationallyowing to the acute geographic disparity between where reservesare located versus their primary markets.To underscore this fossil fuel prognosis for the globe, we onlyhave to look at growth in our consumption of oil, gas and coalbetween 2000 and 2004: 6.5%, 10.3% and 29% respectively.These increases sit at odds with the huge international politicaldiscussion and media attention given to the importance ofreducing carbon emissions to combat global warming.Oil is the single most important internationally tradedcommodity; oil is transportation; transportation touches on amyriad of personal, political, philosophical and industrialfeatures that help define the modern human condition. Wevalue personal mobility. Its pursuit goes beyond its purelyutilitarian attributes of moving us from ‘A’ to ‘B’, or transportinggoods and raw materials. The auto industry is intimately linkedto national industrial strategies, labour policies and internationaltrade agreements; it influences urban planning, health andenvironmental policies. Securing adequate and diverse suppliesof oil inform the strategic elements of most nations’ foreignpolicies. But at its core is mobility’s ineluctable linkage toincomes—as GDP per capita increases, motor vehicle ownershipincreases. Correspondingly, the higher a country’s GDP, thegreater the energy consumed for mobility.So, where will the fuels come from to feed this apparentlyinsatiable demand for mobility? Is it true that the production ofconventional oil is about to peak? Are there alternatives?To answer these questions we need to look beyond the ‘events’and ‘upsets’ of the last two or three years that led to the currenttight supply capacity: they are merely symptoms. In fact, onecould say that oil companies’ record profits for 2005 are due notto what they did last year, but rather what they did not do forthe past twenty years—invest: not only in supply, but intransport, refining and in training of the skilled manpower soneeded today. While geopolitics and the political economy of oilis a fascinating subject, it is too prone to subjectiveinterpretation, which mostly conflates to conspiracy theory. Ifwe do not take care to understand the underlying technical and57


commercial realities of the industry, above all its enormousinertia and lag times, we risk drawing the wrong conclusions.After the 1986 price collapse, which in part led to the collapse ofthe oil-addicted Soviet system, the international oil industrysought ways of improving returns to shareholders in a worldawash with oil. They reduced employees, including geoscientistswhose job it is to find more oil to replace reserves produced. Oilprices bounced off a floor of around $16/b and firms used thisprice to test the economics of new investments. Only the majordiscoveries and most material increments of supply offered bythe deep offshore, some unconventional oil, and the formerSoviet Union met profitability tests. Eventually, firms decidedthat acquiring and merging with other companies could furtherimprove shareholders’ returns. Between 1991 and 2000, over2,600 mergers of oil and gas companies took place in the UnitedStates alone; the five largest oil companies today are theamalgam of at least fifteen companies, some of which werehousehold names for over half a century.These large super-majors now must find targets twice the sizeof their antecedents’ prior to the mergers. This has narrowedthe prospects to difficult oil and gas—technically and politicallydifficult—oil sands, Orinoco ultra heavy oil, gas to liquids,unconventional gas such as coal-bed methane and LNG projectswhere scale and materiality can match these firms’ size andgrowth targets.The ‘Peak Oil’ DebateThe concept of ‘Peak Oil’ is not a new one. As long ago as 1919the peak in U.S. oil production was believed to be imminent.The argument rests on the observation that U.S. oil discoveriespeaked in the late thirties and production began its irreversibledecline in the early seventies. If this thirty-year lapse betweenpeak discovery and peak output occurred in the United States,why should it not occur at the global level? The worldwidedecline in discoveries starting in the early eighties signals for58


some observers that the peak in oil production is near. This iscomplicated by the fact that, confronted by the growing sparecapacity at the time, OPEC countries in particular stoppedexploring for more oil. Indeed there has been relatively littleexploration worldwide. Of all wells drilled between 1995 and2003, over 60% were in mature basins of North America, 22%in Africa, Latin America and Asia and 5% in the FSU. Only 2%were in the Middle East where more than 60% of the world’s oilreserves occur.The ‘Peak Oil’ debate unfortunately has become strident andoften emotional. Some (mostly retired) geologists take thestatic or ‘Depletionists’ view; namely, that discoveries peaked in1980, therefore production’s peak will surely follow, like nightfollows day. They are countered by the economists andtechnologists who take the dynamic or ‘Cornucopianist’ view.Higher prices, they insist, will extend oil supply; technologistssay new breakthroughs will enable us to wring more oil out ofold fields (where we recover on average less than 35% today),find it where earlier we couldn’t look or didn’t know to look, andlead to greater efficiency in how we use oil.Oil is finite. Nobody who is serious claims that oil fields or theirglobal aggregate will last forever. However, most of thedepletionists ignore the unconventional liquids, a resource thatis three or four times as great as conventional oil. Biofuels offerimportant potential. But all of these ‘difficult’ forms of ‘oil’require significant inputs of energy, and labour and placesignificant demands on the physical environment.The finiteness of oil is a serious issue. The fact that theproponents of peak oil continue to shift the peak’s datediminishes their credibility. Like the little boy who cried wolf, thisdoes not mean the wolf is not out there. Unfortunately cryingwolf has belittled the importance of the issue for some; forothers, the word, ‘peak’ elicits great headlines and feedsapprehension and worries among the public. Politicians, as wehave seen since 9/11, tend not to make good policy whencitizens are filled with fear.Oil will most likely plateau—this concept better accommodatesboth the physical reality of resources and the economic reality of59


market forces stimulating technological development andbehavioural changes that in turn influence demand and supply.Unconventional liquidsWhat of the ‘unconventional oils’? Biofuels (biodiesel andbioethanol) are receiving enormous attention around the world.At least thirty-five countries have launched programmes tostimulate or promote their production. Ethanol comprises thelargest share of biofuels, mostly from sugar cane in Brazil andfrom maize in the United States. There is a major debate in theU.S. whether the growth of maize for ethanol is energy-efficienton a full-fuel cycle basis. Regardless, the political momentumbehind bioethanol, not the least because it can help sustain ruraland farm communities and because biofuels can offerenvironmental benefits, principally greenhouse gas reductions,secures a future for this alternative fuel.The sugar cane-based ethanol has great potential and if oilprices continue above $50/bbl we should expect to seesignificant new development and expansion in countries withclimate and soil conditions capable of supporting cane crops.Of the other unconventional liquids, there are at least 10 mb/dof ‘projects’ on the planning board, mostly oil sands in Canada,Orinoco and GTL. For many reasons, these will not come on asfast as their promoters suggest. But they will help diversifysupply of liquids to feed the world’s insatiable appetite formobility. The world needs all sources of energy to meetprojected demand. But we cannot simply ‘drill and supply’ ourway out of the challenge posed by sustainability. We mustdevelop the most secure barrel of transport fuel—the barrel notused.60


Sustainable Mobility: How Ethanol andBio-fuels Can ContributeRobert SaundersBPPetrol as a transport fuels has been with us for over a centuryand diesel for around 70 years. However, they have changedsignificantly over that period and will continue to change beforethey finally outlive their usefulness. Over the last 30 years or somost major oil companies have investigated alternativetransport fuels usually brought on by potential shortages insupply or as a means of improving air quality. However, globallythere has been little real change in the fuel mix used fortransportation over this period. So why think about alternativefuels or Future Fuels today and what is different to make theindustry consider changing the fuel mix or composition. Theanswer to this question is complex and in BP’s view involvesthree key drivers;-Climate change-Air quality-Energy diversification or Security of SupplyDifferent stakeholders may place these drivers in a differentorder but at BP we believe Climate Change is the largestchallenge facing the transport sector today. Putting it anotherway achieving Sustainable Mobility as it is often called is the realchallenge facing society.Air quality in the developed world is well on the way to beingsolved with legislation and technology already in place or in thepipeline. There may be a few air quality hotspots but these willbe solved with local solutions by the end of the decade with afew exceptions. In the developing world the situation is verydifferent but they will almost certainly leapfrog the solutions andthe technologies already developed. As unleaded petrol is beingintroduce in these markets the auto makers are marketing their61


advanced after treatment technology vehicles. This will helpthem turn the corner on air quality levels in the next decade astheir demand for transport increases.Although we are currently passing through a phase of turmoil inthe oil market this will be short lived and it is recognised thereis sufficient crude oil available or undiscovered oil yet-to-find tolast well into this century. These two other issues are frequentlydebated elsewhere, therefore for the purpose of this article wewill concentrate on the key driver of reducing Green-House-Gas(GHG) emissions in the transport sector and sustainablemobility.Options for Reducing GHG from TransportIn the transport sector there are three potential levers to reducethe GHG emissions and all will need to be used to a lesser orgreater extent to ensure the target of Sustainable Mobility isreached.-Vehicle technology-Demand side measures-Fuel measuresVehicle technology – The ACEA voluntary agreement will ensurea continuous improve in fuel efficiency from the new vehicles.This is likely to be a combination of dieselisation, aftertreatmentand engine re-optimisation. Additionally, there isHybrid technology being pushed largely by the Japanese whichcould give a significant fuel economy benefit. These aretechnologies which can take us part way down the road ofSustainable Mobility and reducing the GHG emissions from thetransport sector using sulphur free conventional fuels.Demand side measures are about behaviour and life-stylechanges required and identifying the tool which will influencemotorists into changing the way transport is used. It could utiliseintelligent transport solutions such as road use or congestioncharging. However, it will require a significant change inbehaviour by motorists in the way they use personal transportand certainly increase the use of public transport. Governments62


need to start the process of developing policy to changebehaviour and how society uses energy particularly but notexclusively in the transport sector. Ultimately this could lead topersonal carbon allowances where the individual decides how toadapt their life style using their allowance but this possibility isa long way into the future. However, only Governments candevelop these policies with the help of stakeholders but whenare Governments going to start the thinking process.Fuel measures are where a company like BP spend most of itslong-term strategic thinking. The oil industry has over recentyears taken lead and sulphur out of fuels to enable vehiclemanufacturers to reduce vehicle emissions and improve airquality. The sulphur content will shortly be further reduced towhat is often called Sulphur Free petrol and diesel. This will allowfurther improvements in vehicle fuel efficiency and moresophisticated after-treatment equipment. BP has also launchedits Ultimate range of fuels with their improved environmentalperformance which has started us down the road of reducing thecarbon emissions from our customers’ vehicles using additivetechnology.The question we have asked ourselves is; where do we go next?The answer has to be decarbonising the fuel, this is a very tallorder for an industry based on carbon derived fossil fuels. Theultimate solution of decarbonisation may be renewable hydrogenbut this technology is a very long way off maybe beyond 2050.Therefore, what can be achieved in the short term to mediumterm at reducing the GHG emissions in the sector? But before Idiscuss BP’s vision for fuels let me discuss the broader issue ofsustainable mobility.Sustainable MobilityThe World Business Council on Sustainable Development studiedSustainable Mobility and reported their findings in mid 2004.They defined Sustainable Mobility as;“The ability to meet society’s need to move freely, gain access,communicate, trade and establish relationships without63


sacrificing other essential human or ecological values, today orin the future”.They investigated many issues including safety, congestion,noise and environmental issues. From a fuel companyperspective the important part of the project was their modellingof the various technology options available and being developedto reduce GHG emissions from the transport sector. Their studyattempted to predict the technologies required to reduce theGHG emissions from transport by 50% in 2050 on currentprojections, in other words maintain 2050 GHG emissions to the2000 levels. As you can see from the graph biofuels supplies thelargest portion of the GHG reduction up to 2050. Inevitablyethanol will be a portion of this particularly in the early years.BP Future Fuels PathwayThe World Business Council study gives us a very good basis foran oil company to develop a future fuels strategy. The diagrambelow shows an overview of how we see transport fuelsdeveloping over the coming decades. You will notice there is notimescale on the diagram as it is impossible to predict the speedof technology development but it does demonstrate how we seethe future developing.64


Today we are in the bottom left hand corner of the diagram withinternal combustion engines consuming increasing quantities offossil fuels to drive the vehicles. The target is the top right handcorner at some point in the future which may be vehicles drivenby Fuel Cells fuelled using renewable hydrogen but this is notcertain. The challenge is to reach the destination by the mostefficient and shortest technology route bearing in mind thedifficult technical hurdles that still need to be overcome.How do we start removing carbon fromtransport fuels?The first step is to invest in conventional biofuels such as bioethanolfrom intensively grown crops such as wheat and sugarbeet and biodiesel from rape or soya. These can be blended intoconventional fuels and used in the existing vehicle fleet up to 5%with the added advantage of using the existing fuelinfrastructure. This will only provide a 2-3% reduction in GHGbut at least it is a start. There are some minor technical hurdleswhich need to be overcome before bio-ethanol can be introducedinto the market. These issues are well understood but will65


equire industry co-operation to implement at scale in themarket. The European limit of 5% biofuel blended with fossilfuels is low and the vehicle manufacturers are investigatingraising the level.In general biofuels including bio-ethanol are not cost competitivewith fossil fuels and consumers today are unwilling to pay theadditional costs of renewable fuels. Therefore, Governmentsneed to force biofuels into the market. There are variousmechanisms at Governments disposal to encourage these fuelsinto the market such as tax incentives or as is planned for theUK a Renewable Transport Fuels Obligation. The drivers forGovernments to encourage biofuels range but include helpingthe rural economy, security of supply and environment.However, in BP’s view Governments need to recognise the keydriver is climate change and the biofuels which provide greaterbenefits should receive higher rewards. The rewards to the otherdrivers will then also be maximised but if other drivers arechosen the climate change objective will not be met.It is important for the oil industry to develop an understandingof the issues surrounding sourcing biofuel component. Theagricultural industry has an unfamiliar dynamics compared withthe oil industry and we need to understand and merge with thisprocess.The vehicle manufacturers are supporting biofuel introductionand are working hard to adapt their future vehicles so higherproportions of biofuels can be included in the fuel blend. Thecurrent limit in Europe is 5% by volume, it is hoped that theindustry will be in a position to raise this limit within a few years.However, in the short-term flexi-fuel vehicles are being producedwhich can use blends up to 85% ethanol.2 nd Generation BiofuelsThe bigger prize is from what are frequently referred to as “2 ndGeneration biofuels” which are being researched and developedtoday. These offer greater GHG benefits than conventionalbiofuels and are similar to those of using biomass in powergeneration, reducing the dilemma of where best to utilise this66


valuable resource. They also use parts of the plant which are leftafter the edible portion has been removed. These advancedbiofuels also have improved economics, lowering the level ofsupport required, and more suitable fuel molecules for themodern sophisticated engines of tomorrow. There are currentlyessentially two general options being investigated namely;-ligno-cellulosic biomass broken down using enzymes tosugars followed by the conventional fermentation process toethanol-range of biomass including coppice wood, grasses,forestry and municipal waste which is gasified to syngas and viathe Fischer Tropsch process to dieselIt is predicted that some of these technologies will becomecommercially viable by 2010 and significant production capacitywill be in place by 2015, in Europe slowly displacing the moreexpensive and less efficient conventional biofuels. Theseadvanced technologies also have the benefit of producingcomponents which are similar in chemistry to existing fossiltransport fuels. Additionally, there is the issue, how much wastebiomass or land is available to grow these new energy crops tomeet future transport demands. There have been a number ofstudies investigating the potential biomass availabilityconsidering constrained available land and suitable wastebiomass feedstocks. The current view is by 2030 an estimated20% to as much as 30% of transport fuel demand could be metfrom 2 nd generation biofuels in Europe. This is a very significantportion of the fuel pool and will require large investment inproduction capacity.Linking the reduction in carbon with the improvements in vehicletechnology starts to deliver real savings in GHG emissions fromthe transport sector and could achieve at least a 50% reductionin GHG emissions by 2030. This in itself makes the hurdle forFuel Cell technology higher and more difficult to match.Other Alternative FuelsOur Future Fuels Pathway also shows a number of other fuels foruse in conventional engines Liquid Petroleum Gas (LPG),67


Compressed Natural Gas(CNG) and Gas To Liquids(GTL) diesel.These are all seen as niche fuels partly to solve local air qualityissues. They also offer marginal energy diversity but contributevery little to security of supply. The GHG benefits are similar todiesel for all the gaseous fuels LPG and CNG giving a benefitover gasoline. GTL diesel technology, is somewhere betweengasoline and diesel, depending on how the GHG analysis iscalculated. Therefore, all gaseous fuel options for the EU andother developed markets will only ever be shorter term nichefuels largely to solve local air quality issues.Until renewable or low carbon hydrogen is available biomass toliquids is the most feasible option for the transport sector.Largely since it will utilise the existing fuel supply infrastructureand can be burnt in existing engines without modification.The conclusion is that petrol and diesel as transport fuels andthe internal combustion engine will be with us well into the 21 stcentury but they will look very different to the current fuels andengines. But the industry would have said exactly the samething 30 years ago and we were partially correct then so it willbe interesting in 30 years time to review this article andcompare what actually happened. The final steps will be themost challenging, producing sufficient renewable fuels to meetthe needs of the transport sector. When that will happen isdifficult to predict today but a technology break through couldoccur next week so watch this space.68


The development of EU biofuel policyPaul Hodson and Kristine KozlovaEnergy and Transport Directorate-General, EuropeanCommissionThe European Union (EU) is far from being the world leader inbiofuel production and consumption. Brazil and the UnitedStates are well ahead. However, with the significant rise in oilprices and the growing concern about stable, secure andenvironmentally friendly energy supplies, the promotion ofbiofuels use in transport has become a top priority on theEuropean political agenda. Biofuels are seen as the only way tosignificantly reduce oil dependence in the transport sector. Aspart of a new Energy Policy for Europe, the governments of theEU Member States committed in early 2007 to increasedproduction and use of biofuels by adopting a binding minimumtarget for biofuels of 10% of vehicle fuel by 2020. Thisagreement means that by 2020 at least one tenth of thetransport fuels in all 27 Member States should come frombiofuels.This paper sets out to describe the biofuel development in theEU before the adoption of the EU biofuels directive in 2003; theimplementation of the directive; the biomass action plan andbiofuels strategy; and the forthcoming policy actions.Biofuel development up to the adoption of thebiofuels directiveThe EU and individual Member States have supported thedevelopment of biofuels through research and demonstrationprojects for many years. On the policy side, an important stepforward was the European Commission’s 1997 White Paper onrenewable energy. This set the objective of doubling the share ofrenewable energy in Europe to 12% by 2010. Biofuels fortransport were one of the contributors to this objective, althoughrenewable energy in heating and electricity was expected to playa bigger part.69


The White Paper described a vision. But saying is not doing.Renewable energy’s contribution grew slowly. By 2001, biofuels’share of the petrol and diesel market was still only 0.3%. Tospeed up their growth, the Commission proposed in 2001 a‘biofuels directive’. The main objectives of the directive were toimprove the security of Europe’s energy supply and to reducegreenhouse gas emissions in transport. In addition, it wasrecognised that biofuels can provide a new source of demand foreconomic activity in rural areas.The proposal hinged on targets for biofuel use, rising annuallyfrom a 2% share in 2005 to 5.75% in 2010. Each Member Statecould choose how to achieve the targets.To increase the range of implementation options available toMember States, the biofuels directive was accompanied by aspecial provision in the energy taxation directive 1 .Biofuels cost more than conventional fuels. In Europe, motorfuels are subject to high taxes. One way to make biofuelscompetitive is to exempt them from these taxes. Under the lawas it stood in 2001, Member States could do this for ‘pilot’projects. But if they wanted to introduce a general taxexemption for biofuels, they needed the agreement of all otherMember States.The draft directive on taxation removed this requirement,although tax exemptions still needed the prior approval of theCommission under its state aid rules.The two directives passed into law in 2003, following approval bythe Council (where votes are cast by Member States) and theEuropean Parliament. As usual, the Commission’s originalproposal underwent some changes. Instead of imposing bindingobligations on Member States, as the Commission had proposed,the biofuels directive (directive 2003/30/EC) requires them toset “national indicative targets” for the market share of biofuels.The market shares of 2% in 2005 and 5.75% in 2010 are“reference values” that Member States must take into accountwhen they set their targets.1 Directive 2003/96/EC restructuring the Community framework for the taxation of energy products andelectricity (OJ L 283, 31.10.2003, p. 51).70


Implementation of the biofuels directiveBy 2003, when the biofuels directive became law, biofuels hadreached a market share of 0.6%. Two years later – in 2005 -biofuels were in use in all but 4 of the 21 Member States andtheir market share had reached an estimated 1% 2 . Thatrepresented a certain progress, nevertheless, it was less thanthe 2% reference value, and less than the 1.4% share thatwould have been achieved if all Member States had met theirtargets. Moreover, progress was very uneven. Only Germany(3.8%) and Sweden (2.2%) reached the reference value.The estimated share for 2006 is 1.5%, but a national breakdownis not yet available.It is interesting to compare the policies in the two mostsuccessful countries - Germany and Sweden. While Germany’ssuccess has rested mainly on biodiesel, Sweden hasconcentrated on bioethanol 3 . In other respects, however, theirpolicies have several common factors. Both countries have beenactive in the field for several years. Both promote both highblendor pure biofuels (giving the policy visibility) and low blendscompatible with existing distribution arrangements and engines(maximising the policy’s reach). Both have given biofuels taxexemptions, without limiting the quantity eligible to benefit.Both have combined domestic production with imports (fromBrazil in the case of Sweden, from other Member States in thecase of Germany). Both are investing in biofuel RTD and havetreated first-generation biofuels as a bridge to secondgeneration.Tax exemptions are a longstanding form of support for biofuels.These vary in value in different Member States (from around€300/1000 litres to more than €600). They also vary in design:some are available to all biofuels, while others are only availableto biofuel producers chosen through a competitive selectionprocess (the “quota-based” approach). Since the beginning of2005, 13 Member States 4 have introduced new biofuel taxexemptions.2 COM(2006) 845 Biofuels Progress Report3 Sweden is also the European leader for biogas use in transport.4 Austria, Belgium, Czech Republic, Denmark, Estonia, Hungary, Ireland, Italy, Latvia,Lithuania, Netherlands, Sweden and UK71


In 2005 and 2006, several Member States announced theintroduction of a new form of support: biofuel obligations 5 .These are legal instruments requiring fuel suppliers to include agiven percentage of biofuels in the total amount of fuel theyplace on the market.Biofuels obligations are not the same thing as mandates, of thekind used in countries such as Brazil. Under a mandate, eachlitre of fuel sold has to contain a fixed percentage of biofuel. Inthe EU, such mandates would violate the fuel quality directive(directive 98/70 EC as amended by directive 2003/17/EC). Bycontrast, biofuels obligations are compatible with EU law.Biofuels obligations and mandates have in common that theresponsibility for achieving a given share of biofuel use is placedon fuel suppliers; under biofuel obligations, fuel suppliers havemore flexibility in how this is achieved. Some Member States areusing obligations as a complement to tax exemptions, others asan alternative.There is good reason to believe that in the long run, biofuelobligations will bring down the cost of promoting biofuels – inpart because they ensure large scale deployment - and willprove the most effective approach.So far, France and Austria are the only Member States to haveoperated a biofuel obligation for more than a few months. TheFrench obligation, introduced in January 2005, laid down abiofuel share of 2%. However, fuel suppliers often chose to makean extra tax payment instead – an option provided for by thelaw; the 2% share was not achieved. The Austrian obligationwas introduced in October 2005. It laid down a biofuel share of2.5%. The obligation had an immediate effect. The share ofbiofuels rose to 3.2% in the last quarter of 2005, compared toless than 0.2% during the first three quarters. Both obligationsare due to rise to higher levels in future years.All but 6 Member States have already set their targets for 2010.If they all achieve the shares they have targeted, biofuels’ sharein these Member States in 2010 will reach 5.45% - a shortfall of0.3% compared to the objective.5 France and Austria's obligations came into force in 2005, Slovenia's in 2006. The CzechRepublic, Germany and the Netherlands have announced the introduction of obligations in72


These national implementation measures have been supportedby policy developments at EU level.678 9Since the 2003 reform of the Common Agricultural Policy (CAP)the support farmers receive is no longer linked to the specificcrops they produce. As a result, they are free to move intoenergy crop production. Crops used for energy can be grown on“set-aside” land where crops for food cannot; and the CAP alsoincludes a small “energy crops credit” specifically to supportthese crops. New rules for funding from the Community’sregional development fund and rural development policy alsoemphasise biomass energy. These programmes can, forexample, finance processing facilities and training.6 2006.7 2006.8 0.03% in volume terms, equating to 0.26% in energy content,assuming 100% biodiesel.9 0.3% in volume terms, equating to 0.19% in energy content, assuming 50:5073


However, these supply side measures are no more than a usefulsupplement. The main tool of Community biofuel policy is thedevelopment of demand for biofuels, through the taxexemptions and biofuel obligations described above. About 80%of the biofuel consumed in the EU is biodiesel. In 2005, biodieselachieved a share of about 1.6% of the EU diesel market. This ismostly made from domestically grown oilseed rape,supplemented with small amounts of used cooking oil, sunfloweroil and imported vegetable oils. Germany, the leader in biodieseluse, uses both pure biodiesel and low blends of biodiesel indiesel. In other countries, low blends dominate.Bioethanol has a smaller share – in 2005 it was only 0.4% of thepetrol market. Most is made from domestically grown cerealsand sugar beet, although there have also been substantialimports, notably from Brazil to Sweden, the leader in bioethanoluse. In Sweden bioethanol is blended directly into petrol, both inhigh blends and in low ones; in other countries it is mostly addedin the form of the fuel additive ETBE.The dominance of biodiesel in Europe reflects the fact that dieselcars have a large and growing share of the European market.This means that biodiesel helps solve a problem faced by fuelsuppliers (shortage of diesel) while bioethanol is often perceivedas worsening a problem (excess of petrol). Fuel suppliers alsopoint to technical obstacles to the direct blending of ethanol,although these do not apply to ETBE.The dominance of oilseed rape in European biodiesel productionreflects the fact that the European standard for biodiesel(EN14214, the “FAME” standard) is easiest to meet if rape oilprovides a high proportion of the raw material.The next stepsHaving reviewed the progress in the Member States and alsotaking into account the general objective of reducingdependence on oil in transport, the European Commissionrecognised in January 2007 10 the need for the EU to take astronger commitment towards biofuels in the form of legallybinding targets.The first steps towards such an approach were already takenwith the adoption of the biomass action plan in December 200510 COM(2006) 845 Biofuels Progress Report74


and the biofuels strategy in February 2006, followed by theEnergy Green Paper of March 2006. These policy documentsrecognised that biofuels are not a magic solution. Nor are theythe cheapest way to reduce greenhouse gas emissions. But highoil prices have heightened concern about security of energysupply in general and oil supply in particular. As well as reducinggreenhouse gas emissions, liquid biofuels are today the onlydirect alternative to oil use in cars and lorries.In their responses to these Commission papers, the Council andEuropean Parliament generally endorsed the proposed approachof moving in the direction of setting minimum targets for thefuture share of biofuels. In January 2007 putting forwards theproposals for Energy Policy for Europe, the EuropeanCommission estimated it would be appropriate to set thesetargets at the level of 10% in 2020. This proposal was formallyendorsed by all 27 Member States in early March 2007, whenthe European Council (Heads of States and Governments of theEU Member States) agreed that each of the EU countries will in2020 have to have at least 10% of biofuels.As an additional measure to promote a wider use of biofuels, theEuropean Commission also submitted in January 2007 a reviseddraft for Fuel Quality directive. The proposed adaptations in thisdirective should enable a higher volume (up to 10%) of biofuelsto be used in petrol. These amendments are yet to be approvedby the Council (governments of the Member States).Following the mandate given by the European governments, theEuropean Commission is now working on a new comprehensivedirective for renewable energy which will, among other, includea revised biofuels directive and clear requirements for MemberStates to achieve the new legally binding 10% targets forbiofuels.The environmental dimension of bio-energy will also be includedin the directive. In order to ensure that forests are not cut downto produce bio-energy and that biofuels are produced in waysthat have solid environmental benefits, the Commission iscurrently working on a system that will discourage the biofuelproduction which creates more greenhouse gas emissions thanit saves and the conversion of land with high biodiversity valueto grow feedstocks for biofuels.75


In view of reducing the cost of bio-energy applications andpromoting research, the Commission is also currently workingon European Strategic Energy Technology Plan which will setclear objectives and targets for European energy research andtechnology. The Plan will address the development of secondgeneration biofuels.ConclusionAcross the world, energy use in transport is one of the mainproblem areas for policy makers. Europe is no exception.Transport is the sector most exposed to problems of insecurityin energy supply, and also needs to do more to reduce itsgreenhouse gas emissions.Biofuels are not the magic solution to these problems. They willnever develop to a level that could replace the current volumesof oil use in transport. Energy efficiency and the development ofnew alternative fuels are key priorities that should not beneglected.Nevertheless, biofuels have an important role to play. They areavailable today, can be used by today’s cars and lorries and canbe distributed, with minor modifications, through today’s fuelinfrastructure. As an important spin-off, they provide a newsource of demand for products from rural areas in Europe anddeveloping countries increasingly exposed to the effects ofglobal competition.To make the most of biofuels’ contribution, it is necessary toimprove the production of the fuels themselves and to put inplace an effective policy framework. This paper has concentratedon the second issue, showing how European and national actionhave fitted together. Substantial progress has been made duringthe last few years; but a lot remains to be done. At Europeanlevel, the new comprehensive directive on renewable energy,consolidating and revising the existing directives on renewableelectricity and biofuels, to be proposed in 2007, will be the nextimportant step.76


The views expressed are the views of the authors and do not inany way contribute a commitment on the part of theCommission nor are they necessary representative of theCommission.77

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